Section 280E

Under normal tax law, businesses deduct expenses like rent, employee wages, marketing, and utilities from their gross income before calculating taxes. Section 280E denies these deductions to cannabis businesses, meaning they pay taxes on their gross profit rather than net income. A cannabis dispensary earning $1 million in revenue with $600,000 in expenses would pay taxes on the full $1 million rather than the $400,000 net profit. The only deduction allowed is cost of goods sold (COGS), which covers the direct cost of the cannabis products themselves.

If cannabis is rescheduled from Schedule I to Schedule III (as proposed in 2024), 280E would no longer apply, saving the cannabis industry billions in tax burdens. This single change would dramatically improve profitability for legal operators, potentially lowering consumer prices and making it easier for legal businesses to compete with the illicit market. Some cannabis companies have challenged 280E in court, with limited success. Until scheduling changes are finalized, 280E remains one of the most significant regulatory burdens on the legal cannabis industry.