Federal Cannabis Tax — 2025

Com­plain­ing about the cannabis tax penal­ty under 26 U.S.C. § 280E is just anoth­er way of say­ing cannabis does not belong in Sched­ule 1 of the Con­trolled Sub­stances Act, 21 U.S.C. § 812.

New Mex­i­co Top Organ­ics Inc. v. Com­mis­sion­er, Dock­et No. 19661–24 in the U.S. Tax Court, involves a New Mex­i­co med­ical cannabis com­pa­ny, Ultra Health, chal­leng­ing the cannabis tax penal­ty under 26 U.S.C. § 280E.

BUZZ Cannabis Newslet­ter Feb Tax Edi­tion 2025 pro­vides a brief sum­ma­ry of the case:

While courts have wide­ly reject­ed con­sti­tu­tion­al chal­lenges to 280E, soon a court will weigh in on whether Sec­tion 280E can be inter­pret­ed dif­fer­ent­ly.  A for­mer DOJ attor­ney who argued and won sev­er­al 280E cas­es for the gov­ern­ment has filed a peti­tion in U.S. Tax Court chal­leng­ing the appli­ca­tion of 280E to a New Mex­i­co med­ical mar­i­jua­na com­pa­ny for the tax years end­ed June 30, 2018, 2019 and 2020.  This case is not based on an amend­ed return fil­ing, but rather aris­es from an IRS exam­i­na­tion, which rais­es the issue with­out penal­ty expo­sure, because a “no-280E” posi­tion was not the basis for a return fil­ing.  The case brings two statu­to­ry inter­pre­ta­tion argu­ments that no court has pre­vi­ous­ly con­sid­ered:

First, the Peti­tion­er in New Mex­i­co Top Organ­ics vs. Com­mis­sion­er argues that mar­i­jua­na is not “with­in the mean­ing of” Sched­ule I or II of the CSA because it does not sat­is­fy the statu­to­ry cri­te­ria set forth in the CSA.  Because 280E doesn’t say sub­stances “list­ed on” Sched­ule I or II, but rather uses the words “with­in in the mean­ing of”, we can ignore the fact that mar­i­jua­na is list­ed on Sched­ule I and instead look to whether mar­i­jua­na sat­is­fies the statu­to­ry cri­te­ria for Sched­ule I or II con­trolled sub­stances as set forth in the CSA.  Because the HHS, FDA and NIDA have all found that mar­i­jua­na does not sat­is­fy the CSA’s cri­te­ria for Sched­ule I or II con­trolled sub­stances, then it is not with­in the mean­ing of Sched­ule I or II.

The Petitioner’s sec­ond argu­ment applies only to med­ical mar­i­jua­na and asserts that med­ical mar­i­jua­na is “not pro­hib­it­ed” by either fed­er­al or New Mex­i­co law, which takes it out­side the scope of 280E.  It is clear that once a state legal­izes mar­i­jua­na it is no longer pro­hib­it­ed by the state, but how can one argue that mar­i­jua­na is not pro­hib­it­ed by fed­er­al law?  In short, because Con­gress has pro­hib­it­ed the Depart­ment of Jus­tice from using funds to pros­e­cute med­ical mar­i­jua­na busi­ness­es since 2014 under the var­i­ous Appro­pri­a­tions Acts, (also known as “Rohrabach­er-Farr Amend­ment”), med­ical mar­i­jua­na is no longer pro­hib­it­ed by fed­er­al law.  Time will tell whether these argu­ments are con­vinc­ing enough to end the appli­ca­tion of 280E to cannabis busi­ness­es.

A copy of the peti­tion can be found here: Med­ical Mar­i­jua­na Busi­ness Chal­lenges Defi­cien­cy, Seeks Refund, taxnotes.com, Dec. 16, 2024.  A recent update can be found here: Cannabis News & Pol­i­cy Update | Octo­ber 2025, Octo­ber 24, 2025.

The direct argu­ments for remov­ing the cannabis tax penal­ty are 21 U.S.C. § 811 (remov­ing cannabis from Sched­ule 1) or 21 U.S.C. § 822 (exempt­ing cannabis from Sched­ule 1).

Removing cannabis from Schedule 1

The Trump Admin­is­tra­tion is propos­ing a new rule remov­ing cannabis from Sched­ule 1 and plac­ing it in Sched­ule 3, but that process seems to have got­ten stalled.  See Notice of Pro­posed Rule Mak­ing.

The Depart­ment of Jus­tice is propos­ing to trans­fer mar­i­jua­na from sched­ule I of the Con­trolled Sub­stances Act (“CSA”) to sched­ule III of the CSA, con­sis­tent with the view of the Depart­ment of Health and Human Ser­vices (“HHS”) that mar­i­jua­na has a cur­rent­ly accept­ed med­ical use as well as HHS’s views about marijuana’s abuse poten­tial and lev­el of phys­i­cal or psy­cho­log­i­cal depen­dence.  The CSA requires that such actions be made through for­mal rule­mak­ing on the record after oppor­tu­ni­ty for a hear­ing.

Sev­er­al par­ties to the pro­posed rule mak­ing filed an admin­is­tra­tive appeal last year and the Depart­ment of Jus­tice hasn’t issued a brief­ing sched­ule yet.  In July, the Admin­is­tra­tive Law Judge for the rule mak­ing hear­ing retired.  Mar­i­jua­na Resched­ul­ing, Notice to the Par­ties, July 23, 2025.

The first argu­ment New Mex­i­co Top Organ­ics makes uses this pro­posed rule to argue that 26 U.S.C. § 280E is out-dat­ed and no longer applies to cannabis.

Exempting cannabis from Schedule 1

To under­stand an exemp­tion, start by look­ing at one, 21 C.F.R. § 1307.31.

§ 1307.31  Native Amer­i­can Church.
The list­ing of pey­ote as a con­trolled sub­stance in Sched­ule I does not apply to the non­drug use of pey­ote in bona fide reli­gious cer­e­monies of the Native Amer­i­can Church, and mem­bers of the Native Amer­i­can Church so using pey­ote are exempt from reg­is­tra­tion.  Any per­son who man­u­fac­tures pey­ote for or dis­trib­utes pey­ote to the Native Amer­i­can Church, how­ev­er, is required to obtain reg­is­tra­tion annu­al­ly and to com­ply with all oth­er require­ments of law.

Click on “Details” on the left side­bar.  Author­i­ty:  U.S.C. 821, 822(d), 871(b), unless oth­er­wise not­ed.

The Attor­ney Gen­er­al is autho­rized to pro­mul­gate rules and reg­u­la­tions and to charge rea­son­able fees relat­ing to the reg­is­tra­tion and con­trol of the man­u­fac­ture, dis­tri­b­u­tion, and dis­pens­ing of con­trolled sub­stances and to list­ed chem­i­cals.

The Attor­ney Gen­er­al may, by reg­u­la­tion, waive the require­ment for reg­is­tra­tion of cer­tain man­u­fac­tur­ers, dis­trib­u­tors, or dis­pensers if he finds it con­sis­tent with the pub­lic health and safe­ty.

The Attor­ney Gen­er­al may pro­mul­gate and enforce any rules, reg­u­la­tions, and pro­ce­dures which he may deem nec­es­sary and appro­pri­ate for the effi­cient exe­cu­tion of his func­tions under this sub­chap­ter.

Click on “Details” on the left side­bar.  Source:  36 FR 7801, Apr. 24, 1971, unless oth­er­wise not­ed. Redes­ig­nat­ed at 38 FR 26609, Sept. 24, 1973.

307.31  Native Amer­i­can Church.
Author­i­ty:  The pro­vi­sions of this Part 307 issued under secs. 301, 302(d), 501(b), 84 Stat. 1253, 1271; U.S.C. 821, 822(d), 811(b).

The Office of the Fed­er­al Reg­is­ter has noti­fied the Drug Enforce­ment Admin­is­tra­tion that the Food and Drug Admin­is­tra­tion intends to repub­lish and redes­ig­nate its reg­u­la­tions in a series cov­er­ing Parts 1—1299, and has asked the Drug Enforce­ment Admin­is­tra­tion to redes­ig­nate its parts and sec­tions begin­ning with Part 1300.  There­fore, pur­suant to the author­i­ty vest­ed in the Attor­ney Gen­er­al by sec­tions 201, 202(d), 301, 302(f), 304, 305, 306(f), 307, 308, 501(b), 505, 507, 511, 513, 704©, 705, 1002, 1003, 1004, 1006, 1007(b), 1008(d), 1008(e), and 1015 of the Com­pre­hen­sive Drug Abuse Pre­ven­tion and Con­trol Act of 1970, and del­e­gat­ed to the Admin­is­tra­tor of the Drug Enforce­ment Admin­is­tra­tion by § 0.100 of Title 28 of the Code of Fed­er­al Reg­u­la­tions (38 FR 18380), it is here­by ordered that all parts and sec­tions now con­tained in Title 21, Chap­ter II, of the Code of Fed­er­al Reg­u­la­tions be redes­ig­nat­ed upward by one thou­sand (e.g., Part 301 becomes Part 1301, and § 303.37 becomes § 1303.37).