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IRS Now Denying Cannabis Nonprofits Tax-Exempt Status

The practice began in January focusing on 501(c)6 organizations

Since the start of 2018, there have been several changes at the federal level that are disturbing to those in the cannabis industry.  One that is currently receiving increased focus is the change in approach to cannabis nonprofits regarding their tax-exempt status.

Beginning in January, the Internal Revenue Service has been denying tax-exempt status to nonprofits in the cannabis industry, focusing on 501(c)6 organizations.  These groups include industry and political advocacy groups that lobby and write policy regarding medical and recreational marijuana laws.  Thus far, the IRS has only targeted new groups that are seeking to gain tax-exempt status; nonprofits that already have tax-exempt status have yet to see a change.

This change comes from an Internal Revenue Service bulletin that was issued on January 2 of this year.  In it, the IRS announced that it had amended its rules for issuing tax-exempt status.  As stated in the bulletin:

“The Service will not issue a determination letter when the request concerns an organization whose purpose is directed to the improvement of business conditions of one or more lines of business relating to an activity involving controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act), which are prohibited by Federal law—regardless of its legality under the law of the state in which such activity is conducted.”

While this does not specifically call out the cannabis industry, there are no other industries the language can be applied to outside of the black market.

 

What Is a Determination Letter?

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One of the key terms in the language of the bulletin is “determination letter.”  This letter is a document issued by the Internal Revenue Service which authorizes tax-exempt status for an organization at the federal level.  In order to receive a determination letter, the nonprofit organization must submit an application, which is reviewed by an examiner at the IRS.  Under the new rule, the examiner would likely reject applications from nonprofits that are tied to the cannabis industry if the examiner can find that the efforts of the organization are aimed to improve business conditions for the industry.

It is rare for determination letters to be rescinded, and as of this moment, few ever need to be renewed.  This indicates that nonprofits who already have secured tax-exempt status should be okay.  However, as we have seen this year, things can change in an instant.

 

Reactions Within the Industry

The National Cannabis Industry Association is very concerned with the change in rules and the impact the change has already had on the industry.  The NCIA is an established organization that received tax-exempt status in 2010, and as a leader in the field, is upset at how the new rule will hurt lobbying efforts, especially in states that are just starting their push towards legalization.  According to NCIA co-founder and executive director Aaron Smith, as told to Leafly, “We strongly oppose the rules change because legal cannabis businesses and professionals have a fundamental, constitutional right to associate and engage in free speech activities.  Associations are simply the vehicles professionals use to collectively express those constitutional rights. Cannabis-related associations that comply with the law should be afforded the same treatment by the IRS as any other lawful nonprofit entity.”

Many in the cannabis industry see this as an expansion of 208E, which prohibits most tax deductions for businesses that deal with the sale of Schedule 1 substances.  However, no matter what laws it builds off of, it is a clear attack on the industry.

“The current administration continues to act in direct contradiction to what the majority of Americans want,” Krista Whitley, CEO of Nevada-based Altitude Products, said to Leafly. “Blocking nonprofit cannabis industry associations who are working to advocate for responsible consumption of this powerful plant medicine makes absolutely no sense.”

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