Legal weed stores are still taxed under a rule written for a drug dealer

Since April, cannabis sold under a state medical licence is ordinary business for tax. The same plant sold under a recreational licence is not, and on September 29 a DEA judge froze the case that would change that.

Section 280E of the tax code is one sentence long. A business that traffics in a drug on Schedule I or II of the Controlled Substances Act may take no deduction or credit for what it spends running the business. It can still subtract what the product itself cost. It cannot subtract rent, payroll or marketing. For a licensed recreational dispensary, that means paying federal tax on a figure far closer to its gross margin than to its profit.

The rule was not written with dispensaries in mind. In 1981 the Tax Court let a man who sold amphetamines, cocaine and marijuana deduct his rent, his telephone and his car as ordinary business expenses. Congress enacted 280E the next year, and the Senate Finance Committee's report says it did so in direct response to that case. Forty-four years later, the dealer is long gone and the rule applies to every legal recreational seller in the country.

On April 23 the Justice Department moved two categories of marijuana to Schedule III: FDA-approved products, and marijuana sold under a state medical licence. Its order says those licensees will no longer be subject to the deduction disallowance in 280E. Everything else, including recreational marijuana, stays in Schedule I. The same order opened a separate hearing on moving the rest.

That hearing ran from June 29 to July 15. Post-hearing briefs were filed in August, and the next step was the judge's recommendation. On September 28, three parties that oppose rescheduling asked him to add a new government audit to the record first. The next day he stayed the case while he decides whether to allow it. On September 30, the cannabis stock fund MSOS closed about 11 percent lower.

The April split created a problem that did not exist before. A business that holds both a medical and a recreational licence, and many do, now runs one activity that can deduct ordinary expenses and another that cannot. Practitioners describe operators that share a dispensary floor, a back office, a POS system, and a payroll provider across both. The IRS has not issued guidance on how those shared costs should be divided, and one accounting firm expects the IRS to argue that a business running both is a single trade, with no basis to split its costs at all.

The report the opponents want added is GAO-26-108623, published September 23. It found that the DEA does not have policies that identify roles, responsibilities, and procedures related to scheduling, and that the FDA has no policies or procedures for how its staff conduct evaluations. It also found that in all 84 cases from its 2020 to 2025 actions where the DEA had published a final rule by the end of 2025, its decision matched the health agency's recommendation. The report examines how the agencies work. It does not say where marijuana belongs.

The order pauses the wait for a recommendation. It does not decide whether the report goes into the record, whether there will be more briefing, or whether marijuana moves to Schedule III. The government must answer the motion by October 13, and other parties may answer by the same date. The stay itself has no end date.

The four statements below come from the parties to the case and the agencies whose work it rests on. Read the second and third together: the opponents cite the audit's finding on missing procedures, and the same audit records that the DEA's decisions matched the health agency every time it looked.

Three things. First, the split is the story more than the freeze. Since April, whether a sale is ordinary business or drug trafficking for tax depends on the licence it is made under, not on the plant. That is a hard line to keep inside one building, and until the IRS says how to draw it, every business that holds both licences carries an allocation question it cannot fully answer.

Second, the freeze is procedural, and procedure is slow. The motion asks for a record to be reopened and for more briefing. Neither step decides the outcome, but each adds weeks before the recommendation the industry had expected, and the recommendation is not the final rule. A reader should expect the next several headlines to be about filings, not about a decision.

Third, the cost of waiting falls in one place. Medical sellers have their deductions. Recreational sellers pay 280E for every quarter the case does not move, and that cost lands on profit, not on revenue, which is how a procedural pause can matter to companies whose sales did not change at all.