Why Minnesota Cannabis and Hemp Operators Should Worry More About State and Local Taxes Than IRC 280E
1. IRC 280E: Still a Federal Burden, But Mitigated by 471(c)
IRC Section 280E prohibits cannabis businesses from deducting most ordinary business expenses because cannabis remains a Schedule I controlled substance under federal law. This means costs like rent, marketing, and payroll are non-deductible, leaving only cost of goods sold (COGS) as a viable deduction.
However, under IRC 471(c), small businesses (those with average gross receipts under $25 million) can adopt simplified inventory accounting methods. This allows for broader inclusion of indirect costs into COGS, effectively softening the blow of 280E. With proper entity structuring and cost segregation, savvy operators can significantly reduce their federal tax liability.
2. Minnesota Has Decoupled from IRC 280E
In a major shift, Minnesota no longer conforms to IRC 280E for state income tax purposes. This means cannabis businesses in the state can deduct ordinary business expenses when calculating Minnesota taxable income—even though they remain disallowed at the federal level. While this is a welcome relief, it doesn’t eliminate the broader tax burden.
3. State and Local Taxes Are the Real Financial Threat
Minnesota imposes a 10% cannabis excise tax on retail sales, which will increase to 15% starting July 1, 2025. This is in addition to standard state sales tax and local municipal taxes, which vary by jurisdiction. These layered taxes can quickly erode margins, especially for vertically integrated businesses that handle cultivation, processing, and retail.
Key points:
These taxes are transactional and unavoidable.
They apply regardless of profitability.
Businesses must remit excise and sales taxes on every sale.
4. Hemp Product Producers Are Not Exempt
Hemp-derived product manufacturers, who are not subject to IRC 280E (since hemp is federally legal), are still required to pay Minnesota’s cannabis taxes if their products contain THC above certain thresholds or are sold in cannabis retail channels. This creates a paradox where compliant hemp businesses face cannabis-level taxation without the federal restrictions—effectively paying more in taxes than some cannabis operators.
5. Quarterly Filing Requirements and Compliance Risks
Minnesota requires cannabis retailers to file quarterly excise tax returns, and failure to comply can result in penalties or license suspension. The complexity of calculating COGS, layering multiple taxes, and maintaining cannabis-compliant bookkeeping makes accurate filing a challenge. Many operators risk overpaying (hurting cash flow) or underpaying (triggering audits and fines).
Conclusion
While IRC 280E remains a federal hurdle, Minnesota’s decoupling and the availability of 471(c) offer relief. The real concern for cannabis and hemp operators in Minnesota should be the high and layered state and local taxes, which apply regardless of profitability and affect even federally legal hemp businesses. Strategic tax planning, accurate recordkeeping, and proactive compliance are essential to surviving—and thriving—in Minnesota’s cannabis economy.
