Federally illegal, but still a taxable business in the Internal Revenue Service’s purview. Hmmm.

It sounds a lot like similarly conflicting language that the U.S. Supreme Court invalidated last century. Only a mere 77 years ago, it ruled that the “separate but equal” persona of segregated schools in Brown v. Board of Education was anything but. Maybe a case a la Brown, argued in front of the nation’s highest appellate court, is what finally gets cannabis federally legalized.

It would surely be a landmark case if there ever was one. But until that day, marijuana’s tax status during federal prohibition remains as thorny as ever. And in a somewhat unprecedented move, the IRS has emerged not as reactive foe but proactive friend to shed light on the matter.

De Lon Harris, commissioner of examination at the IRS Small Business/Self Employed (SB/SE) Division, spoke last month via PBC Conference on the tax implications of cannabis businesses. His message: the IRS is here to help.

“It’s really our mission at the IRS—not just with marijuana and cannabis industries, but with all taxpayers—to promote voluntary compliance,” Harris said. “When most people think of the IRS, they think of examinations or audits and they think that’s the only way that we interact or try to promote voluntary compliance with taxpayers, but we do our fair share of outreach and education as well.”

In every conventional sense, cannabis businesses operate like any other company; they generate revenue and stay afloat by making more than they spend. But they are different from anyone else because of Section 280E of the IRS code, which prohibits taxpayers engaged in trafficking certain controlled substances from making typical business deductions. Harris dutifully acknowledged this, while clarifying that § 280E “doesn’t prohibit the participant in the marijuana industry to reduce their gross receipts by properly calculating the cost of goods sold.”

The realization of the headaches that current IRS policy creates for cannabis businesses even went as high as the former Cabinet. Steven Mnuchin, Treasury secretary under the Trump administration, said in 2020 that the law as currently written is problematic for IRS and financial regulators, and “creates significant risk in the communities for collecting this amount of cash.”

Legislatively speaking, the holdup to federal legalization of cannabis originates in the U.S. Senate. To date, the House of Representatives has passed five versions of the Secure and Fair Enforcement (SAFE) Banking Act, but to no avail. At the state level, lawmakers are trying to pass state-specific versions of SAFE to protect financial institutions who lend to cannabis companies. But what would really tip the scales in weed’s favor is the hypothetical case we mentioned in the introduction: “Green v. United States.” It’s a race to see what happens first.

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