Corey W. Edmunds, CPA, MBT
IRS and State Audit Assistance
Federal and State 280E Audits
One of the most challenging issues that your cannabis organization will face is compliance with IRS Section 280E. Section 280E originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. In 1982, Congress created 280E to prevent other drug dealers from following suit. That means that your cannabis organization ends up paying much more in federal and state taxes than any other businesses do. That’s because 280E expressly disallows any tax deductions besides the cost of goods sold. However, understanding what is deductible as cost of goods sold is not as clear as it may appear.
If your cannabis organization has received an IRS or State audit notice you should contact us and have one of our experienced tax professional deal directly with the auditor on your behalf. Our cannabis tax professionals have been through over three dozen IRS and State 280E audits. Also, we are very collaborative with the top 280E attorneys in the United States. Through these relationships we can make sure you get the best audit results possible.
Form 8300 Compliance / Audits
In Colorado many of the top licensed cannabis organizations have faced “random” Form 8300 audits at the whim of the IRS. This is true even if the company has been operating entirely legally and compliantly at the state-level, and the IRS still chooses to audit them. Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file a Form 8300. Completing the Form 8300 is not always clear. However, the penalty for not filing is the greater of $25,000 or the amount of cash received that was required to be reported, up to $100,000. If in a span of one year your cannabis organization has 10 violations, the IRS penalty can be $250,000. Non-filing or late filing of the form is considered a violation.
Sales and Use Tax and Excise Tax
We have seen a significant increase in sales and use tax and excise tax audits among our cannabis clients. Generally, it can be difficult to make sure that your cannabis organization is being compliant in calculating and submitting sales and use and excise taxes. Additional state, city or county sales and excise taxes only increase the difficulty of compliance. Therefore, prudent license holders will be diligent to ensure they have identified all imposed sales and excise taxes, have calculated taxes accurately and remitted timely to avoid penalty and interest. We had a client that thought they were being compliant but was assessed over $200,000 for unpaid taxes, penalties and interest. Also, be aware of use tax that you should be remitting. The use tax usually relates to items that you may have purchased but did not pay sales tax to the seller.
Our cannabis tax professionals can help you be compliant with all of the aforementioned audits and compliance issues because of their extensive experience in the cannabis industry since 2009.