Section 280E Constitutionality Faces Long Odds

Section 280E Constitutionality Challenges to the Federal Marijuana Tax Rule Face Steep Legal Hurdles

Congress does not often write tax law with the illicit drug trade in mind. In 1982, however, lawmakers did exactly that. Internal Revenue Code Section 280E was enacted after a federal court allowed a cocaine trafficker to deduct ordinary business expenses. The reaction in Washington was swift. Congress closed what it saw as a loophole by barring businesses trafficking in Schedule I or II controlled substances from claiming standard federal deductions.

Four decades later, that same statute governs thousands of state-licensed cannabis operators who comply with local law, pay state taxes and operate openly under regulatory oversight. A February 2025 analysis by the Congressional Research Service, first reported by Marijuana Moment, asks a question many in the industry have posed for years: Could Section 280E constitutionality be successfully challenged in court?

The short answer from congressional researchers appears to be no, at least under current precedent. Courts historically grant Congress broad authority over taxation. That reality places steep odds in front of any cannabis company hoping to overturn the federal marijuana tax rule through constitutional litigation rather than legislative reform.

What Section 280E Does in Plain English

Section 280E applies to any business trafficking in Schedule I or II substances. Cannabis remains in Schedule I under the Controlled Substances Act, even as most states have legalized medical or adult-use marijuana. Companies may deduct cost of goods sold. They cannot deduct rent, payroll, marketing or other ordinary and necessary business expenses. The result is an effective tax rate that can dwarf that of traditional retailers.

The Internal Revenue Service enforces the statute as written in 26 U.S.C. § 280E. Courts have repeatedly upheld its application to marijuana businesses because marijuana remains federally illegal, regardless of state licensing.

CRS: The Constitution Is a Tough Hill to Climb

The CRS report, as described in coverage, reviews several constitutional theories. Litigants have floated arguments under the Sixteenth Amendment, which authorizes Congress to levy income taxes; the Fifth Amendment’s due process and equal protection components; and the Eighth Amendment’s Excessive Fines Clause. The analysis reportedly concludes that while creative arguments exist, courts have consistently deferred to Congress’ taxing authority under Article I.

That deference is not subtle. Supreme Court precedent has repeatedly signaled that tax policy is primarily a legislative domain, and the judiciary is reluctant to intervene unless Congress clearly crosses a constitutional line.

Supreme Court Signals on Tax Power and Deference

Two modern cases help explain why CRS sounds skeptical about a successful challenge. In NFIB v. Sebelius, the court treated the Affordable Care Act’s individual mandate as a valid exercise of Congress’ taxing power. In South Dakota v. Wayfair, Inc., the court affirmed broad authority for states to require tax collection in a changing economy. Neither case involves cannabis, but both reinforce a larger point: courts tend to give wide berth to lawmakers writing tax rules.

For cannabis businesses, that legal backdrop matters because 280E is not an accidental glitch. Congress wrote it on purpose, and judges tend to respect that intent even when the policy implications look outdated.

Why Equal Protection and Due Process Claims Struggle

Equal protection arguments face an uphill battle because Section 280E applies uniformly to Schedule I and II substances. The law does not single out cannabis. That structure makes it difficult to argue the statute is irrational or discriminatorily aimed at marijuana businesses.

Due process claims run into similar headwinds. Congress is allowed to use the tax code to discourage certain conduct, particularly when the underlying conduct remains illegal under federal law. Courts generally treat deductions as a benefit Congress can define and limit, not a right guaranteed to taxpayers.

The Excessive Fines Theory and Its Limits

Some advocates have explored whether the resulting tax burden functions as punishment, raising the Excessive Fines Clause. The argument resonates politically because the numbers can be brutal, especially for operators with high payroll and rent costs. In court, though, the theory faces doctrinal barriers because judges often distinguish taxes from fines and hesitate to constitutionalize tax fairness disputes.

CRS, as characterized in reporting, appears to view this as another novel approach that is unlikely to overcome existing precedent.

Arizona’s Reality: Legal Here, Taxed Like It Is Not

The state-by-state expansion of legalization turned 280E into a mainstream business problem. Arizona voters approved adult-use marijuana in 2020. The state runs a regulated market with licensing, testing and compliance requirements. Dispensaries in Phoenix, Tucson and Flagstaff operate in the open. They still face the same federal tax treatment as any business trafficking in a Schedule I substance.

That contradiction is a daily operational issue, not just a legal debate. When ordinary expenses cannot be deducted, business planning changes. Hiring decisions change. Investment timelines change. In a competitive market, the policy favors those with deeper capital reserves and squeezes smaller operators that cannot absorb higher effective tax rates.

Rescheduling Could Change Everything, Fast

The Section 280E constitutionality debate sits in the shadow of a simpler lever: federal scheduling. If marijuana were moved below Schedule II, 280E would no longer apply by its terms. That shift would not require a constitutional win in court. It would be the straightforward result of the statute’s own language.

That is why many operators and policy advocates view litigation as a long shot and reform as a political fight. One route depends on persuading judges to narrow Congress’ tax power. The other depends on persuading lawmakers or federal agencies to change marijuana’s federal status.

Congress Still Holds the Cleanest Path

Legislative repeal or amendment remains the most direct fix. Bipartisan proposals have circulated in Congress to eliminate 280E’s application to state-legal cannabis businesses. Industry groups have framed the policy as tax parity, arguing that compliant operators should be treated like other regulated businesses rather than like criminal enterprises.

The counterargument is also real. Congress has not legalized cannabis federally. Lawmakers who oppose normalization can point to 280E as consistent with federal prohibition. Courts tend to treat that policy choice as Congress’ call to make.

The Real-World Impact: An Arizona Perspective

Tax law is not sexy, yet it shapes what consumers see and pay. It influences whether local operators can invest in better retail experiences, staff training, product education and community partnerships. It can also determine which brands and dispensaries have the runway to survive downturns.

Arizona’s market has matured quickly since adult-use began, and that maturity is exactly why 280E feels more irrational to operators each year.

A tightly regulated industry that funds public programs through state taxes is still treated, federally, as something the government refuses to recognize as legitimate commerce.

The Bottom Line on Section 280E Constitutionality

The CRS analysis, as publicly described, lands on an unsatisfying but important truth: Section 280E constitutionality arguments can be made, yet winning them is unlikely under current precedent. Courts generally defer to Congress on taxation. The statute’s uniform application to Schedule I and II substances weakens equal protection claims. Due process challenges face a long history of judicial restraint in tax policy. Excessive fines theories are creative but hard to fit cleanly into existing doctrine.

That leaves cannabis businesses with the oldest lesson in American governance. If the courts will not fix it, politics must. Until federal scheduling changes or Congress rewrites the rule, 280E will continue to be the tax penalty that state legalization cannot erase.

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