by Luigi Zamarra, CPA

On July 31, 2015, the IRS released ILM 201531016, concluding that the old Washington State cannabis excise tax may be properly treated as a reduction of gross revenues received. This is a very favorable ruling for our industry as it means that this tax can escape the harsh non-deductibility treatment of IRC Section 280E.

Although this ruling is applicable directly only to old Washington law, it may have far-reaching consequences for cannabis businesses operating in other jurisdictions that also impose special taxes on cannabis business activities.

As originally enacted, the Washington excise tax is imposed upon all sales of cannabis, at either the producer level, the processor level, or the retail level. As written, the tax is imposed upon each sale. (This law has now been amended so that the tax is imposed only at the retail level.)

The IRS has concluded that businesses may treat this tax as a reduction of Gross Revenues. This treatment is similar to “Returns & Allowances” in that it is a “Revenue Contra Account.” As such, it is not an expense, either above-the-line (Cost of Goods Sold) or below-the-line. Since it may be treated as a reduction of Gross Revenues rather than as an expense, it should escape treatment as non-deductible under IRC Section 280E.

Colorado also imposes a variety of special taxes upon cannabis sales. In California, local cities and counties impose special taxes on cannabis sales too. Although it is not yet clear, it seems there may be opportunities for businesses in these jurisdictions to take advantage of this ruling. This would involve these businesses changing their accounting treatment for these taxes: away from an expense or Cost of Goods Sold treatment and toward a Revenue Contra Account treatment.

Businesses are advised to consult with their CPA for a more in-depth analysis of the application of this ruling to their particular situation.

Luigi Zamarra, CPA, has been a member of NCIA since 2013. Luigi CPA is an accounting firm located in Oakland, CA, that helps all types of businesses and individuals with tax planning, tax compliance, and tax dispute services. Luigi specializes in the medical marijuana industry. He helps these businesses comply with IRC Section 280E so as to balance tax cost against audit examination risk.

*Disclaimer: NCIA does not provide legal or financial services or advice. Any views or opinions presented in this guest blog post are solely those of the author and do not necessarily represent those of the organization. You must not rely on the legal information on our website as an alternative to legal or financial advice from your lawyer or other professional services provider.