Transfer Pricing Implications for the Cannabis Industry

The US cannabis industry encounters substantial tax challenges stemming from the classification of cannabis as a Schedule I controlled substance and the implications of section 280E of the Internal Revenue Code. To mitigate the adverse tax treatment imposed by this section, cannabis companies can employ various transfer pricing strategies. Vertical integration strategies, which allow companies to segregate activities across distinct business units within different industry verticals, serve to maximize the cost of goods sold calculation while minimizing the impact of section 280E. However, it is essential to recognize that such strategies also subject cannabis companies to transfer pricing regulations under section 482 of the Internal Revenue Code. Adequate transfer pricing documentation plays a crucial role in supporting pricing structures and minimizing tax exposure.