The Cannabis Tax Revolt: A Brewing Battle Against Federal Taxation

The cannabis industry in the United States is currently witnessing a significant tax rebellion, with numerous companies challenging the federal government's tax demands. As of this summer, eleven major cannabis companies collectively owed over $2.3 billion in federal income taxes. This tax burden is largely attributed to Section 280E of the tax code, which prevents cannabis businesses from deducting business expenses due to the federal classification of cannabis as a Schedule I drug. This has led both large and small businesses to file tax returns asserting they owe less than what the IRS claims

Historically, tax revolts in the U.S. have often ended unfavorably for the taxpayers involved. The Whiskey Rebellion of 1791 saw farmers in western Pennsylvania refusing to pay an excise tax, only to be suppressed by federal troops led by President George Washington. Similarly, in the late 20th century, Irwin Schiff led a movement against federal income taxes, claiming they were unconstitutional. Despite his efforts, Schiff's followers faced legal defeats, and he himself died in prison. These historical precedents suggest a challenging path ahead for the cannabis tax revolt

Proponents of the current cannabis tax revolt are looking at past settlements for inspiration. The 2022 Harborside settlement is frequently cited, where the IRS agreed to accept less than the $22 million owed by a California cannabis company. This agreement included a ten-year repayment period, adjusted biennially based on the company's earnings. However, this case also highlights the precarious financial status of cannabis companies, as Harborside's successor, StateHouse Holdings, eventually went bankrupt

The broader implications of this tax revolt are significant, as they highlight the ongoing struggles of the cannabis industry under federal taxation laws. Section 280E has long been criticized for stifling the growth of cannabis businesses by imposing an excessive tax burden. Industry experts argue that without reform, many companies may face insolvency, further hindering the industry's potential economic contributions. The possibility of a retroactive change in tax law or a settlement program has been discussed, but both remain uncertain

Looking to the future, the cannabis industry continues to hope for legislative changes that could alleviate the tax burden. However, the Treasury Department has historically resisted retroactive tax changes, and the likelihood of significant legislative reform remains low. Some industry stakeholders suggest that a settlement program similar to the employee retention credit settlement could provide relief, but the current financial state of many cannabis businesses makes even reduced repayments difficult

The cannabis tax revolt is unprecedented in its scale and nature, as it challenges the very framework of federal tax obligations for an entire industry. As the revolt unfolds, it raises questions about the sustainability of the cannabis market under current tax laws and the potential need for policy reform. The outcome remains uncertain, but the revolt underscores the urgent need for a reevaluation of how cannabis businesses are taxed in the United States