House Democrats Demand the IRS Issue 280E Cannabis Tax Guidance — What It Means for Dispensaries

For more than a decade, the single most punishing fact of running a cannabis business in the United States had nothing to do with banking, licensing, or even legality. It was a single line in the tax code: Section 280E. That provision routinely pushed effective federal tax rates for state-legal dispensaries to between 70% and 90%, taxing companies into the ground while their liquor-store and pharmacy neighbors deducted rent, payroll, and marketing like any normal business.

That era is finally ending — at least for medical marijuana. But as of early June 2026, the cannabis industry is stuck in an uncomfortable limbo: the law has changed, the savings are real, and yet the Internal Revenue Service still has not told operators exactly how to claim them. Now a group of federal lawmakers is publicly demanding that the IRS stop dragging its feet.

On Thursday, May 28, 2026, seven members of the U.S. House of Representatives sent a formal letter to Treasury Secretary Scott Bessent and IRS Commissioner Frank Bisignano urging the agencies to issue "prompt" and "clear" tax guidance for cannabis businesses now navigating the post-rescheduling landscape. The letter, led by Representative Steven Horsford of Nevada and Representative Steve Cohen of Tennessee, lands at a pivotal moment for an industry that has bet billions of dollars on getting this exactly right.

What Just Changed: Schedule III and the Death of 280E (for Medical)

To understand why this letter matters, you need to understand what happened on April 23, 2026.

On that day, Acting Attorney General Todd Blanche announced a final Department of Justice order rescheduling two specific categories of cannabis from Schedule I to Schedule III of the Controlled Substances Act: marijuana contained in an FDA-approved drug product, and marijuana sold under a state medical marijuana license. The order took effect upon publication in the Federal Register on April 28, 2026.

This is the critical distinction that every operator, accountant, and investor needs to internalize: only medical marijuana moved to Schedule III. Adult-use, recreational marijuana remains in Schedule I, pending a separate and broader DEA administrative hearing scheduled to begin June 29, 2026. That hearing must conclude no later than July 15. Until then, recreational cannabis lives under the old rules.

Why does the schedule matter so much for taxes? Because Section 280E — enacted in 1982 in response to a cocaine dealer who tried to deduct his business expenses — applies only to businesses "trafficking" in Schedule I or II controlled substances. It bars those businesses from deducting ordinary and necessary expenses like wages, rent, utilities, insurance, and advertising. They can subtract only their Cost of Goods Sold, which is why a dispensary that might show a healthy operating margin on paper could still owe the IRS the majority of its real profit.

Schedule III sits below that line. By moving medical marijuana to Schedule III, the DOJ order effectively lifted 280E off of state-licensed medical cannabis activity. Those businesses can now deduct normal expenses for the first time in the industry's history. Estimates put the annual federal tax savings for the cannabis sector at roughly $2.3 billion once relief is fully realized.

The Problem: The Law Changed, But the Rules Didn't

Here is the catch. Rescheduling is a legal fact, but turning that fact into a tax return is an accounting nightmare without IRS instructions — and those instructions don't fully exist yet.

On April 23, the same day as the DOJ announcement, Treasury and the IRS issued a press release (SB-0471) saying they plan to issue guidance on the federal tax consequences of the order, which they acknowledged carries "significant positive tax consequences" for the medical marijuana industry. They previewed two key concepts: a transition rule applying 280E relief to the first full taxable year that includes the order's effective date — meaning relief could reach back to the start of the 2026 tax year — and an apportionment approach for businesses that operate across both medical and adult-use lines.

But a press release is not guidance. As of early June, no formal IRS Notice, revenue procedure, or detailed rules have been published. And the questions operators face are not academic. They are the difference between a clean return and a costly audit.

The lawmakers' letter zeroes in on exactly these unresolved questions, asking the IRS to clarify:

• How 280E applies — and no longer applies — to qualifying state-legal cannabis businesses now under Schedule III, and how those businesses can claim ordinary and necessary deductions and tax credits going forward.
• The mixed-license problem. Many operators hold a single license that covers both medical and adult-use sales — one storefront, one register, two legal classifications. How does 280E apply when the same employee rings up a medical patient and a recreational customer in the same hour? The letter also asks about operators who hold separate licenses for each market.
• Cost allocation. For a business with both Schedule III (medical, now deductible) and Schedule I (adult-use, still nondeductible) activity, how should expenses like rent, payroll, and security be split between the two?
• Coordination with the Small Business Administration and other federal partners so guidance actually reaches the operators who need it.

"Clarifying guidance will promote uniform compliance, reduce potential tax disputes, and support efficient tax administration," the lawmakers wrote, urging "swift and clear action." Joining Horsford and Cohen on the letter were Representatives Betty McCollum of Minnesota, Eleanor Holmes Norton of the District of Columbia, Rashida Tlaib of Michigan, Jared Huffman of California, and Jesús "Chuy" García of Illinois.

The $1.6 Billion Question: Retroactive Refunds

The forward-looking questions are complicated enough. But the real fight is over the past.

For years, anticipating that rescheduling was coming, dozens of publicly traded multistate operators stopped paying 280E or filed amended returns claiming refunds for prior years. By early 2026, those disputed and unpaid 280E claims had ballooned to roughly $1.6 billion across the public MSOs alone. These companies are betting that once the dust settles, the IRS will let them recover taxes they argue they never truly owed.

The IRS, so far, disagrees — and it is fighting back in a way that should give every operator pause. Around May 21, 2026, the U.S. Justice Department and IRS moved to claw back roughly $8.3 million plus interest from multistate operator TerrAscend, demanding repayment of a refund the company received for its 2020 tax year. The government's position is blunt: that refund was "erroneous," and 280E applied in full for the years before rescheduling took effect.

Tax experts read the TerrAscend clawback as a signal of the government's broader posture toward that $1.6 billion in pending claims. The DOJ's own final order encouraged Treasury to consider retroactive 280E relief for years a business operated under a state medical license — but "encouraged" is not "required," and the IRS has shown no sign of opening the refund floodgates. The live tension is now in plain view: operators want retroactive relief reaching back years; the IRS appears determined to draw a hard line at the rescheduling effective date.

This is precisely why the lawmakers' letter matters. Without clear guidance, every operator is left guessing — and guessing wrong on a cannabis tax return has historically meant audits, penalties, and litigation.

What Dispensary Operators Should Do Right Now

If you run a licensed cannabis business, the uncertainty is frustrating, but inaction is not a strategy. Here is what tax professionals broadly recommend while the industry waits for the IRS to act:

Separate your medical and adult-use accounting now. If you hold a mixed license, the single most valuable thing you can do is build clean records that distinguish medical-side activity (now potentially deductible) from adult-use activity (still subject to 280E). Whatever apportionment method the IRS ultimately blesses, you will need granular data to apply it.

Don't assume retroactive relief. The TerrAscend fight is a warning. Aggressive refund positions for pre-2026 years carry real audit risk. Talk to a cannabis-specialized CPA before filing or amending anything based on a refund expectation.

Preserve your amended-return window. For many filers, tax years 2022 and 2023 — and possibly 2021 — remain within the statute of limitations for refund claims. Whatever you decide, know your deadlines so you don't lose options by default.

Plan for the 2026 tax year specifically. The previewed transition rule suggests relief could apply to the full 2026 tax year for eligible medical operators. That makes your current-year bookkeeping the foundation of your first clean, deductible return.

The Bigger Picture

The push for IRS guidance is one thread in a much larger 2026 cannabis policy story. The June 29 DEA hearing will determine whether adult-use marijuana follows medical into Schedule III — a move that would extend 280E relief to the entire industry. Federal cannabis banking reform remains stalled in Congress despite the rescheduling momentum. And a federal ban on intoxicating hemp products is scheduled to take effect in November 2026, reshaping a parallel market entirely.

For the millions of consumers who simply want to buy legal cannabis, these Washington fights can feel abstract. But they are not. When operators are taxed at 90%, those costs flow straight to the shelf in the form of higher prices and thinner menus. When 280E relief finally arrives in full, the savings can fund better stores, fairer prices, and more competition. If you want to see what a healthy, licensed market looks like today, you can find a dispensary near you on Budpedia and compare verified, licensed retailers across every legal state.

The lawmakers' letter does not, by itself, change the tax code. But it puts public pressure on an agency that has been moving cautiously while operators make consequential decisions in the dark. The cannabis industry has spent a decade asking Washington for fairness on taxes. In 2026, for the first time, the answer is partly yes — and the only thing standing between operators and that relief is a set of instructions the IRS has promised but not yet delivered.

This article is for informational purposes only and does not constitute tax or legal advice. Cannabis businesses should consult a qualified, cannabis-experienced tax professional before making filing decisions.