This article considers several issues affecting Internal Revenue Code section 280E, which denies income-tax deductions and credits to businesses trafficking in controlled substances. Even though marijuana is legal in an increasing number of states, it remains a controlled substance under federal law and section 280E therefore applies to marijuana businesses. As a result, investing in a marijuana business is much less attractive than it would otherwise be. The article discusses issues of statutory interpretation but, more important, considers whether an almost complete denial of deductions and credits converts what is in form an income tax into something else. If the “income” tax as applied to a marijuana business is not on income, within the meaning of the Sixteenth Amendment, it may have to be apportioned among the states on the basis of population to be constitutional (the so-called direct tax apportionment rule). The article also argues, however, based on a 1911 Supreme Court decision, that the Sixteenth Amendment issues might go away if the business is conducted using a taxable corporation. Finally, the article includes a brief discussion about marijuana businesses conducted either directly by American Indian nations or through tribally created corporations. Those entities are not subject to the federal income tax; the limitations of section 280E therefore are irrelevant; and tribal businesses have a competitive advantage in the marijuana market. Because of section 280E’s application to businesses that are legal under state law but illegal under federal law—an untenable situation—federalism issues underlie all of the discussion.


marijuana businesses, Controlled Substances Act, IRC section 280E, Standing Akimbo LLC v. United States, San Jose Wellness v. Commissioner, Northern California Small Business Assistants, Inc. v, Commissioner, Pollock v. Farmers’ Loan & Trust Co., Eisner v. Macomber, Flint v. Stone Tracy Co., cost of goods sold (COGS), Eighth Amendment, Sixteenth Amendment, American Indian Nations, Indian Country

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67 South Dakota Law Review 465 (2022)

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Tax Law Commons


COinS Erik M. Jensen Faculty Bio