The cannabis industry has always operated in a state of legal contradiction—state-legal on one side, federally prohibited on the other. Most operators have learned to live with that tension. But a growing number of multistate operators (MSOs) made a different choice: they decided to stop paying federal taxes under Internal Revenue Code Section 280E, betting that rescheduling would eventually erase their liability.
According to a March 12th report from MJBizDaily, that bet is not paying off. The collective tab now exceeds $1.6 billion—and the IRS is done being patient.
What 280E Actually Does, and Why It Still Applies
Section 280E was written in 1982 as a direct response to a Tax Court decision that allowed a drug trafficker to deduct ordinary business expenses. Congress responded by codifying a rule that bars any business engaged in trafficking Schedule I or II controlled substances from claiming standard deductions—rent, payroll, marketing, utilities—on their federal returns. The only offset still permitted is cost of goods sold (COGS).
Cannabis landed squarely in that prohibition because it remains classified as a Schedule I substance under the Controlled Substances Act. That classification hasn’t changed, despite years of state-level legalization, the Biden administration’s rescheduling proceedings, and President Trump’s December 2025 executive order directing the Justice Department to downgrade cannabis’ federal status “in the most expeditious manner possible.” As of this writing, the DOJ has yet to complete that process. Cannabis is still Schedule I.
The MSOs who stopped paying 280E taxes starting in late 2023 argued that this legal reality was about to change—and that the direction of federal policy justified treating their tax obligations as if the change had already happened. The IRS sees it very differently.
The IRS Position Is Not Ambiguous
In a March 6 filing in the closely watched by MjBiz, is the case of New Mexico Top Organics v. Commissioner, IRS Acting Chief Counsel Kenneth Kies laid out the agency’s position in precise terms. “Despite many taxpayer challenges, federal courts have consistently held that section 280E is constitutionally valid and have created a robust legal authority supporting its validity and applicability to sellers of marijuana,” he wrote.
Kies went further, arguing that the Tax Court is obligated to “apply the law in effect at the time it renders its decision”—meaning that even if rescheduling is finalized tomorrow, the tax years already in dispute would still be evaluated under the rules that applied when those taxes were owed.
That argument is not novel. The IRS has been making it consistently, including in a formal memo issued in the summer of 2024. What makes this moment different is the scale of the unpaid liability now visible in public filings.
As reported by MJBizDaily, the numbers are substantial: Trulieve Cannabis Corp. carries an uncertain tax position of $630 million, Curaleaf Holdings sits at $531.5 million, Verano Holding Corp. reports $378.26 million, and Cresco Labs lists $171.4 million.
More than 40 cannabis operators have taken their 280E challenges to U.S. Tax Court. Senior Tax Court Judge Mark Holmes noted last year that “all have been unsuccessful.” That is a track record the industry should take seriously.
Rescheduling Is Prospective, Not Retroactive
Here is the distinction that matters most and gets the least attention in industry conversations: even if cannabis is rescheduled to Schedule III tomorrow, that change would apply going forward. It would not retroactively erase taxes owed in prior years. The law that applies to a past tax year is the law that existed during that year—not the law as it eventually becomes.
This matters because a core part of the MSO strategy appeared to rest on the assumption that rescheduling would function as a kind of retroactive amnesty. That assumption has no basis in how tax law works.
The IRS has made clear that it views the arguments companies are using to justify non-payment as failing to meet even a “reasonable basis” standard—which opens the door to accuracy-related penalties of 20% or more on top of the underlying tax bills.
This Was Always a Cash Flow Strategy, Not a Legal Strategy
It’s worth stepping back to understand why these companies made this choice in the first place. 280E is brutally punishing. Under its terms, a cannabis retailer paying $1 million in rent, $3 million in payroll, and $2 million in other operating costs can deduct almost none of that. The effective federal tax rates facing cannabis businesses often exceed 70% of taxable income. For companies operating at thin margins in a hyper-competitive, oversaturated market, that burden is existential.
So when legal arguments began circulating—some based on the trajectory of federal policy, others on appropriations riders limiting DOJ cannabis prosecutions—some operators saw an opening to improve their cash positions now and sort out the tax exposure later. San Francisco-based tax attorney Henry Wykowski called it out plainly in 2024, telling MJBizDaily: “We think this more aggressive strategy is reckless and is going to come back to haunt the people who are using them.” He specifically noted that penalties could exceed 20% of the outstanding balance.
The $1.6 billion figure doesn’t capture another dimension of this problem: interest and penalties will cause those uncertain tax positions to grow considerably. These aren’t static numbers on a balance sheet waiting for resolution; they are actively accumulating.
What This Means for the Cannabis Industry’s
The 280E standoff reveals a larger structural issue: industry players built the cannabis sector assuming federal normalization was always just around the corner. Operators priced that assumption into their business models, their capital structures, and in some cases, their tax strategies. Each time the horizon shifted—and it has shifted repeatedly—the gap between industry expectations and legal reality grew wider.
Rescheduling, when it finally happens, will matter. It will eliminate 280E going forward, making cannabis businesses eligible for the same deductions available to any other company. That’s genuinely significant. But it won’t clear the accounts that have been building since 2023. The IRS has shown no appetite for retroactive relief, the courts have consistently upheld 280E’s constitutionality, and the legal arguments advanced by taxpayers have not gained traction.
The Math Doesn’t Care About the Narrative
The cannabis industry has a well-developed instinct for optimism—sometimes usefully, sometimes not. Operators who withheld 280E payments weren’t acting out of ignorance; many had legal opinions supporting their positions. But there’s a difference between a legal opinion and a legal outcome, and the outcomes in tax court have been uniformly unfavorable for cannabis companies challenging 280E.
The $1.6 billion figure is a collective liability that won’t disappear with rescheduling, and almost certainly won’t be resolved through litigation. For the MSOs sitting on those uncertain tax positions, the realistic path forward is probably negotiation—working with tax counsel to develop a resolution strategy before the IRS moves to enforce collection.
The lesson for the cannabis industry is one about the difference between regulatory momentum and legal certainty. They’re not the same thing. Betting one’s tax compliance on future policy changes is a risk that the IRS is making clear it will not allow operators to socialize through wishful accounting.
