Supreme Court Cannabis Case Threatens Michigan State Tax Deductions

Case Background and Constitutional Question

The case, Patients Mutual v. Commissioner of Internal Revenue, challenges whether the Supremacy Clause permits states to allow ordinary-and-necessary business deductions that federal law—specifically IRC §280E—expressly disallows for Schedule I trafficking. The petitioner, a Michigan provisioning center, argues that Michigan's Corporate Income Tax Act authorizes deductions for all lawful state business expenses. State tax sovereignty permits this divergence, the petitioner said. The Solicitor General's brief, filed in July, counters that §280E's disallowance is a floor that binds state tax codes under the doctrine of federal preemption.

Oral argument is scheduled for the Court's November sitting. A ruling is expected by June 2027.

Michigan's Current State-Tax Treatment

Michigan currently permits cannabis businesses to deduct ordinary operating expenses—rent, payroll, utilities, and cost-of-goods-sold (COGS)—on state corporate income tax returns, even though those same expenses are disallowed on federal returns under §280E. This split has been in place since the Michigan Regulation and Taxation of Marihuana Act took effect in December 2019. On a strict reading of the Michigan Corporate Income Tax Act (MCITA), state taxable income starts with federal adjusted gross income but then applies Michigan-specific adjustments. Michigan Treasury guidance issued in 2020 confirmed that §280E is a federal-only limitation.

If the Supreme Court rules for the government, Michigan would be compelled to conform its state tax base to the federal §280E disallowance. The Michigan Department of Treasury hasn't issued formal guidance on compliance mechanisms in the event of such a ruling, but tax practitioners expect the department would require addbacks on Schedule C and corporate returns to mirror the federal treatment.

Financial Impact on Michigan Operators

The median Michigan provisioning center reported $1.2 million in gross revenue and $780,000 in operating expenses in 2025, according to Cannabis Regulatory Agency data. Under current law, those expenses reduce state taxable income by $780,000, yielding a state tax liability of approximately $41,600 at Michigan's 6 percent corporate rate (assuming no other adjustments).

If the Supreme Court bars state-level deductions, the entire $1.2 million becomes taxable at the state level. That raises the state tax bill to $72,000—a 73 percent increase.

Combine that with the existing federal effective tax rate of 40-50 percent under §280E (federal tax on gross profit with no expense deductions except COGS), and the all-in effective rate for a Michigan operator could exceed 70 percent of gross revenue. Multi-state operators with Michigan licenses face even steeper exposure. They typically carry higher G&A and interest expenses that are currently deductible at the state level.

Implications for 37 Other State Markets

Thirty-seven states and the District of Columbia have legalized medical or adult-use cannabis, and 29 of those jurisdictions currently permit some form of state-level expense deduction that diverges from federal §280E treatment. A ruling in favor of the government would require conforming amendments in all 29 states. California, Illinois, and Massachusetts—three of the four largest state markets by revenue—currently allow state deductions. The fiscal impact in California alone is estimated at $140 million in additional state tax collections annually, according to a Legislative Analyst's Office memo circulated in August.

For context on the broader federal tax and legal landscape affecting cannabis operators, see the CannIntel topic hub on Supreme Court cannabis cases.

The case doesn't address the underlying constitutionality of §280E itself, which has survived multiple circuit-court challenges. It's narrowly confined to the Supremacy Clause question: whether a federal tax disallowance preempts contrary state tax treatment. The Court granted certiorari in June on a 6-3 vote, with Justices Sotomayor, Kagan, and Jackson dissenting from the grant.

We'll be watching for oral argument transcripts in November and any signaling from the Court on how broadly it interprets federal preemption in tax matters—a question with implications well beyond cannabis.