Harborside Decision


by Sarah Lee Gossett Parrish, Cannabis Lawyer

Harborside was brilliantly briefed and argued before the Tax Court by my International Cannabis Bar Association colleague, Henry Wykowski, an exceptionally talented cannabis attorney headquartered in the San Francisco Bay Area.

2021 Legislation Still in Play, by Sarah Lee Gossett Parrish

If you are in the cannabis industry in Oklahoma or, for that matter, anywhere in the United States, you likely have heard of 280-E and the infamous 2018 Harborside decision of the U.S. Tax Court. If not, you need to know about both, along with a new decision filed by the U.S. Court of Appeals for the Ninth Circuit on April 22, 2021, upholding the Tax Court’s Harborside decision.

What is the Harborside Decision?

In Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center v. Commissioner of Internal Revenue, 151 T.C. No. 11 (November 29, 2018) 2, the Tax Court determined Harborside, a well-known dispensary and brand based in Oakland, California that was co-founded by cannabis legend Steve DeAngelo, owed approximately $11 million in back taxes because it took business deductions and exclusions “in connection with the sale of a federally illegal substance.”

Harborside appealed the decision in Patients Mutual Assistance Collective Corporation, d.b.a. Harborside Health Center v. Commissioner of Internal Revenue, No. 19-73078, filed April 22, 2021. On appeal, the issue considered by the Ninth Circuit was whether Harborside, a dispensary that purchases and resells marijuana and uses the cost method to value its inventory, must account for its inventory cost in accord with Section 1.471-3(b) of the Treasury Regulations.

While the issue sounds complicated, the impact on OMMA licensees is simple: for purposes of federal income tax, the only deduction available in calculating gross income is the cost of purchasing or producing the goods being sold (“cost of goods sold” or “COGS”). No standard business deductions are available to cannabis businesses in our country.

What is Section 280E and Who Cares?

A provision in the Internal Revenue Code known as Section 280E prohibits cannabis companies from claiming deductions and exclusions available to every other business in the country. Section 280E was enacted in 1982 after a U.S. Tax Court decision allowed a drug dealer to deduct expenses associated with his illegal business activities and provides:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within 2 the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.

Since marijuana remains a Schedule I illegal substance under the federal Controlled Substances Act (“CSA”), then OMMA licensees doing business within Oklahoma’s medical marijuana system are considered to be “trafficking in controlled substances” under the CSA and, as such, are not allowed any deduction or income tax credit for amounts paid or incurred in the course of their business activities.

To simplify how this impacts Oklahoma cannabis businesses, it means that the only deduction available in calculating gross income for purposes of federal income tax is the cost of purchasing or producing the goods being sold by that business (COGS). This would include, for example, the wholesale price of medical marijuana a dispensary owner pays to a grower or processor, or the cost a grower incurs from actually growing medical marijuana. It does not include expenses such as wages or rent.

In practice, Oklahoma medical marijuana companies (and cannabis businesses across the United States) often pay a tax rate of 80% to 90% to the IRS, unlike other businesses. Even if an OMMA licensee has a net loss on its books, the company will still incur significant federal tax liability.

So…what’s the take-away?

The Harborside decision, along with the IRS’s admission it has been training agents for at least eight years “in the finer details of auditing marijuana companies, using PowerPoint presentations that outline everything from legal precedents to questions that should be asked during interviews with business owners” should send you running to your cannabis CPA—which, by the way, is a must-have member of your team.

Information contained herein provides general information related to the law and does not provide legal advice. It is recommended that readers consult their personal lawyer if they want legal advice. No attorney-client or confidential relationship exists or is formed between you and Ms. Parrish as a result of this article.


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