Tax Benefits of Government-Owned Marijuana Stores

30 Pages Posted: 21 May 2016 Last revised: 3 Jan 2017

Benjamin M. Leff

American University Washington College of Law

Date Written: December 20, 2016

Abstract

Over a year ago (March 7, 2015), a little store called the Cannabis Corner opened up in the small town of North Bonneville, Washington, about an hour by car from Portland, Oregon. The Cannabis Corner is the first marijuana store to be operated by a “public development authority,” an independent entity created by a state or local government. Public development authorities are generally exempt from federal income taxes under section 115 of the Internal Revenue Code. For a marijuana business, this exemption is especially valuable because section 280E of the Code currently prevents marijuana businesses from deducting many of the ordinary expenses other businesses regularly deduct, resulting in extremely high federal income taxes.

This Article is the first to address whether independent governmental affiliates that sell marijuana are exempt from federal income tax under section 115 of the Internal Revenue Code. It argues that such entities should easily pass the IRS’s current interpretation of the three requirements for tax-exemption under section 115: (i) that exempt income be derived from “the exercise of any essential governmental function;” (ii) that such income “accru[e] to a State or any political subdivision thereof;” and (iii) that the income “not serve private interests[.]” In addition, this Article argues that the fact that selling marijuana is illegal under federal law is not a bar to exemption under section 115 of the Code the way it is under section 501(c)(3).

Tax exemption for public development authorities that sell marijuana is important because of the non-tax benefits of a marijuana market dominated by government sellers. Some of these benefits exist when governments are participants in a marijuana market that is open to private sellers as well, such as is the case in North Bonneville, Washington. This Article also explores the benefits that might accrue if a state chose to create a regulatory regime for legalizing marijuana in which all marijuana selling took place in government-owned stores. Many states have experimented for years with state control of liquor sales, but there are reasons to believe that marijuana may be significantly more suited to a state-controlled market than alcohol, at least for a transitional period. The question of whether an independent governmental affiliate is exempt from federal income tax, including section 280E, is especially important to governments contemplating the contours of their legal marijuana markets.

Keywords: federal income tax, tax, IRC 280E, IRC 115, public development authorty, governmental affiliate, tax-exempt, tax exemption, marijuana, cannabis

JEL Classification: H25

Suggested Citation

Leff, Benjamin M., Tax Benefits of Government-Owned Marijuana Stores (December 20, 2016). 50 U.C. Davis L. Rev. 559 (2016); American University, WCL Research Paper No. 2016-22. Available at SSRN: https://ssrn.com/abstract=2782464

Benjamin M. Leff (Contact Author)

American University Washington College of Law ( email )

4300 Nebraska Ave NW
Washington, DC 20016
United States
202-274-4359 (Phone)

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