IRS Chief Counsel has determined that a state excise tax on marijuana products and that taxpayers in a marijuana-related business can treat the excise tax as a reduction in the amount realized on the sale of marijuana-related property. Code Sec. 280E’s denial of deductions and credits for businesses involved in illegal drugs does not apply to a tax that reduces the amount realized. The tax is neither a deduction from gross income nor a tax credit.
Background. The State of Washington authorized a tax on marijuana for persons 21 years old and older. The tax applies to marijuana producers, marijuana processors, and marijuana retailers who are validly licensed whose actions are permitted by state law. The tax generally is 25 percent of the selling price of the product. For marijuana retailers, the tax is part of the total retail price to which state and local sales taxes apply.
IRS analysis. Code Sec. 280E denies a deduction or credit for an amount paid to carry on a trade or business involving trafficking in controlled substances that is prohibited by federal or state law. Marijuana is a controlled substance. Code Sec. 164 provides that any tax paid or accrued on the acquisition or disposition of property shall be treated as part of the cost of the acquired property or as a reduction in the amount realized on the disposition of the property. Chief Counsel concluded that the State of Washington’s marijuana excise tax is a tax paid or accrued in connection with the disposition of property by a trade or business.