According to recent analysis from the Congressional Research Service, cannabis businesses may not need to wait for rescheduling to challenge the now-notorious 280E tax burden, suggesting that it may be unconstitutional.

The CRS report (R46709), published on 6 February by legislative attorney Milan N. Ball, provides a detailed legal analysis of Internal Revenue Code Section 280E, the provision at the centre of the rescheduling debate for many US cannabis businesses.

Section 280E denies tax deductions and credits to any business trafficking in a Schedule I or Schedule II controlled substance, meaning state-legal cannabis operators cannot deduct rent, utilities, payroll, advertising, depreciation, or charitable contributions.

The only available relief is the ability to offset gross receipts by cost of goods sold, a narrow carve-out that the CRS notes exists primarily to avoid constitutional challenge under the Sixteenth Amendment. Beyond that, the report states, ‘there is little tax guidance concerning the application of Section 280E.’

The provision applies regardless of state law: “Section 280E applies to marijuana businesses operating in compliance with state law because trafficking marijuana continues to violate federal law,” the CRS states. “Any lack of enforcement of the CSA does not render Section 280E inoperable.”

But the report found that whether this treatment violates the Eighth Amendment’s Excessive Fines Clause remains an open legal question.

In Northern California Small Business Assistants Inc. v. Commissioner (2019), a Tax Court panel split three ways. Ten judges held that 280E does not constitute a penalty under the Eighth Amendment. Two declined to rule on whether it imposed a fine but concurred in denying the taxpayer’s motion because the taxpayer had failed to demonstrate the fine was excessive. Three concluded that 280E does impose a fine, but did not determine whether it was excessive.

The CRS characterised the constitutional status as ‘a matter of debate’, noting the Supreme Court’s standard that a fine is excessive where it is ‘grossly disproportional to the gravity of the offence.’

The question of whether taxing cannabis businesses punitively for an offence the federal government overwhelmingly declines to prosecute meets that threshold has not been tested at the appellate level.

A 2020 Treasury Inspector General audit, cited in the report, found high rates of noncompliance with 280E among cannabis businesses in California, Oregon, and Washington, and noted that ‘there is no easy method to identify marijuana businesses based on tax return filing information.’

Rescheduling may not even solve the problem

Perhaps the most underreported element of the CRS report is its survey of legislative proposals that would maintain 280E’s application to cannabis businesses even after rescheduling. Two current bills, S. 471 and H.R. 1447, would amend Section 280E to expressly prohibit cannabis business deductions regardless of scheduling status.

If either bill advances, rescheduling to Schedule III would not deliver the tax relief that US operators have been banking on.

The report also highlights the banking access problem that rescheduling alone cannot resolve. It cites testimony from a former Treasury Secretary describing cannabis businesses’ exclusion from the financial system as ‘a very large concern,’ noting the IRS has had to ‘build cash rooms to take in large amounts of cash’ to collect taxes from unbanked operators.

As Business of Cannabis reported last week, the administrative pathway for rescheduling itself remains deeply uncertain, but the CRS report raises the question of whether 280E relief would occur even if it finally rescheduled.

FDA acknowledges medical utility

FDA Commissioner Marty Makary publicly acknowledged the medical utility of cannabis, adding regulatory weight to the issue given that its current Schedule I classification is predicated on a substance having ‘no currently accepted medical use.’

The comments came during a Fox Business interview this week, as the commissioner was asked about recent New York Times coverage calling for more ‘guardrails on cannabis’.

Although the bulk of his answer focused on well-trodden public health arguments, like the increased potency of modern cannabis, links of adolescent use to psychosis, and the rise in youth THC vaping, he went on to espouse its medical utility.

“We are also in the Trump administration very serious about making sure that the medicinal purposes, that is, the indications where people find benefit in medical conditions, for example, with chronic terminal cancer, is advanced, and so we’ve taken action to change the scheduling from Schedule I to Schedule III.”

The FDA’s scientific evaluation underpinned the HHS recommendation in August 2023 that initiated the rescheduling process. Yet in December, HHS declined to provide evidence at the DEA’s rescheduling hearings, prompting the agency to seek subpoenas to compel testimony from four FDA officials. Makary’s public acknowledgement of medical utility now puts the FDA commissioner on the record affirming the conclusion his own agency’s analysis reached more than two years ago.