The Internal Revenue Service says cannabis industry workers do not currently qualify for the “No Tax on Tips” deduction signed by President Donald Trump, but their eligibility could change if marijuana is federally legalized.
The agency addressed the issue in a final rule published in the Federal Register on Monday, responding to a September draft comment period. A commenter argued that state-legal cannabis workers shouldn’t be excluded because their employers deal in a federally controlled substance; IRS declined to revise its position.
Budtenders at marijuana dispensaries commonly receive tips from customers. Under the final rule, “qualified tips” exclude those “received while performing services that are misdemeanors or felonies under applicable law”—and cannabis remains federally illegal.
IRS said cannabis workers must meet the same statutory and regulatory requirements as any other employee, and their tips must come from an occupation on the List of Occupations that Receive Tips, not from services that constitute a felony or misdemeanor under federal or state law, to be eligible under section 224. The agency added that “if Federal law changes, making certain marijuana-related transactions legal, and those same transactions are legal under State law, then tip amounts received in such transactions may be qualified tips if all other requirements for qualified tips are met.”
Separately, IRS told the U.S. Tax Court that pending rescheduling does not exempt state-legal cannabis businesses from 280E, the provision barring them from standard federal tax deductions. The filing came in response to a petition by New Mexico marijuana company Ultra Health, which challenged the code’s application to Schedule I and II drugs under the Controlled Substances Act.
A Congressional Research Service report published in February noted that Tax Court judges upheld 280E in a majority opinion, finding it doesn’t violate the Constitution “because the disallowance of deductions does not constitute a ‘penalty’ for the purposes of the Eighth Amendment.” In 2024, IRS also warned that some cannabis companies had, without a “reasonable basis,” filed supplementary forms to claim 280E-prohibited deductions.
The issue may resolve if the Justice Department follows through on Trump’s December executive order directing officials to move cannabis to Schedule III “in the most expeditious manner,” but no updates have emerged since.
