James Mann, the lawyer representing Harborside in its federal case against industry-hated tax rule 280E, broke it down for WeedWeek business columnist Dan Mitchell.

  • First, he argues, the Constitution’s 16th Amendment, which created the federal income tax, makes clear that only “income” can be taxed, but for some of the years in question, 2007-2012, Harborside didn’t have income because it was losing money.
  • The second point involves the definition of accounting term “cost of goods sold (COGS),” which cannabis companies can still deduct despite 280E.  The IRS charges Harborside improperly categorized deductions as COGS. Mann argues Harborside categorized expenses like buyers and product testing properly because without them it would have nothing to sell.
  • The IRS response is due August 24.

Last week in his column, Dan also discussed 471C, which some in the industry think is a 280E loophole and others warn could be a recipe for disaster. Mann thinks it’s the former: “A notable feature of tax law is that it applies to all taxpayers equally,” he said. “Section 471C was written to apply to all small businesses, including cannabis.”

Separately, Canna Law Blog warned to be very careful when your company issues securities, calling it a, “Top 10 ‘go to jail’ scenario.