Could New Mexico apply federal Section 280E to deny ordinary business deductions to a licensed medical-cannabis producer?

Plain-English summary

New Mexico Top Organics won full abatement of a $423,341.34 corporate income tax assessment based on federal Section 280E. The licensed producer cultivated, processed, and dispensed medical cannabis throughout New Mexico under the Compassionate Use Act.

The Department's assessment consisted of $330,333 tax, $66,066.60 penalty, and $26,941.74 interest for the 2012–2016 audit years. Top Organics paid $428,221.58 against the assessment, stopping further interest, and sought a refund plus abatement of any remaining balance.

The audit treated cost of goods sold as allowable but applied federal Section 280E to remove ordinary and necessary business expenses from the state tax computation. Those disallowances drove the disputed increase in base income.

Hearing Officer Chris Romero granted summary judgment to the taxpayer:

• Section 280E controlled federal deductions because cannabis remained a Schedule I controlled substance under federal law.
• New Mexico had adopted a different policy through the Compassionate Use Act, making licensed medical-cannabis production lawful and seeking to make treatment accessible to patients with debilitating conditions.
• Sacred Garden required the medical-cannabis and tax statutes to be read harmoniously and identified affordability as part of the legislative purpose.
• The corporate base-income definition applied “unless the context requires otherwise.” That language allowed New Mexico to omit the federal 280E disallowance where strict federal conformity would frustrate the state's cannabis policy.
• The 2021 Cannabis Regulation Act later made the treatment explicit by excluding otherwise federally deductible Section 280E expenditures from New Mexico base income. The hearing officer viewed the enactment as clarifying existing policy.

The decision did not change federal tax law. It determined that the federal expense disallowance should not inflate this licensed producer's New Mexico corporate income tax.

Result: protest GRANTED; assessment fully ABATED; amounts paid ordered REFUNDED.

What this means for you

Paying an assessment can stop interest without abandoning the protest

Top Organics paid more than $428,000 during the dispute, halting interest accrual, and still pursued a refund and abatement.

Federal 280E and New Mexico base income were treated separately

The business still faced the federal rule. The state decision used New Mexico statutory context to remove the 280E effect from the state calculation.

COGS and ordinary deductions are distinct

Section 280E generally allows cost of goods sold to reduce gross income. The dispute concerned operating expenses beyond COGS that the Department removed from the New Mexico computation.

Later statutory language directly addressed the issue

The 2021 provision quoted in the ruling expressly excludes otherwise deductible 280E expenses from state base income. Apply the version governing your own periods and entity.

Common questions

Q: What amount did Top Organics pay and recover?
A: It paid $428,221.58 against the assessment. The decision abated the assessment and ordered any amounts paid toward it refunded.

Q: What was the assessed amount?
A: $423,341.34: $330,333 tax, $66,066.60 penalty, and $26,941.74 interest.

Q: Did the decision eliminate federal Section 280E?
A: No. It concerned New Mexico corporate base income only.

Q: Why was Sacred Garden important?
A: It recognized that New Mexico's cannabis and tax statutes should work together to support treatment access and affordability.

Q: Can another producer rely on D&O 22-06?
A: No. It resolves Top Organics' 2012–2016 assessment. Later periods may be governed directly by the 2021 statutory language.

Citations and references

Statutes:

• 26 U.S.C. § 280E — federal controlled-substance business deduction disallowance
• 26 U.S.C. § 162(a) — ordinary and necessary business expenses
• NMSA 1978, § 7-2A-2(C) (2017, amended 2021) — corporate base income and contextual flexibility
• NMSA 1978, § 7-2A-2(C)(4) (2021) — state exclusion for otherwise deductible Section 280E expenses
• NMSA 1978, §§ 26-2A-2 and 26-2B-4(F) — Compassionate Use Act purpose and licensed-producer protection
• NMSA 1978, § 7-9-73.1(A) (2021) — cannabis gross-receipts deduction discussed through Sacred Garden
• NMSA 1978, §§ 7-1-17 and 7-1-3(X) — assessment presumption and scope of tax
• NMSA 1978, §§ 7-1B-6 and 7-1B-8; § 7-1-25 — hearing procedure and appeal

Cases:

• Sacred Garden, Inc. v. New Mexico Taxation & Revenue Department, 2021-NMCA-038, 495 P.3d 576, certiorari quashed Feb. 23, 2022 — accessibility, affordability, and harmonious tax treatment
• Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 173 (2007) — federal Section 280E
• Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-034 — federal starting point and state-liability review
• Chavez v. Commissioner of Revenue, 1970-NMCA-116 — construction furthering legislative intent

Source

• Listing: New Mexico Decisions & Orders
• Decision post: New Mexico Top Organics
• Decision PDF: D&O 22-06

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 NEW MEXICO TOP ORGANICS
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L0699119792

8 v. AHO Case Number 19.07-142A, D&O #22-06

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER
11 GRANTING SUMMARY JUDGMENT FOR TAXPAYER

12 On June 10, 2021, Hearing Officer Chris Romero, Esq., conducted a hearing on the

13 competing motions for summary judgment in the protest of New Mexico Top Organics, also

14 known as New Mexico Top Organics-Ultra Health (“Taxpayer”) pursuant to the Tax

15 Administration Act and the Administrative Hearings Office Act. Ms. Kristina Caffrey, Esq.,

16 appeared representing Taxpayer. Mr. Richard Pener, Esq., appeared on behalf of the opposing

17 party in the protest, the Taxation and Revenue Department (“Department”).

18 Taxpayer filed Taxpayer’s Motion for Summary Judgement (“Motion”) on August 6,

19 2019. The Department filed New Mexico Taxation and Revenue Department’s Response to

20 Taxpayer’s Motion for Summary Judgement and Cross Motion and Memorandum in Support of

21 Cross Motion for Summary Judgment (“Response and Cross Motion”) on August 20, 2019. The

22 parties went on to also prepare their respective responses and replies and engage in additional

23 discovery, some of which was significantly delayed by the circumstances of the public health

24 emergency presented by COVID-19.

25 The June 10, 2021 hearing occurred by videoconference pursuant to NMSA 1978,

26 Section 7-1B-8 (H) under the circumstances of the public health emergency presented by

27 COVID-19, as discussed in greater detail in Standing Order 21-02, which is made part of the

In the Matter of the Protest of New Mexico Top Organics
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1 record of the proceeding.

2 The legal issue presented concentrates on whether New Mexico is either required or

3 permitted to apply 26 U.S.C. Section 280E (hereafter “Section 280E”) in disallowing

4 certain business deductions in the computation of New Mexico income tax. Because the

5 Hearing Officer concludes that application of Section 280E contradicts the intentions of

6 the Legislature under New Mexico law, Taxpayer’s motion and protest should be granted.

7 The Department’s motion should be denied. IT IS DECIDED AND ORDERED AS

8 FOLLOWS:

9 FINDINGS OF FACT

10 Taxpayer’s Background

11 1. Taxpayer is a New Mexico non-profit corporation with its principal place of

12 business in Bernalillo, New Mexico. [Motion (Exhibit 1, Para. 2)]

13 2. Taxpayer is licensed by the New Mexico Department of Health as a licensed

14 producer of medical cannabis, and it has been so licensed since 2012. [Motion (Exhibit 1, Para.

15 3)]

16 3. Taxpayer has produced, possessed, distributed, and dispensed medical cannabis

17 since 2012. [Motion (Exhibit 1, Para. 3)]

18 4. Since 2014, Taxpayer’s production and cultivation of medical cannabis has taken

19 place at an 11.5-acre cultivation facility in Bernalillo. That facility currently has 66,000 square

20 feet of greenhouse space, 3,500 square feet of space devoted to curing and drying cannabis,

21 23,000 square feet of space devoted to processing cannabis into oils, edibles, lotions, and other

22 products, and 4,200 square feet of office space. [Motion (Exhibit 1, Para. 6)]

In the Matter of the Protest of New Mexico Top Organics
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1 5. Taxpayer dispenses cannabis to qualified patients through a statewide system of

2 dispensaries. As of 2019, Taxpayer had 17 dispensaries located in 14 counties in New Mexico. In

3 2018, Taxpayer grew its network from 9 dispensaries to 12 dispensaries. In 2019, Taxpayer grew

4 its network from 12 dispensaries to 17 dispensaries. [Motion (Exhibit 1, Para. 7)]

5 6. Taxpayer had a workforce of 200 employees as of 2019. In 2018, Taxpayer grew

6 its workforce from 95 employees to 150 employees. [Motion (Exhibit 1, Para. 8)]

7 7. Taxpayer pays for health insurance benefits for its full-time employees. [Motion

8 (Exhibit 1, Para. 9)]

9 8. As of the time Taxpayer filed its Motion, its monthly payroll for all full-time and

10 part-time employees was $335,000. [Motion (Exhibit 1, Para. 10)]

11 9. In 2018, Taxpayer’s average monthly payroll for all full-time and part-time

12 employees was $190,000. [Motion (Exhibit 1, Para. 11)]

13 10. Taxpayer’s total revenue in 2017 was $10,538,603. [Motion (Exhibit 1, Para. 12)]

14 11. Taxpayer’s total revenue in 2018 was $16,325,771. [Motion (Exhibit 1, Para. 13)]

15 12. Taxpayer’s revenue for 2019 through the end of July was $10,702,829. [Motion

16 (Exhibit 1, Para. 14)]

17 13. Taxpayer grows its cannabis plants in greenhouse facilities. Greenhouses are

18 supplied with artificial light, water, and nutrients for the plants. One 23,000-square-foot

19 greenhouse can house approximately 2,500 plants depending on plant size. The average monthly

20 electric and gas bill for one 23,000-square-foot greenhouse is $5,000. The average monthly water

21 bill for one 23,000-square-foot greenhouse is $2,000. The average monthly bill for plant food for

22 one 23,000-square-foot greenhouse is $20,000. [Motion (Exhibit 1, Para. 15)]

In the Matter of the Protest of New Mexico Top Organics
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1 14. The New Mexico Department of Health assesses license fees against medical

2 cannabis producers. The licensing fee is $30,000 for the first 150 cannabis plants, plus $10,000

3 for each additional 50 plants. Prior to March 2019, each producer was limited to 450 plants.

4 [Regulation 7.34.4.8 (W) (2) NMAC; Motion (Exhibit 1, Para. 16)]

5 15. In both the 2017-2018 and 2018-2019 licensing years, Taxpayer paid $90,000 to

6 the New Mexico Department of Health for licensing fees. [Motion (Exhibit 1, Para. 17)]

7 16. Taxpayer pays rent and/or mortgages for its cultivation facility and the various

8 dispensaries it operates around the state. In 2018, the total amount paid by Taxpayer in rent and

9 mortgages was $6,474,386. [Motion (Exhibit 1, Para. 18)]

10 The Audit

11 17. In 2018, the Department began a special audit of Taxpayer.

12 18. The Department delivered the audit results on or about January 16, 2019. [Motion

13 (Exhibit 2)]

14 19. The audit evaluated the periods from January 1, 2012 through June 30, 2017,

15 representing tax years 2012 through 2016. [Response and Cross Motion (Affidavit of Theresa

16 Root, Para. 5 (d))].

17 20. The Department observed, “Cost of Goods Sold (COGS) is the only allowable

18 expense that can be taken by a business in this industry as mandated under Title 26 Federal

19 Revenue Code (IRC) §280 (E)” [Motion (Exhibit 2 (“Summary of Findings”)); Response and

20 Cross Motion (Affidavit of Theresa Root, Para. 5 (f))]

21 21. The discussion of COGS derives from Memorandum No. 201504011 issued by

22 the Internal Revenue Service on January 23, 2015 that explains the rationale for permitting

23 medical cannabis businesses to deduct COGS from income. [Motion (Exhibit 4)]

In the Matter of the Protest of New Mexico Top Organics
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1 22. The Department further explained, “review of [Taxpayer]’s federal returns that

2 the reported COGs for each year included regular business expenses that would have otherwise

3 been disallowed under Title 26 IRC §280 (E). [Taxpayer] also understated its ordinary

4 income…for the tax years 2012 and 2013 and its Federal Taxable Income…for the tax years

5 2014-2016 as a result of taking business expenses other than COGS as mandated under Title 26

6 IRC §280 (E)” [Motion (Exhibit 2, Page 1)]

7 23. The Department additionally found that “reported taxable income amounts on

8 [Taxpayer’s] tax years 2014-2016 NM CIT returns matched those reported on its federal forms

9 1120 however, taxable income was derived from including and deducting business expenses in

10 COGS that would otherwise not be allowed under Title 26 IRC §280 (E)” [Motion (Exhibit 2,

11 Page 2)]

12 24. The Department’s tax assessment was based upon the “audited NM taxable

13 income amounts” being “derived by deducting the audited COGS from the total amount of

14 revenue” [Motion (Exhibit 2, Page 2)]

15 25. For the tax years ending December 31, 2012, December 31, 2013, June 30, 2014,

16 June 30, 2015, June 30, 2016, and June 30, 2017, Taxpayer took a combined deduction for

17 COGS on its federal tax returns of $3,945,067. The Department, after adjustments, allowed a

18 combined deduction for COGS on Taxpayer's New Mexico corporate tax returns of $4,125,440.

19 [Response and Cross Motion (Affidavit of Theresa Root, Para. 5 (g))]

20 26. For the tax years ending December 31, 2012, December 31, 2013, June 30, 2014,

21 June 30, 2015, June 30, 2016, and June 30, 2017, Taxpayer deducted the following amounts of

22 business expenses (in excess of COGS) on its federal returns to arrive at its taxable income:

23 December 31, 2012: $5,960; December 31, 2013: $167,075; June 30, 2014: $61,042; June 30,

In the Matter of the Protest of New Mexico Top Organics
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1 2015: $241,804; June 30, 2016: $1,687,229; June 30, 2017: $3,696,259. [Response and Cross

2 Motion (Affidavit of Theresa Root, Para. 5 (i))]

3 27. The Department disallowed Taxpayer’s claimed ordinary and necessary business

4 expense deductions for the tax years ending December 31, 2012, December 31, 2013, June 30,

5 2014, June 30, 2015, June 30, 2016, and June 30, 2017 asserting that Taxpayer was not permitted

6 to deduct these expenses pursuant to Section 280E. [Response and Cross Motion (Affidavit of

7 Theresa Root, Para. 5 (j))]

8 28. The Department’s audit claimed, “During the audit period [Taxpayer] filed

9 original NM CIT returns for the tax years 2014-2016. [Taxpayer] failed to appropriately apply

10 Title 26 IRC §280 (E) to all years included under audit by including business expenses in COGS

11 which otherwise would have been disallowed.” [Motion (Exhibit 2, Page 3)]

12 29. The Audit Narrative explained, “The growth, sale and use of Cannabis among

13 other controlled substances is deemed as illegal activities under Federal regulation. No NM

14 legislation has been passed to allow a business expense deduction for New Mexico Income tax

15 purposes relative to Title 26 IRC §280 (E).” It continued, “NM Corporate Income Tax statutes

16 and regulations follow the Federal Internal Revenue Code (IRC) set by the Federal Treasury

17 Department, Internal Revenue Service (IRS). No deviations from the IRC have been made in the

18 Department statutes or regulations relative to the treatment of the deductions for illegal activities

19 that would affect the treatment of the facts in this audit.” [Motion (Exhibit 2, Page 3)]

20 30. Citing NMAC 7.34.4.25(A), the Department explained, “Albeit this section of the

21 Health Department regulation decriminalizes the use of cannabis for medicinal purposes and

22 exempts users from civil penalties – it does not speak to, nor are there regulations which instill

In the Matter of the Protest of New Mexico Top Organics
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1 the decoupling from the Federal treatment of expenses in connection with the illegal sale of

2 drugs” [Motion (Exhibit 2, Page 4)]

3 31. On February 18, 2019, the Department issued a Notice of Assessment of Taxes

4 and Demand for Payment under Letter ID L0699119792 (“Assessment”) in the total amount of

5 $423,341.34 comprised of $330,333.00 in corporate income tax, $66,066.60 in penalty, and

6 $26,941.74 in interest. [Motion (Exhibit 3); Response and Cross Motion (Affidavit of Theresa

7 Root, Para. 5 ( e)); Administrative File]

8 32. On May 15, 2019, Taxpayer, by and through counsel, submitted a protest of the

9 Assessment. [Administrative File]

10 33. Taxpayer paid $428,221.58 against the Assessment on May 28, 2019. [Response

11 and Cross Motion (Affidavit of Theresa Root, Para 5 (k))]

12 Procedural History of the Protest

13 34. On May 29, 2019, the Department acknowledged Taxpayer’s protest under Letter

14 ID No. L2004356272. [Administrative File]

15 35. On July 12, 2019, the Department filed a Hearing Request on Taxpayer’s protest.

16 [Administrative File]

17 36. On July 12, 2019, the Administrative Hearings Office entered a Notice of

18 Telephonic Scheduling Hearing which set an initial scheduling hearing for August 5, 2019.

19 [Administrative File]

20 37. On August 5, 2019, a telephonic scheduling hearing occurred at which time

21 Taxpayer objected that the hearing would satisfy the 90-day hearing deadline established by

22 NMSA 1978, Section 7-1B-8 (A). [Administrative File]

In the Matter of the Protest of New Mexico Top Organics
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1 38. Because of Taxpayer’s objection that the initial scheduling hearing would satisfy

2 the 90-day hearing deadline, the Administrative Hearings Office scheduled a hearing on the

3 merits of the protest to occur on August 27, 2019 and set other associated deadlines.

4 [Administrative File]

5 39. On August 6, 2019, Taxpayer filed Taxpayer’s Motion for Summary Judgement

6 (“Motion”). [Administrative File]

7 40. On August 20, 2019, the Department filed New Mexico Taxation and Revenue

8 Department’s Response to Taxpayer’s Motion for Summary Judgement and Cross Motion and

9 Memorandum in Support of Cross Motion for Summary Judgment (“Response and Cross

10 Motion”). [Administrative File]

11 41. As of August 20, 2019, Taxpayer owed two hundred ten dollars and fifty-six cents

12 ($210.56) on the Assessment. Said amount is composed entirely of penalty. [Response and Cross

13 Motion (Affidavit of Mary Griego, Para. 5)]

14 42. On August 23, 2019, the Department filed the Prehearing Statement of the New

15 Mexico Department of Taxation and Revenue. [Administrative File]

16 43. On August 23, 2019, Taxpayer filed Taxpayer’s Pre-Hearing Statement.

17 [Administrative File]

18 44. On August 26, 2019, the parties filed a Joint Motion to Vacate and Reset Merits

19 Hearing. [Administrative File]

20 45. On August 26, 2019, the Administrative Hearings Office entered an Order

21 Denying Joint Motion to Vacate and Reset Merits Hearing. [Administrative File]

22 46. A hearing on the merits of Taxpayer’s protest commenced on August 27, 2019 at

23 which time the parties agreed that the hearing should satisfy the 90-day hearing requirement but

In the Matter of the Protest of New Mexico Top Organics
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1 that more time was required in order for all issues to be adequately prepared for presentation. On

2 August 28, 2019, the Administrative Hearings Office entered a Scheduling Order and Notice of

3 Administrative Hearing which set a hearing on the Motion and Response and Cross Motion for

4 October 15, 2019 and set deadlines for further briefing. [Administrative File]

5 47. The hearings occurring on August 5, 2019 and August 27, 2019 were both held

6 within 90 days of the Taxpayer’s protest being acknowledged by the Department.

7 [Administrative File]

8 48. On October 1, 2019, Taxpayer filed Taxpayer’s Motion to Compel and/or for

9 Sanctions Against Department. [Administrative File]

10 49. On October 1, 2019, Taxpayer filed Taxpayer’s Response to Department’s

11 Motion for Summary Judgment and Reply in Support of its Motion for Summary Judgment.

12 [Administrative File]

13 50. On October 16, 2019, the Department filed New Mexico Taxation and Revenue

14 Department’s Response to Taxpayer’s Motion to Compel and/or Sanctions Against Department.

15 [Administrative File]

16 51. On October 29, 2019, Taxpayer filed Taxpayer Ultra Health’s Reply on Its

17 Motion to Compel and/or for Sanctions. [Administrative File]

18 52. On November 21, 2019, the Administrative Hearings Office entered a Notice of

19 Hearing on Taxpayer’s Motion to Compel. The hearing was set to occur on December 16, 2019.

20 [Administrative File]

21 53. On February 18, 2020, the Administrative Hearings Office entered an Order

22 Granting Motion to Compel. [Administrative File]

In the Matter of the Protest of New Mexico Top Organics
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1 54. On March 4, 2020, Taxpayer filed an Amended Notice to Take Deposition of

2 Theresa Root. The deposition was set to occur on March 25, 2020. [Administrative File]

3 55. On March 9 2020, Taxpayer filed a Second Amended Notice to Take Deposition

4 of Theresa Root. The deposition was set to occur on March 25 2020. [Administrative File]

5 56. On March 16, 2020, due to COVID-19 precautions or restrictions, Taxpayer filed

6 its Notice to Vacate Deposition of Theresa Root and Taxpayer Ultra Health’s Motion to Extend

7 Deadline for Deposition of Theresa Root. [Administrative File]

8 57. On March 17, 2020, the Administrative Hearings Office entered an Order

9 Extending Deadline. [Administrative File]

10 58. On May 13, 2020, due to COVID-19 precautions or restrictions, Taxpayer filed

11 Taxpayer Ultra Health’s Motion to Extend Deadline for Deposition of Theresa Root.

12 [Administrative File]

13 59. On May 13, 2020, the Administrative Hearing Office entered an Order Extending

14 Deadline. [Administrative File]

15 60. On July 7, 2020, due to COVID-19 precautions or restrictions, Taxpayer filed

16 Taxpayer Ultra Health’s Motion to Extend Deadline for Deposition of Theresa Root.

17 [Administrative File]

18 61. On July 8, 2020, the Administrative Hearings Office entered an Order Extending

19 Deadline. [Administrative File]

20 62. On August 4, 2020, due to COVID-19 precautions or restrictions, Taxpayer filed

21 a Second Amended Notice to Take Deposition of Theresa Root. [Administrative File]

In the Matter of the Protest of New Mexico Top Organics
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1 63. On October 13, 2020, Taxpayer filed Taxpayer’s Supplement to Its Response to

2 the Department's Motion for Summary Judgment and Reply in Support of Its Motion for

3 Summary Judgment. [Administrative File]

4 64. On October 27, 2020, the Department filed New Mexico Taxation and Revenue

5 Department’s Supplemental Reply to Taxpayer’s Supplement to Its Response to the

6 Department’s Motion for Summary Judgment and Reply in Support of Its Motion for Summary

7 Judgment. [Administrative File]

8 65. On April 5, 2021, the Administrative Hearings Office entered a Notice of

9 Videoconference Hearing on Motions for Summary Judgment. [Administrative File]

10 66. On June 3, 2021, the Department filed New Mexico Taxation and Revenue

11 Department’s Notice of Supplemental Authority. [Administrative File]

12 67. A videoconference hearing on the motions was held on June 10, 2021.

13 [Administrative File]

14 DISCUSSION

15 Because the issue presented centers on a question of law, and there are no disputed material

16 facts, both parties moved for summary judgment. In controversies involving a question of law, or

17 application of law where there are no disputed facts, summary judgment is appropriate. See

18 Koenig v. Perez, 1986-NMSC-066, ¶10-11, 104 N.M. 664. If the movant for summary judgment

19 makes a prima facie showing that it is entitled to a judgment as a matter of law, the burden shifts

20 to the opposing party to show evidentiary facts that would require a trial on the merits. See Roth

21 v. Thompson, 1992-NMSC-011, ¶17, 113 N.M. 331.

22 The material facts presented by this protest are not in dispute. Taxpayer is engaged in the

23 business of producing, packaging, and dispensing medical cannabis, an activity that during all times

In the Matter of the Protest of New Mexico Top Organics
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1 relevant to the protest has been legal under the Lynn and Erin Compassionate Use Act, NMSA

2 1978, Chapter 26, Article 2B (“Compassionate Use Act”), the purpose of which “is to allow the

3 beneficial use of medical cannabis in a regulated system for alleviating symptoms caused by

4 debilitating medical conditions and their medical treatments.” See NMSA 1978, Section 26-2A-2

5 (2007)

6 Presumption of Correctness

7 Pursuant to NMSA 1978, Section 7-1-17 (C) (2007), the Assessment of tax issued in this

8 case is presumed correct and unless otherwise specified, for the purposes of the Tax

9 Administration Act, “tax” includes interest and civil penalty. See NMSA 1978, Section 7-1-3 (X)

10 (2013). Therefore, under Regulation 3.1.6.13 NMAC, the presumption of correctness under

11 Section 7-1-17 (C) also extends to the Department’s assessment of penalty and interest. See

12 Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation & Revenue, 2006-NMCA-050, ¶16, 139

13 N.M. 498, 134 P.3d 785 (agency regulations interpreting a statute are presumed proper and are to be

14 given substantial weight).

15 As a result, the presumption of correctness in favor of the Department requires that

16 Taxpayer carry the burden of presenting countervailing evidence or legal argument to establish

17 entitlement to abatement of the Assessment. See N.M. Taxation & Revenue Dep’t v. Casias

18 Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436. “Unsubstantiated statements that [an] assessment

19 is incorrect cannot overcome the presumption of correctness.” See MPC Ltd. v. N.M. Taxation &

20 Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308; See also Regulation 3.1.6.12

21 NMAC. If a taxpayer presents sufficient evidence to rebut the presumption, then the burden

22 shifts to the Department to re-establish the correctness of the assessment. See MPC, 2003-

23 NMCA-021, ¶13.

In the Matter of the Protest of New Mexico Top Organics
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1 Since the central issue in dispute relates to the claim for business deductions, Taxpayer

2 bears the burden of establishing entitlement to a clearly and unambiguously expressed statutory

3 deduction. See TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-007, ¶9, 133 N.M.

4 447, 64 P.3d 474. Tax statutes must also be given “fair, unbiased, and reasonable construction,

5 without favor or prejudice to either the taxpayer or the [s]tate, to the end that the legislative

6 intent is effectuated and the public interests to be subserved thereby are furthered.” See Chavez v.

7 Comm'r of Revenue, 1970-NMCA-116, ¶7, 82 N.M. 97, 476 P.2d 67.

8 Since Taxpayer has paid the vast majority of the outstanding assessment, the relief sought

9 takes the form of a request for refund, with the request to abate any outstanding balance. By

10 paying the assessment, Taxpayer halted the accrual of interest under the Assessment during the

11 pendency of the protest.

12 Application of 26 U.S.C. Section 280E

13 The central issue of this protest is the application of Section 280E in the computation of

14 Taxpayer’s New Mexico income tax liability.

15 At the federal level, Section 280E prohibits a Taxpayer and other similarly situated

16 businesses from taking deductions and claiming credits on their federal income taxes for any

17 amounts paid or incurred in “trafficking1” in controlled substances. See Californians Helping to

18 Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 182 (2007) (“Section 280E and its

19 legislative history express a congressional intent to disallow deductions attributable to a trade or

20 business of trafficking in controlled substances.”). Although Section 280E does not define

21 “trafficking,” courts in this context have interpreted the term to mean “engaging in a commercial

1
The Hearing Officer acknowledges that the term, “trafficking,” may be perceived as suggesting criminal activities.
The Hearing Officer does not intend for use of that term in this Decision and Order to imply such meaning with
respect to Taxpayer (or any other similarly situated business). Use of the term, “trafficking,” is merely intended to
correspond with the language used in Section 280E.

In the Matter of the Protest of New Mexico Top Organics
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1 activity—that is, to buy and sell regularly.” Id.

2 A sampling of the categories of deductions precluded include “ordinary and necessary”

3 business expenses under IRC Section 162(a), state and local taxes under IRC Section 164, losses

4 under IRC Section 165, and depreciation under IRC Section 167. Even charitable contributions

5 incurred “in carrying on” the business of trafficking marijuana have been held nondeductible.

6 See Wellness v. Comm'r of Internal Revenue, 156 T.C. 62 (2021). As a result, businesses

7 lawfully engaged in the commercial activity at the state level of regularly buying or selling

8 cannabis are prohibited from “writing off” many of their operating expenses and overhead costs

9 including rent, utilities, and payroll expenses for federal income tax purposes because of their

10 status under federal law.

11 In this protest, Taxpayer perceives the Department as incorrectly applying “the entirety of

12 the federal Internal Revenue Code to the calculation of New Mexico income tax.” In other

13 words, according to Taxpayer, the Department assumes the same position as the Internal

14 Revenue Service regarding taxation of businesses in the medical cannabis sector despite the fact

15 that New Mexico law and federal law view the activity in stark contrast to one another.

16 Understandably, the Department does not see the issue through the same lens. The

17 Department asserts that it is required by statute to determine “base income” with reference to

18 “taxable income” as determined by a taxpayer’s federal corporate income tax return. It cites

19 NMSA 1978, Section 7-2A-2 (C) (2017, Amended 2021) which explains in relevant part:

20 C. “base income” means that part of the taxpayer’s income defined
21 as taxable income and upon which the federal income tax is
22 calculated in the Internal Revenue Code for income tax purposes
23 plus [other enumerated items.]

24 [Emphasis Added]

25 As such, the Department relies on the longstanding method of calculating state income

In the Matter of the Protest of New Mexico Top Organics
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1 tax by beginning with the income upon which a taxpayer must pay tax to the federal government.

2 See Holt v. New Mexico Dept. of Taxation & Revenue, 2002-NMSC-034, ¶9, 133 N.M. 11, 13,

3 59 P.3d 491, 493; Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, ¶39, 88 N.M.

4 411, 416, 540 P.2d 1300, 1305.

5 It asserts that the starting point for state taxation begins with “base income,” as calculated

6 under the requirements of the Internal Revenue Code. For that reason, “base income” will

7 incorporate applicable deductions for “all the ordinary and necessary expenses paid or incurred

8 during the taxable year in carrying on any trade or business” under 26 U.S.C Section 162 (a) with

9 adjustment for the application of Section 280E when deemed to apply.

10 Despite the broad prohibitions established by Section 280E, it does not prevent cannabis

11 businesses from reducing gross receipts by the cost of goods sold (“COGS”) when computing

12 their federal income tax liability.2 COGS generally refers to “expenditures necessary to acquire,

13 construct or extract a physical product which is to be sold.” See Reading v. Comm’r, 70 T.C.

14 730, 733 (1978), aff’d, 614 F.2d 159 (8th Cir. 1980). “A taxpayer derives COGS using the

15 following formula: beginning inventories plus current-year production costs (in the case of a

16 producer) or current-year purchases (in the case of a reseller) less ending inventories.” See FN2

17 It is within this setting that the Department rejected Taxpayer’s claim for deductions for

18 ordinary and necessary business expenses explaining that the New Mexico Legislature had not

19 provided for such deductions, and for that reason, it was obligated to strictly adhere to Section

20 280E in the same manner as the IRS. The Department’s audit narrative explained:

21 NM Corporate Income Tax statutes and regulations follow the
22 Federal Internal Revenue Code (IRC) set by the Federal Treasury
23 Department, Internal Revenue Service (IRS). No deviations from
24 the IRC have been made in the Department statutes or regulations

2
https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions
(referencing as authority Motion (Exhibit 4))

In the Matter of the Protest of New Mexico Top Organics
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1 relative to the treatment of the deductions for illegal activities that
2 would affect the treatment of the facts in this audit.

3 Therefore, the Department concluded, “[Taxpayer] failed to appropriately apply Title 26

4 IRC §280 (E) to all years included under audit by including business expenses in COGS which

5 otherwise would have been disallowed.” The Department concluded that Taxpayer’s “base

6 income” should be adjusted to reflect the disallowance of deductions for ordinary and necessary

7 business expenses prohibited by Section 280E, along with other expenses which it determined

8 were inappropriately included in the computation of costs of goods sold. The result of the

9 disallowance increases Taxpayer’s “base income” and associated income tax, leading to the

10 disputed Assessment at issue in this protest.

11 The referenced provision of the Internal Revenue Code, Section 280E, specifies:

12 No deduction or credit shall be allowed for any amount paid or
13 incurred during the taxable year in carrying on any trade or
14 business if such trade or business (or the activities which comprise
15 such trade or business) consists of trafficking in controlled
16 substances (within the meaning of schedule I and II of the
17 Controlled Substances Act) which is prohibited by Federal law or
18 the law of any State in which such trade or business is conducted.

19 Notwithstanding the prohibition of medical cannabis under federal law, New Mexico has

20 legislatively legalized and legitimized the production, packaging, and dispensing of medical

21 cannabis under the Compassionate Use Act. Yet, the Department claims, “[t]he fact that

22 Taxpayer produces and sells medical marijuana in a state that has legalized its production and

23 sale (for medical purposes) is irrelevant for purposes of I.R.C. § 280E.”

24 In light of direction from the New Mexico Court of Appeals and the New Mexico

25 Supreme Court’s recent quashing its writ of certiorari3 in Sacred Garden, the Hearing Officer

3
On January 28, 2020, the New Mexico Court of Appeals published its formal opinion in Sacred Garden, Inc. v.
New Mexico Taxation & Revenue Dep't, 2021-NMCA-038, 495 P.3d 576. The New Mexico Supreme Court granted

In the Matter of the Protest of New Mexico Top Organics
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1 does not agree that the legalization (or decriminalization) of medical cannabis in New Mexico is

2 irrelevant for the purposes of Section 280E because to do so disregards the intentions of the

3 Legislature when it enacted the Compassionate Use Act.

4 Well-established principles of statutory construction guide the interpretation of state tax

5 laws in which the primary goal is “to give effect to the intent of the [L]egislature.” See Dell

6 Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-001, ¶19, 145 N.M. 419,

7 199 P.3d 863. Legislative intent is fulfilled “by first looking at the plain meaning of the language

8 of the statute, reading the provisions ... together to produce a harmonious whole.” Id.; Sundance

9 Mech. & Util. Corp. v. Armijo, 1987-NMSC-078, ¶5, 106 N.M. 249, 250, 741 P.2d 1370, 1371.

10 Despite its status under federal law, Taxpayer engages in a permissible business activity

11 under the authority of the Compassionate Use Act which “was expressly intended ‘to allow the

12 beneficial use of medical cannabis in a regulated system for alleviating the symptoms caused by

13 debilitating medical conditions and their medical treatments.’” See NMSA 1978, Section 26-2A-2

14 (2007); Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-NMCA-038, ¶17,

15 495 P.3d 576, 580, cert. quashed Sacred Garden v. Taxation, No. S-1-SC-38164 (Feb. 23, 2022).

16 In Sacred Garden, the Court of Appeals said, “the Compassionate Use Act was intended

17 to make medical marijuana accessible to those with debilitating medical conditions who might

18 benefit from the use thereof.” Id. In evaluating whether a similarly situated taxpayer could obtain

19 the benefit of a gross receipts tax deduction reserved for prescription drugs, the Court of Appeals

20 observed that, “[i]t is reasonably self-evident that the deduction from gross receipts for

21 prescription drugs was similarly intended to make medical treatment more accessible, by

a writ of certiorari on March 29, 2021 in No. S-1-SC-38164. On February 23, 2022, the New Mexico Supreme Court
quashed its writ of certiorari as improvidently granted and ordered that a mandate immediately issue. The Hearing
Officer delayed issuing this decision anticipating that a final decision in Sacred Garden would be valuable to the
issues now under consideration.

In the Matter of the Protest of New Mexico Top Organics
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1 lessening the expense to those who require it. These statutes should be read harmoniously, to

2 give effect to their commonality of purpose.” Id. Although this observation was directed to a

3 deduction from gross receipts under the Gross Receipts and Compensating Tax Act, the same

4 logic applies in the present case. Sacred Garden observed that affordability was a key

5 component of the Legislature’s intentions, emphasizing, “it is noteworthy that the financial

6 impact report issued in association with the Compassionate Use Act did not contemplate that any

7 tax revenue would be generated thereby.” See Sacred Garden, Inc., 2021-NMCA-038, ¶16.

8 If pursuant to the observation made in Sacred Garden that affordability was a key

9 component of the Legislature’s intent, then the Department’s proposed application of Section

10 280E to prohibit deduction of medical cannabis business expenses simply because of its status

11 under federal law surely contradicts those intentions. Refusing Taxpayer the benefits of income

12 tax deductions commonly allowed for other, “traditional” forms of business increase Taxpayer’s

13 costs which ultimately get passed on to the consumer in the form of a higher price, which is the

14 result the Legislature, according to Sacred Garden, wanted to avoid.

15 Despite the Department’s perception that the application of Section 280E is unyielding, a

16 close review of the introductory paragraphs of NMSA 1978, Sections 7-2-2 and 7-2A-2 (defining

17 “base income” for purposes of the Income Tax Act and the Corporate Income and Franchise Tax

18 Act) reveal that the Legislature intended to allow some reasonable flexibility and discretion

19 depending on the circumstances presented. Both sections state with concern for all the defined

20 terms that follow, including the definitions of “base income” that:

21 For the purpose of the [Income Tax Act and Corporate Income and
22 Franchise Tax Act] and unless the context requires otherwise[…]

23 [Emphasis Added]

24 This simple phrase, clear and unambiguous, and perhaps easily overlooked, exemplifies

In the Matter of the Protest of New Mexico Top Organics
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1 the Legislature’s intention to avoid absurd results. Conversely stated, it signifies the desire that

2 none of the terms be inflexibly construed when a literal construction under some circumstances

3 would contradict the Legislature’s intentions.

4 Continuing with the analysis, it would be clearly contradictory to the Legislature’s

5 intention to permit a deduction from gross receipts on one hand, for the reasons the Court of

6 Appeals found reasonably self-evident in Sacred Garden, yet deny Taxpayer and other similarly

7 situated businesses the benefits of deducting ordinary and necessary business expenses for

8 income tax purposes on the other. The results would be that the increased tax burden on one end

9 would consume the benefits provided on the other. This construction fails to produce a

10 “harmonious whole” and leads to absurd results whereby the Legislature’s intentions, as

11 recognized in Sacred Garden, are not effectuated, but instead trampled; where the public

12 interests to be subserved thereby are not furthered (evoking Chavez, 1970-NMCA-116, ¶7).

13 Instead, the scenario now at hand represents the sort of unique circumstances the

14 Legislature contemplated when it permitted the Department to deviate from its definitions by use

15 of the exception, “unless the context requires otherwise” to regard Taxpayer as it would other

16 traditional forms of businesses, such as, for example, pharmacies as seen in Sacred Garden.

17 In another example illustrative of the Legislature’s intent, the Compassionate Use Act, at

18 NMSA 1978, Section 26-2B-4 (F) (2007, amended 2019, 2021) provides that, “A licensed

19 producer shall not be subject to … penalty, in any manner, for the production, possession,

20 distribution or dispensing of cannabis pursuant to the Lynn and Erin Compassionate Use Act.”

21 This language not only embodies the intentions of the Legislature that no criminal or civil

22 penalties be imposed on licensed producers engaging in business under the Compassionate Use

23 Act, but that they be viewed analogous with any other “traditional” business.

In the Matter of the Protest of New Mexico Top Organics
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1 Although strict application of Section 280E may not technically be perceived as a penalty

2 as seen in cases such as N. California Small Bus. Assistants Inc. v. Comm'r of Internal Revenue,

3 153 T.C. 65, 68 (2019), its strict application to Taxpayer under New Mexico law sets it apart

4 from other businesses engaged in lawful business activity. Indeed, application of Section 280E

5 places Taxpayer at a disadvantage to the extent it denies the benefit of common tax deductions

6 which will increase its state income tax liability based solely on how it is perceived under federal

7 law despite engaging in “the production, possession, distribution or dispensing of cannabis,”

8 activities that have long been permissible under the Compassionate Use Act in New Mexico. Id.

9 As previously observed, federal law and state law view Taxpayer’s business activities in

10 stark contrast to one another. However, the fact that the IRS views the activity contrarily does

11 not circumvent the will of the New Mexico Legislature which is entitled to establish a different

12 policy for New Mexico, “to make medical marijuana accessible to those with debilitating

13 medical conditions who might benefit from the use thereof.”

14 “Federal or state deductions are a matter of legislative grace and a way of achieving

15 policy objectives.” See Sutin, Thayer & Browne v. Revenue Div. of Taxation & Revenue Dept.,

16 1985-NMCA-047, ¶17, 104 N.M. 633, 636, 725 P.2d 833. As observed by the Court of Appeals

17 in Sacred Garden, the policy objective of the Compassionate Use Act is readily apparent and

18 encompasses the intent to minimize costs to those who could benefit from the use of medical

19 cannabis. Omitting Section 280E from the computation of Taxpayer’s New Mexico state income

20 tax liability promotes the Legislature’s objective and is consistent with the discretion afforded to

21 the Department to consider its definitions within the context of the given circumstances. For this

22 reason, Taxpayer’s protest should be granted.

23 At this time, it is notable that the New Mexico Legislature passed the Cannabis

In the Matter of the Protest of New Mexico Top Organics
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1 Regulation Act during its first special session4 of 2021. It was signed by the governor of the State

2 of New Mexico on April 12, 2021 and became effective on June 29, 2021. Among various other

3 enactments, including the legalization of recreational adult-use cannabis, it amended the

4 definition of “base income” in NMSA 1978, Sections 7-2-2 and 7-2A-2 to explicitly exclude “an

5 amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction

6 but is disallowed pursuant to Section 280E of the Internal Revenue Code[.]” See NMSA 1978,

7 Section 7-2-2 (B) (5) (2021); NMSA 1978, Section 7-2A-2 (C) (4) (2021); 2021 New Mexico

8 Laws 1st Sp. Sess. Ch. 4 (H.B. 2).

9 Given that the same bill clarified the application of NMSA 1978, Section 7-9-73.25

10 consistent with the court’s ruling in Sacred Garden, the Hearing Officer perceives the

11 amendment to “base income” in a similar light – that is, to clarify the existing law consistent

12 with the purpose expounded by Sacred Garden, rather than change it. See Aguilera v. Bd. of

13 Educ. of Hatch Valley Sch., 2006-NMSC-015, ¶ 20, 139 N.M. 330, 335, 132 P.3d 587, 592

14 (Changing a definition is “[s]uch a modest step [that it] is not usually a harbinger of radical

15 change.”)

16 The Hearing Officer does not reach Taxpayer’s argument that New Mexico does not

17 incorporate federal disallowances into its tax laws because a significant portion of the argument,

18 as well as the response from the Department, requires the Hearing Officer to presume facts not in

19 evidence, particularly in reference to the various methods a hypothetical taxpayer could use to

4
See https://www.governor.state.nm.us/wp-content/uploads/2021/12/House-Executive-Message-1-Proclamation.pdf
5
The 2021 enactment of the Cannabis Regulation Act codified the ruling of the New Mexico Court of Appeals in
Sacred Garden by inserting the italicized language in the following quotation which was not previously explicit in
the statute. See NMSA 1978, Section 7-9-73.1 (2007). It now reads, “Receipts from the sale of prescription drugs
and oxygen and oxygen services provided by a licensed medicare durable medical equipment provider and cannabis
products that are sold in accordance with the Lynn and Erin Compassionate Use Act may be deducted from gross
receipts and governmental gross receipts.” See NMSA 1978, Section 7-9-73.1 (A) (2021) (italics in quotation
emphasizing new material)

In the Matter of the Protest of New Mexico Top Organics
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1 prepare a tax return and how that process demonstrates the technical difference between the

2 “disallowance” of a deduction and a “deduction not allowed.” Moreover, the 2021 enactment

3 explicitly addresses how the Legislature intends the Department to compute base income with

4 respect for Section 280E.

5 The Hearing Officer will, however, reemphasize that “base income” is the figure from

6 which the computation of New Mexico income tax begins. The various mathematical processes

7 for computing that figure may vary from taxpayer to taxpayer but should always result in a

8 computation that accurately reflects the taxpayer’s federal tax obligation, but from which the

9 Department possesses the latitude to deviate when necessary. See Holt, 2002-NMSC-034, ¶22

10 (“Department has the authority to examine records in order to determine the extent of the

11 taxpayers’ liability[.]”). Under the facts of this protest, that authority to deviate derives from the

12 discretion provided by Section 7-2A-2, the Compassionate Use Act, as well as Holt which

13 recognized the Department’s authority to make an independent evaluation of a taxpayer’s

14 liability despite whatever information the taxpayer reported to the federal tax authorities.

15 To proceed further into a technical analysis to distinguish between a “disallowance” of a

16 deduction and a “deduction not allowed” is unnecessary and requires a discussion which the

17 Hearing Officer contemplates will ultimately exalt form over substance. See Dugger v. City of

18 Santa Fe, 1992-NMCA-022, ¶13, 114 N.M. 47, 52, 834 P.2d 424, 429, writ quashed, Dugger v.

19 City of Santa Fe, 113 N.M. 744, 832 P.2d 1223 (1992) (“A basic tenet of judicial review is not to

20 exalt form over substance.”)

21 For the reasons stated, Taxpayer’s protest is GRANTED.

22 CONCLUSIONS OF LAW

23 A. Taxpayer filed a timely, written protest to the Assessment. Jurisdiction lies over the

In the Matter of the Protest of New Mexico Top Organics
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1 parties and the subject matter of this protest.

2 B. The Department made a timely request for hearing and the Administrative Hearings

3 Office timely conducted two hearings within 90 days of Taxpayer’s protest under NMSA 1978,

4 Section 7-1B-8 (2019).

5 C. Taxpayer carries the burden to present countervailing evidence or legal argument

6 to show entitlement to an abatement of an assessment. See Casias Trucking, 2014-NMCA-099,

7 ¶8.

8 D. If Taxpayer presents sufficient evidence to rebut the presumption, then the burden

9 shifts to the Department to re-establish the correctness of the assessment. See MPC Ltd., 2003-

10 NMCA-021, ¶13.

11 E. Taxpayer overcame the presumption of correctness with respect to the computation

12 of its income tax liability. See Section 7-1-17(C).

13 F. Taxpayer bears the burden of establishing entitlement to a clearly and

14 unambiguously expressed statutory deduction. See TPL, Inc. v. N.M. Taxation & Revenue Dep't,

15 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d 474.

16 G. “Federal or state deductions are a matter of legislative grace and a way of

17 achieving policy objectives.” See Sutin, Thayer & Browne v. Revenue Div. of Taxation &

18 Revenue Dept., 1985-NMCA-047, ¶17, 104 N.M. 633, 636, 725 P.2d 833.

19 H. Statutory provisions must be given “fair, unbiased, and reasonable construction,

20 without favor or prejudice to either the taxpayer or the [s]tate, to the end that the legislative

21 intent is effectuated and the public interests to be subserved thereby are furthered.” See Chavez v.

22 Comm'r of Revenue, 1970-NMCA-116, ¶7, 82 N.M. 97, 476 P.2d 67.

23 I. The primary goal of statutory interpretation is “to give effect to the intent of the

In the Matter of the Protest of New Mexico Top Organics
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1 [L]egislature.” See Dell Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-

2 001, ¶19, 145 N.M. 419, 199 P.3d 863.

3 J. Legislative intent is fulfilled “by first looking at the plain meaning of the

4 language of the statute, reading the provisions ... together to produce a harmonious whole.” See

5 Dell Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-001, ¶19, 145 N.M.

6 419, 199 P.3d 863; Sundance Mech. & Util. Corp. v. Armijo, 1987-NMSC-078, ¶5, 106 N.M.

7 249, 250, 741 P.2d 1370, 1371.

8 K. 26 U.S.C. Section 280E prohibits businesses engaged in trafficking cannabis from

9 taking deductions and claiming credits on their federal income taxes for any amounts paid or

10 incurred in such business activity. See Californians Helping to Alleviate Med. Problems, Inc. v.

11 Comm’r, 128 T.C. 173, 182 (2007) (“Section 280E and its legislative history express a

12 congressional intent to disallow deductions attributable to a trade or business of trafficking in

13 controlled substances.”).

14 L. “Trafficking” for the purpose of 26 U.S.C. Section 280E means “engaging in a

15 commercial activity—that is, to buy and sell regularly.” See Californians Helping to Alleviate

16 Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 182 (2007)

17 M. The business of producing, packaging, and dispensing medical cannabis is legal in

18 New Mexico under the Lynn and Erin Compassionate Use Act, NMSA 1978, Chapter 26, Article

19 2B.

20 N. The business of producing, packaging, and dispensing medical cannabis, although

21 legal in New Mexico under the Lynn and Erin Compassionate Use Act, NMSA 1978, Chapter 26,

22 Article 2B, constitutes “trafficking” for the purpose of 26 U.S.C. Section 280E. See Californians

23 Helping to Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 182 (2007).

In the Matter of the Protest of New Mexico Top Organics
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1 O. The Lynn and Erin Compassionate Use Act, NMSA 1978, Chapter 26, Article 2B

2 “was expressly intended ‘to allow the beneficial use of medical cannabis in a regulated system

3 for alleviating the symptoms caused by debilitating medical conditions and their medical

4 treatments.’” See NMSA 1978, Section 26-2A-2 (2007); Sacred Garden, Inc. v. New Mexico

5 Taxation & Revenue Dep't, 2021-NMCA-038, ¶17, 495 P.3d 576, 580, cert. quashed Sacred

6 Garden v. Taxation, No. S-1-SC-38164 (Feb. 23, 2022).

7 P. “A licensed producer shall not be subject to … penalty, in any manner, for the

8 production, possession, distribution or dispensing of cannabis pursuant to the Lynn and Erin

9 Compassionate Use Act.” See NMSA 1978, Section 26-2B-4 (F) (2007, amended 2019, 2021)

10 Q. The computation of New Mexico income tax begins with “base income” as

11 defined by NMSA 1978, Section 7-2A-2 (C) (2017, Amended 2021); See Holt v. New Mexico

12 Dept. of Taxation & Revenue, 2002-NMSC-034, ¶9, 133 N.M. 11, 13, 59 P.3d 491, 493;

13 Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, ¶39, 88 N.M. 411, 416, 540 P.2d

14 1300, 1305.

15 R. “‘[B]ase income’ means that part of the taxpayer’s income defined as taxable

16 income and upon which the federal income tax is calculated in the Internal Revenue Code for

17 income tax purposes plus [other enumerated items.]” See NMSA 1978, Section 7-2A-2 (C) (2017,

18 Amended 2021)

19 S. NMSA 1978, Section 7-2A-2 (2017, Amended 2021) permits the Department to

20 exercise discretion with regard for the definitions provided therein, including the definition of

21 “base income” (NMSA 1978, Section 7-2A-2 (C) (2017, Amended 2021)) by allowing flexibility

22 in circumstances where “the context requires otherwise” consistent with the intentions of the

23 Legislature.

In the Matter of the Protest of New Mexico Top Organics
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1 T. Omitting 26 U.S.C. Section 280E from the computation of “base income” reflects

2 a “fair, unbiased, and reasonable construction, without favor or prejudice to either the taxpayer

3 or the [s]tate, to the end that the legislative intent is effectuated and the public interests to be

4 subserved thereby are furthered.” See Chavez v. Comm'r of Revenue, 1970-NMCA-116, ¶7, 82

5 N.M. 97, 476 P.2d 67.

6 U. By applying Section 280E to Taxpayer merely because of federal law treatment of

7 medical cannabis, the Department’s proposed construction of the statute inflates the cost of the

8 otherwise legal production of medical cannabis in New Mexico compared to any other non-

9 cannabis medical businesses in the state permitted to claim all applicable deductions, not limited

10 to COGS. The Legislature did not intend for state taxes to inflate the cost of products for those

11 requiring them, but intended “to make medical treatment more accessible.” See NMSA 1978,

12 Section 26-2A-2 (2007); Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-

13 NMCA-038, ¶17, 495 P.3d 576, 580, cert. quashed Sacred Garden v. Taxation, No. S-1-SC-

14 38164 (Feb. 23, 2022).

15 V. Omitting 26 U.S.C. Section 280E from the computation of “base income” is

16 consistent with legislative intent with respect for taxation of Taxpayer’s business under the

17 Compassionate Use Act. See Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't,

18 2021-NMCA-038, ¶17, 495 P.3d 576, 580, cert. quashed Sacred Garden v. Taxation, No. S-1-

19 SC-38164 (Feb. 23, 2022).

20 W. The Cannabis Regulation Act clarified that “base income” explicitly excludes “an

21 amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction

22 but is disallowed pursuant to Section 280E of the Internal Revenue Code[.]” See NMSA 1978,

23 Section 7-2-2 (B) (5) (2021); NMSA 1978, Section 7-2A-2 (C) (4) (2021); 2021 New Mexico

In the Matter of the Protest of New Mexico Top Organics
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1 Laws 1st Sp. Sess. Ch. 4 (H.B. 2).

2 For the reasons stated, Taxpayer’s protest is GRANTED. Assessed tax, penalty and

3 interest shall be abated, and any amounts paid to satisfy the Assessment from which this protest

4 arose shall be refunded.

5 DATED: March 30, 2022

6
7 Chris Romero
8 Hearing Officer
9 Administrative Hearings Office
10 P.O. Box 6400
11 Santa Fe, NM 87502

12 NOTICE OF RIGHT TO APPEAL

13 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

14 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

15 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

16 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

17 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

18 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

19 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

20 Hearings Office may begin preparing the record proper. The parties will each be provided with a

21 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

22 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

23 statement from the appealing party. See Rule 12-209 NMRA.

24

In the Matter of the Protest of New Mexico Top Organics
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1 CERTIFICATE OF SERVICE

2 I hereby certify that I served the foregoing on the parties listed below this 30th day of March,

3 2022 in the following manner:

4 E-Mail E-Mail

5 INTENTIONALY BLANK

In the Matter of the Protest of New Mexico Top Organics
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