The biggest financial fight in cannabis history just escalated.
On March 6, the IRS filed a response in the Top Organics case, pushing back hard against a cannabis company’s argument that Section 280E penalties should no longer apply because marijuana doesn’t fit the statutory definition of a Schedule I substance. The agency’s position is blunt: accepting that logic would force the U.S. Tax Court to conduct its own rescheduling review — a process the IRS says is legally prohibited.
What Is 280E, and Why Does It Matter?
Section 280E of the Internal Revenue Code was enacted in 1982 after a convicted drug dealer tried to deduct business expenses on his tax return. The provision bars any business trafficking in Schedule I or II controlled substances from deducting ordinary business expenses — rent, payroll, utilities, marketing — from their federal taxes.
For legal cannabis operators, this means effective tax rates of 50% to 70%, while every other legal business in America deducts these costs as a matter of course. A dispensary paying $30,000 a month in rent can’t deduct a dollar of it. A cultivation facility with $2 million in labor costs writes off exactly zero.
The $1.6 Billion Question
Multi-state operators now collectively owe an estimated $1.6 billion in past-due 280E-related tax liabilities, according to MJBizDaily’s analysis. That number has been growing as more operators stop paying what they consider an unjust tax — essentially betting that rescheduling or legal challenges will bail them out.
The biggest debtors include some of the most recognizable names in cannabis:
- Trulieve: $452 million in unresolved 280E claims
- Curaleaf: $280 million
- Green Thumb Industries: $194 million
- Cresco Labs: $168 million
These aren’t small operators gambling with pocket change. These are publicly traded companies making calculated bets that the tax code will change before the IRS comes to collect.
Why the IRS Won’t Budge
The agency’s argument boils down to jurisdiction. The IRS contends that whether marijuana qualifies as a Schedule I substance is a question for the DEA and the administrative rescheduling process — not for the Tax Court. Allowing a tax court to effectively reschedule a drug would set a precedent that could undermine the entire Controlled Substances Act framework.
There’s also the retroactivity question. Even if cannabis moves to Schedule III (as expected in the first half of 2026), the IRS has signaled that rescheduling would apply prospectively. Operators hoping to claw back years of 280E payments may be out of luck.
The Rescheduling Wildcard
The DEA’s proposed rule to move cannabis from Schedule I to Schedule III has been winding through the federal bureaucracy since August 2023. If finalized, it would eliminate 280E’s applicability to cannabis going forward — but the effective date matters enormously.
For the industry, the math is simple: every month of delay costs operators hundreds of millions in non-deductible expenses. A dispensary doing $5 million in annual revenue might pay $400,000 more in taxes than an equivalent non-cannabis business. Multiply that across thousands of operators and you begin to see why $1.6 billion in unpaid taxes isn’t recklessness — it’s a survival strategy.
What Happens Next
The Top Organics case will likely be decided in the coming months, but it’s just one of dozens of 280E challenges working through the system. The real resolution depends on three possible outcomes:
- Rescheduling finalizes and 280E no longer applies prospectively
- Congress acts to exempt state-legal cannabis from 280E (the SMALL Business Tax Equity Act has bipartisan support)
- Courts rule that 280E is unconstitutional as applied to state-legal businesses
Until one of these dominoes falls, the cannabis industry remains in a bizarre limbo: generating billions in legal revenue while being taxed like a criminal enterprise.
The $1.6 billion question isn’t whether operators will eventually get relief. It’s whether they can survive long enough to see it.