The Internal Revenue Service (IRS) has denied a marijuana-focused tourism organization’s request for nonprofit tax-exempt status, citing the ongoing federal criminalization of cannabis and saying that the group’s activities create a “private benefit to the cannabis industry” and its members.
Therefore, the agency said, the organization cannot claim tax exemptions for charitable purposes.
In a notice to the group that IRS made publicly available, the agency said the articles of incorporation (AOI) that were submitted to qualify as a tax-exempt nonprofit corporation stated that the organization’s purpose was to “promote the development of a responsible cannabis-related tourism industry, and advocate for sustainable innovations and social equity.”
“Your application stated you aim to accomplish your purpose by engaging in education, training-workforce development, and outreach partnerships,” the notice, which was posted in a redacted form that does not show the group’s name, said. “One of your goals, per your website, is to cultivate local partnerships that can grow cannabis-related economic development opportunities…through education and training.”
IRS said a review of the organization’s website shows that it planned to “utilize a portion of local abandoned buildings to create a vertically integrated farming entity through seed-to sale operations to cultivate an economy around cannabis development (cannabis, food, and industrial hemp seed-to-sale).” That includes “teaching vertical farming techniques and providing real estate to grow cannabis.”
“The cannabis business will be sustained year-round through the hydroponic techniques taught to your members,” the agency said. “As a result, you would create a hub for cannabis-related networking and business development.”
While the state the group is based in has “legalized cannabis activities you aim to promote,” the letter says, “federal law classifies cannabis as a Schedule I controlled substance… Furthermore, federal law prohibits the manufacture, distribution, possession, or dispensing of a controlled substance.”
“Further, you operate for a substantial non-exempt purpose of providing private benefit to the cannabis industry and your members. You advocate for the local cannabis industry in the city of [information withheld] to engage in business to grow and sell cannabis. The creation of networking hubs, combined with access to vertical farming facilities, would provide direct benefits to your members seeking to enter the cannabis industry (i.e., aiding in getting a license and providing real estate within the city [information withheld] to develop cannabis through vertical farming methods.) These opportunities would disproportionately benefit those individuals rather than the public at large.”
“You fail the organizational test because your purpose, as stated in your AOI, is too broad and expressly empowers you to engage substantially in activities which do not further exempt purposes,” IRS concluded. “Moreover, although you do have charitable and educational purposes, you fail the operational test because you have substantial non-exempt purposes of promoting federally illegal activities (cannabis production) and serving the private interests of your members. Therefore, you fail to qualify for exemption under IRC Section 501(c)(3).”
To that end, the organization is required to pay any federal taxes it avoided by claiming nonprofit exempt status within 30 days of receiving the notice.
The final rejection letter was sent to the organization in September and publicly posted by IRS last month, one day after President Donald Trump issued an executive order directing the attorney general to complete the process of moving marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
Whether that pending reform would impact the organization’s request for nonprofit tax-exempt status is unclear, but one of the key policy changes that would be enacted is directly related to IRS—specifically an agency code known as 280E. If marijuana moved to Schedule III, that code barring businesses from taking federal tax deductions if they work with Schedule I or Schedule II substances would be rendered moot for the cannabis sector.
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Last year, IRS advised marijuana companies that they still could not take federal tax deductions for business expenses afforded to other traditional industries unless the administration finalized the rule to reschedule cannabis.
In anticipation of the rescheduling move, certain multi-state marijuana operators sough refunds for what they said were excess taxes paid in past years due to 280E.
Multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to 280E, but the federal rule has not yet changed. The Congressional Research Service (CRS) noted in a 2021 report that IRS “has offered little tax guidance about the application of Section 280E.”
IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
The update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”
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