In a closely watched tax case that’s been raging for two and a half years, cannabis company Harborside was dealt a major blow in late November when a judge ruled against them in favor of the IRS, upholding the 280E tax code that prevents cannabis businesses from writing off business expenses as tax-deductible.
After he called Harborside “a giant drug trafficker,” Judge Mark Holmes, a George W. Bush appointee who was recently reappointed by Donald Trump, broke with precedent and held that Harborside and other cannabis businesses can no longer deduct cost of goods sold, thus sticking them with a much higher tax rates.
But while this ruling is unfortunate, it isn’t as bad as it sounds: Harborside will be appealing the decision and hopes to win that appeal. And in a victorious (if convoluted) twist, the same court ruled Wednesday that Harborside will not have to pay any penalties related to 280E errors in previously filed taxes. This latest ruling will save the company, and other cannabis businesses caught in similar legal quagmires, millions of dollars.
What the Case “Consists Of”
While it may seem silly, a major issue raised throughout the legal battle by Harborside’s attorney, Henry Wykowski, was a semantic argument. Wykowski argued that the IRS is improperly defining the phrase “consists of” in their application of Section 280E to Harborside and other legal cannabis businesses. For a quick refresher, here is what IRS code 280E actually says:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Wykowski spoke at last year’s National Cannabis Industry Association (NCIA) conference in Oakland, California and discussed the case in as much detail as he could, as it was being adjudicated at the time, and told attendees about previous efforts to overturn 280E on semantic grounds. In CHAMP vs Commissioner, a previous 280E-related court case where Wykowski was on the legal team representing Californians Helping to Alleviate Medical Problems, the lawyer said they attacked the idea of “trafficking” tied up in the language of 280E and argued that CHAMP provided services beyond the realm of cannabis. This led to victory — CHAMP was relieved of a proportionate amount of tax burden to its employees who were not involved in handling cannabis. But in the case of Harborside, Wykowski said he felt this time it would be more effective to attack from the ‘consists of’ angle.
During his most recent, semantic battle with 280E, Wykowski had an example at the ready to help make sense of his argument. “New York City doesn’t ‘consist of’ Manhattan and the Bronx, it includes them,” Wykowski said. “It ‘consists of’ all five boroughs.”
To really hammer home the parallel, Wykowski argued the following: While Harborside’s business includes the sale of cannabis, “it consists of the sale of cannabis along with non-controlled substances, as well as various wellness services.” And beyond that, Wykowski said, “it consists of the Harborside brand, which set the standards for the industry at its inception.”
Unfortunately, Judge Holmes did not agree with these assertions, and his ruling shows he felt neither 280E’s wording nor his own classification of Harborside as little more than criminals was incorrect.
Harborside Does Not Admit Defeat
Harborside’s CEO, Andy Berman, released a statement after the ruling calling it “a setback for entire cannabis industry, which is simply seeking the same tax treatment by the IRS that every other industry is subjected to.” Berman stressed that “since its inception, Harborside has demonstrated an utmost commitment to maintaining compliance under California state law,” a fact also recognized by the court and cited as part of the reason the company will not face 280E penalties for past tax filings. He added that the company intends to “consider all legal options as we proceed, including an appeal to the United States Court of Appeals for the Ninth Circuit.”
Another statement from Harborside co-founders Steve DeAngelo and dress wedding points to the harms this ruling will have on patients. “This ruling artificially raises the cost of cannabis by disallowing standard business tax deductions,” the statement said. “Studies have showed that higher priced cannabis drives vulnerable patients to less expensive but more dangerous substances, including opiates, alcohol, and pharmaceuticals.”
Andrew DeAngelo Sheds Some More Light
During the Emerald Cup, Cannabis Now had the chance to speak with Andrew DeAngelo, Steve’s brother and Harborside’s 3rd co-founder, about their tax court ruling, next steps, their Canadian IPO and efforts to reform 280E.
Andrew was pragmatic about the loss. “Harborside always expects to win our cases,” he said. “[But] you have to embrace an attitude of defiance in these fights with the Feds or you won’t be able to summon the energy and courage it takes to fight.” Andrew reiterated that the people behind Harborside aren’t traffickers: “We are cannabis tradespeople,” he said.
Despite speculation that the ruling might negatively impact on their public offering on the CSX, Andrew said there would be none due to foresight from the company in factoring in 280E ahead of time. “We have been very transparent with investors about our case and the various possible outcomes of it,” Andrew said. This ruling was just a bump in the road, and Andrew says potential investors should not be concerned.
Taking 280E Reform “From the Grassroots to the Grasstops”
Nearly seven years ago, Steve referred to 280E as a “dagger pointed at the heart of medical cannabis.” Since then, the effort to reform 280E has shifted from a grassroots fringe issue to a major one, discussed in the halls of Congress by cannabis lobbyists working for publicly traded companies.
More recently, Andrew echoed what Berman said about appealing: “The fight is not over yet, we can and will appeal. And, naturally, we believe 100 percent that we will win the appeal at the Ninth Circuit and win big for the entire industry.”
But failing that, Andrew said it was “a good thing the reform movement for 280E moved from the grassroots to the grasstops.” He went on the say the shift from protesting in the streets to groups like the NCIA lobbying Congress for bills, is something “to be celebrated,” because he is more hopeful that sweeping reform could come from Congress. “Congress has the power and they need to exercise it to fix 280E once and for all,” he said. “Congress offers the most holistic and widespread reform we can hope for.”
TELL US, do you see Congress stepping in on behalf of cannabis businesses against the IRS?