A medical marijuana dispensary owner-operator in Oregon was sentenced to seven months in prison this week, in what appears to be the first federal sentencing of a legal cannabis business owner for tax crimes. Matthew Price pleaded guilty to willfully failing to file income tax returns in connection with his cannabis stores, and did not file individual tax returns from 2011 to 2014 for income received from the dispensaries’ operations.

“As with any business, marijuana business owners must operate in strict compliance of the local, state and even federal tax laws,” said Rachel Gillette, a partner and chair of Greenspoon Marder’s Cannabis practice. For cannabis businesses, tax compliance is part of operating in a state-legal marketplace, and includes understanding IRC §280E and how it affects these companies and owners of flow-through marijuana entities. “A tax issue can cause big problems for marijuana businesses and business owners as most states require license holders to be ‘tax compliant’ in order to maintain the license,” Gillette said.

The IRS already keeps a close watch on the cannabis industry, and marijuana businesses are audited at greater rates than other businesses. This is due in part to the IRS’s aggressive application of the 1982 tax code provision §280E, which prevents businesses that are engaged in “drug trafficking,” including marijuana, from taking regular deductions. Because many business owners and even tax accountants do not know how §280E applies, it often causes tax deficiencies for businesses and business owners, even with their best efforts. “The Price sentencing is a tax evasion case that serves as a good reminder to cannabis industry executives on the importance of legal and tax planning,” Gillette concluded.