In yet another wrinkle stemming from the ongoing federal prohibition on marijuana, a U.S. district court has ruled that an Internal Revenue Service (IRS) tax rule prevents state-legal cannabis companies from being eligible for refunds of employee retention credits (ERCs), which helped businesses continue to pay workers during early COVID-era shutdowns.
In the decision, the U.S. District Court for the Western District of Washington ruled that “nothing in the plain text of [IRS code] Section 280E limits its application to income tax credits,” rejecting arguments from plaintiffs.
The government, meanwhile, contended that the Section 280E prohibits any and all tax credits, including refunds of the COVID-era ERCs, which are typically refundable for other businesses.
On May 9, the court granted the government’s motion to dismiss the the case, Solstice Holdings v. U.S.
Section 280E disallows standard tax deductions and tax credits for businesses that traffic in Schedule I or II substances. It applies even in cases where businesses are operating in compliance with state law.
The law firm Holland & Hart said in a post about the new ruling that it appears to be “the first case where a court has addressed the application of IRC § 280E to ERC.”
Another law firm, GreenspoonMarder, noted in post about the district court opinion that many cannabis businesses applied for the ERC during the pandemic—and many received it.
“Some were deemed ‘essential’ and had to stay open during the pandemic despite the higher costs associated with continued operations during the pandemic and various restrictions that rendered it much more difficult to visit their stores,” attorneys Nick Richards and Sabrina Strand wrote recently.
“When the ERC first came out, there was a question as to whether it was available to cannabis companies because it creates a tax credit that Section 280E may disallow,” the post points out. “There was also an argument that it didn’t apply to the ERC, because Section 280E is part of Section A of the [Internal Revenue Code], which concerns income rather than employment taxes. At least one court now disagrees.”
Both law firms suggest the case out of Washington State creates a standard across all states within the jurisdiction of the U.S. Court of Appeals for the Ninth Circuit. GreenspoonMarder, for example, says the ruling “technically only applies to companies located in the 9th Circuit.”
“That said, as the only opinion on this subject,” lawyers wrote, “the IRS may look to it as authority regardless of whether taxpayers are in one of the nine states located in the Circuit.”
Hellbound and Down 