Business

Harborside Lawyer Confident about 280E Tax Lawsuit

By Willis Jacobson Sep 25, 2020
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
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Days after the IRS asked a federal judge to dismiss a lawsuit to invalidate industry-despised tax rule 280E, a lawyer for the plaintiff said he’s as confident as ever in his client’s case.

Oakland-based dispensary chain Harborside Health Centers is involved in a dispute with the IRS over an $11M tax bill accumulated from 2007 to 2012. The IRS responded to Harborside’s arguments with a brief Wednesday that argued Harborside didn’t properly raise its Constitutional concerns with 280E in U.S. Tax Court. The brief also questioned the merits of Harborside’s case against the rule, which limits the expenses cannabis businesses can deduct on their taxes.

On Friday, Attorney James Mann, who is representing Harborside in the appeal, now being heard by the U.S. Court of Appeals for the Ninth Circuit, said he didn’t want to discuss specific elements of the Justice Department’s allegations, but said “after reviewing the government’s brief, we are very happy with our position.”

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“We continue to be optimistic about the outcome [of the case],” he said. “I actually am confident we will prevail on both of the grounds of the appeal.”

Harborside, which bills itself as one of the largest cannabis retailers in the world, is appealing a 2018 U.S. Tax Court decision that maintained it owes $11M. 

Harborside argues the ruling improperly limited certain business deductions through the use of Section 280E, which the appeal also argues goes against the 16th Amendment of the U.S. Constitution.

While a narrow view of the case reveals a tax dispute, the broader implications have many in and around the cannabis industry paying close attention.

Section 280E is hated by many within the industry. The section was adopted in the 1980s at the height of the War on Drugs with the intention of stopping illegal drug traffickers from claiming business expense deductions.

Because cannabis is classified federally as a Schedule I drug under the Controlled Substances Act, the section applies to current businesses, even if they are state-legal. Because of the section, marijuana companies are subject to a higher effective tax rate than other traditional businesses.

Harborside’s appeal posits that Section 280E violates the Constitution’s 16th Amendment, which grants the government its right to levy income taxes. Harborside essentially argues the IRS is using Section 280E to tax revenue since the company sometimes operated at a loss as it accumulated the $11M tax bill.

Attorneys for the Justice Department dispute that characterization in their brief calling for Harborside’s appeal to be tossed.

Many within the marijuana industry, though, back Harborside’s position.

Two separate amicus briefs were filed this summer with the Ninth Circuit court in support of Harborside’s appeal: One from the National Cannabis Industry Association and another from the Colorado-based Marijuana Industry Group and national Cannabis Trade Federation.

Mann said he believes those amicus briefs will bolster Harborside’s case as the appeal moves forward.

“They both show the court the support of the industry for the positions expressed by Harborside,” he said. “They were both good briefs, they were credible briefs, and I believe that the response in the Department of Justice’s brief to the amicus briefs was inadequate. The Department of Justice attempts to brush aside both of those briefs and I don’t believe that’s appropriate.”

Many in the industry have expressed a desire for legislators to amend the tax code and strike down Section 280E. The Harborside case, depending on the final verdict, could play a part in that happening.

Mann, who said there’s “no question” that 280E should be repealed, said he’s looking forward to formally responding to the government’s arguments. Harborside has three weeks to file its response, unless it is granted an extension.

“Harborside continues to believe that its position is correct and that the course of action it has taken in fighting this is the right course of action,” Mann said.

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