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The IRS Is Denying Cannabis Advocacy Groups Nonprofit Status

Legalization activists around the country are no longer being awarded tax exempt status, causing uncertainty for countless nonprofit cannabis lobbying organizations.

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In yet another anti-cannabis action from Donald Trump's administration, officials in the Internal Revenue Service (IRS) have updated the agency's policy to unequivocally deny 501(c)6 federal nonprofit status to any group that advocates for legal cannabis business.

According to Leafly reporter Sarah Somerset, the administrative change was made in January of this year as part of a 280-page tax update. But the policy shift was not brought to the attention of the larger cannabis industry until this week.

In the report, IRS officials do not mention cannabis specifically, but note that determination letters — the confirmation sent to nonprofit status applicants — will not be awarded to any group working to advance federally illicit drugs. And with medical and adult-use cannabis legalization taking hold across the country, it's not hard to read between the lines.

"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," the IRS policy update reads.

And while the agency's latest prohibition protections have largely remained under the radar for the past few months, at least one cannabis advocacy group, the New Jersey Cannabis Industry Association (NJCIA), has already felt the new IRS policy hit home.

In January, after months of talks with IRS representatives about the status of the NJCIA, the Garden State canna-business trade group was denied a nonprofit determination letter just days after the new policy was enacted.

"We had been moving along, and there were a number of points at which [the IRS was] asking us for further details on our application," NJCIA president Hugh O'Beirne told Marijuana Business Daily. "At the eleventh hour, we were informed, 'Sorry, there's been a procedural rule change, we're not giving these types of letters to your type of company.'"

For the handful of national and state-level cannabis advocacy organizations that already enjoy either 501(c)3 or 501(c)6 federal tax exemption, the IRS policy update has caused both confusion and worry, with no clear indication whether the federal agency will use the new rule to revoke businesses' existing nonprofit status.

Implemented just days before Attorney General Jeff Sessions revoked the Obama-era Cole Memo, which protected state-legal canna-businesses from federal law enforcement, the new IRS policy change adds another layer of tax burden for an industry that is already treated as second class in the eyes of Uncle Sam.

Since states like Colorado and California legalized retail cannabis businesses, the IRS has administratively shafted the industry, applying Section 280e of the U.S. tax code to deny any credits or deductions from income obtained by selling a federally illicit drug. Without deductions, state-legal pot shops and marijuana producers are made to pay incredibly high taxes, even as the threat of raid and arrest looms.

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Despite the fact that Section 280e was implemented in the early '80s as a way to dissuade black market drug dealers from taking federal tax breaks, a 2017 challenge to that rule was rejected by both U.S. tax court and the Supreme Court.

As of press time, no existing cannabis-related nonprofits have lost their tax exempt status due to the January policy change.

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