[jericsinger]

Not quite. What would happen is that people would get rung up on drug trafficking charges and then the IRS would pile on by taxing the undeclared illegal income. In the late 70s/early 80s, a case[1] made its way through the tax courts wherein a petitioner, a convicted drug dealer facing a jeopardy assessment from the IRS, filed a tax return for the prior year in which he declared income calculated net of COGS and other misc business expenses. The IRS disallowed these deductions, which if upheld meant that the petitioner would owe tax on his entire gross income. The petitioner sued and won, which established a precedent that didn't quite gibe with the political climate of the day. In response, the Senate Finance Committee promulgated a code amendment generally referred to as 280E[2], which prohibits those engaged in illegal activities from deducting ordinary and reasonable business expenses when reporting their net income to the IRS. Only COGS can be deducted, which for dispensaries and other non-manufacturing license holders, can result in an effective tax rate of 70% or more. In fact, it's quite easy to lose money and still owe taxes in the industry if you let G&A run away from you.

[1] https://scholar.google.com/scholar_case?case=702348433062253... [2] https://newrevenue.org/2013/03/13/marijuana-tax-code-section...