With the increasing number of states enacting statutes that authorize legal marijuana sales in various circumstances, the provisions of IRC §280E are becoming an increasingly frequent topic in both court cases and IRS guidance. Chief Counsel Advice 201531016 looks at the impact of an excise tax imposed by the state of Washington on sales of marijuana on federal taxes.
Under IRC §280E no deductions or credits (aside from cost of sales) are allowed to taxpayers trafficking in federally controlled substances, of which marijuana is one. That is true regardless of whether the sale of such a substance is deemed legal in the state in question.
The voters of the state of Washington passed an initiative in 2012 removed authorized sales of marijuana in the state from being subject to criminal or civil penalties. The state, not wishing to waste a revenue source, enacted a 25% excise tax on the sale of marijuana, whether wholesale or retail, in addition to all otherwise applicable sales or use taxes.
The question this memorandum looks at how (if at all) the seller is to report this tax on a federal income tax return.
The memorandum concludes that IRC §164(a) (which deals with deductions for taxes) controls this situation. The final sentence of that provision provides “…any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.”
That sentence was added to §164(a) by the Tax Reform Act of 1986 to clarify that such taxes paid for the acquisition or disposition of property are to be capitalized. Thus the memorandum concludes that the amount paid by the taxpayer in this case is treated as a reduction of the sales price.
As the reduction in sales price is neither, for federal tax purposes, a deduction nor a credit, there is no impact of §280E on this amount—rather the taxpayer simply reports the net sales price on the tax return.