IRC 280E, Schedule III, and Minnesota Dispensary Prices

A Minneapolis dispensary on Hiawatha Avenue told a neighborhood paper that a federal tax rule is one reason shoppers still see high prices, and that a move to Schedule III should change the number on the receipt. The quote is specific. The tax code behind it is older than Minnesota's adult-use market. This guide explains what Internal Revenue Code section 280E actually says, why a Schedule III classification would matter under those words, and what the owners of Levitated said that would mean for Minnesota dispensary prices.

The neighborhood source is Tesha M. Christensen's October 2, 2026 story in the Longfellow Nokomis Messenger, "Dispensary opens along Hiawatha Ave." The statute is 26 U.S. Code section 280E. This is an educational reading of those two sources. It is not tax advice, and it is not a prediction of any shop's next menu.

What the Messenger reported from Levitated

Levitated Dispensary is at 4145 Hiawatha Ave., Minneapolis, MN 55406, according to the Messenger. The paper's photo captions say co-owners Ryan Widuch, Bryan Longville, and Tom Bolland celebrated the opening in September 2026, and that co-owner Mark Paulsen was not in that photograph. Another caption names all four: Ryan Widuch, Mark Paulsen, Bryan Longville, and Tom Bolland. The body text also spells two of those names Tom Boland and Mark Paulson. The 280E quotation below is attributed to Paulsen, which is how the paper printed the last name.

The shop sits on the same Hiawatha stretch as Elevated Beer, Wine and Spirits, which the Messenger's timeline places at 4135 Hiawatha Ave. Two of the four co-owners, the paper wrote, own that liquor store next door. The cannabis shop is the new room. The tax issue the owners flagged is federal, not a Minneapolis zoning rule.

Christensen wrote that Levitated's owners are paying close attention to section 280E in the federal tax code. The story then gives the paper's explanation of why: as cannabis remains classified as a Schedule I controlled substance federally, businesses cannot deduct "ordinary and necessary" business expenses. The next sentence in the story is: "Cannabis is moving to schedule three."

Paulsen tied that unfinished change to the price a customer pays. "Once this rule change is finalized, we should see prices at the register start to come down at all dispensaries across Minnesota," he said. "That's needed. Everyone wins there."

That is an owner's forecast, printed on October 2, 2026. It is not an Office of Cannabis Management price study, and the Messenger did not attach a percent, a dollar amount, or an effective date to the sentence. The rest of this guide is the statute those sentences are talking about, and the Minnesota taxes that the statute does not repeal.

Shoppers comparing what is on shelves today can use the Hub's cannabis price pages and the Minnesota dispensary prices guide. Those pages track retail offers. They do not assume Paulsen's forecast has already happened.

What section 280E says

Section 280E is titled "Expenditures in connection with the illegal sale of drugs." The statutory text, as published by the Legal Information Institute from the U.S. Code, is one sentence:

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

A few pieces of that sentence do the work.

First, the consequence is "no deduction or credit." A deduction is what a normal business subtracts before it computes taxable income. A credit reduces tax after that computation. Section 280E blocks both, for the amounts it covers.

Second, the amounts are "any amount paid or incurred" during the taxable year "in carrying on" the trade or business. The Messenger used the phrase "ordinary and necessary" business expenses, in quotation marks, to describe what businesses cannot deduct. Those three words are the paper's explanation. They are also the familiar test in the federal deduction rules for business expenses generally. Section 280E's own words are the broader bar: no deduction or credit for any amount paid or incurred in carrying on that business, when the trafficking condition is met.

Third, the condition is trafficking in controlled substances "within the meaning of schedule I and II" of the Controlled Substances Act, when that trafficking is prohibited by federal law or by the law of the state where the business is conducted. The schedules named in the parenthetical are I and II. Schedule III is not in that parenthetical.

The section took effect for amounts paid or incurred after September 3, 1982, in taxable years ending after that date, under the enacting note to Public Law 97-248. It was not written for Minnesota's 2023 legalization. It still applies, by its text, when the trafficking condition is met. Minnesota can license a shop and still leave that shop inside a federal disallowance if the federal schedule test is met. The Messenger made the same point in plainer language: things are complicated because cannabis is legal in Minnesota but illegal federally.

Operators who want the Hub's longer business-side walkthrough can read cannabis 280E taxes for Minnesota businesses and how much a dispensary makes in Minnesota. Those pages are for planning. This one stays with the statute and the Messenger quote.

A simplified illustration, not Levitated's books

The arithmetic below is a teaching example. It is not Levitated's revenue, not a Minnesota average, and not a forecast of anyone's tax bill. Round numbers make the statute easier to see.

Suppose a shop sells $100 of cannabis. The product itself cost $40. Rent, wages, and other costs of operating the store are another $40. Cash left after those costs is $20.

A business that can deduct its ordinary costs is taxed on the profit after those costs. In the example, that base is $20.

A business that cannot deduct the $40 of rent and wages, because section 280E disallows deductions for amounts paid in carrying on the business, still has to pay those bills. The taxable amount stays closer to what is left after the product cost alone, $60 in the example, even though the till only kept $20 after rent and wages. The tax is computed on a larger number than the cash the shop has left. That is the squeeze Paulsen was talking about when he said a finalized change should show up at the register.

The example ignores credits, inventory accounting, entity type, and every other line a preparer would actually use. It also ignores Minnesota's own retail taxes, which are a separate bill and are covered below. The only point of the numbers is the statute's structure: when the disallowance applies, operating costs do not reduce the federal tax base the way they do for a business outside section 280E.

How a Schedule III classification would change the statute's test

Section 280E does not say "cannabis." It says trafficking in controlled substances within the meaning of Schedule I and Schedule II. The Messenger's account, as of October 2, 2026, is that cannabis remains classified as Schedule I federally and that cannabis is moving to Schedule III. Paulsen's price comment is explicitly conditional: "Once this rule change is finalized."

If the activity a dispensary is taxed on is no longer trafficking in a Schedule I or Schedule II substance, the parenthetical in section 280E is no longer met for that activity. The disallowance of deductions and credits, which the statute limits to Schedule I and Schedule II trafficking, would not attach to a trade or business that consists of trafficking in a Schedule III substance. That is a reading of the sentence Congress wrote. It is not a determination of any taxpayer's liability, and the statute tells the reader to look at the Controlled Substances Act schedules to see which list a substance is on.

The Messenger does not say the change is already final for the adult-use shop it profiled. It says cannabis is moving to Schedule III, and Paulsen said the price effect comes once the rule change is finalized. This guide uses that same conditional. A broader explanation of what rescheduling does and does not do, including the fact that Schedule III is still a controlled category, is in the Hub's cannabis rescheduling guide.

What the statute would not do, even if the schedule test changed, is set a retail price. Section 280E is an income-tax disallowance. It does not contain a shelf price, a margin cap, or an order that savings be passed through to customers. A lower federal tax bill can leave a shop more room to compete. Whether that room becomes a lower menu price is a business choice. Paulsen told the Messenger he expects the choice, across Minnesota dispensaries, to be lower prices at the register. That expectation is his. The statute does not require it.

What that means for a Minnesota receipt

A customer receipt in Minnesota already has state and local tax on top of the seller's price. The Hub's Minnesota cannabis tax breakdown describes the adult-use cannabis gross receipts tax as 15 percent, plus the state general sales tax and any local sales tax. Those are Minnesota taxes on the sale. Section 280E is a federal rule about which of the seller's expenses can be deducted on the seller's income-tax return. They show up in different places.

The 15 percent gross receipts tax is collected because of a retail sale of adult-use cannabis. A federal schedule change would not, by itself, repeal that Minnesota tax or the state sales tax. A shopper should not read Paulsen's comment as a promise that the tax line on the receipt disappears. His comment was about prices at the register coming down, which can mean the seller's price, the total, or both. The Messenger did not define which line he meant. The honest reading is the one he gave: prices at the register, at dispensaries across Minnesota, should start to come down once the rule change is finalized.

The mechanism, if it happens, runs through the seller's federal taxable income. If rent, payroll, and similar costs become deductible because the Schedule I and II test is no longer met, the federal income tax owed on that business can fall relative to a year when section 280E applied. A seller who was holding prices up to fund that tax has room to charge less and still cover costs. A seller can also keep the price and keep the difference. Nothing in section 280E, and nothing in the Messenger story, forces one of those choices. Paulsen said the outcome he expects is lower register prices, and that everyone wins there.

The same story is a reminder that price has more than one cause. The Hub's explanation of why weed is expensive in Minnesota walks through supply, testing, and the state tax, with 280E as one of the federal pieces. A Schedule III change would address the 280E piece Paulsen named. It would not harvest more plants or open more testing labs. Those are different constraints.

What the same story said about hemp, which is a different federal rule

The Messenger also noted a separate federal issue in the same section: a ban initially scheduled for November 12 that has been pushed to December 11, limiting hemp-derived products and affecting gummies, beverages, tinctures, vapes, and other full-spectrum CBD products. The story's timeline says a federal ban on THC-infused drinks is set to take effect in December and will limit hemp-derived products to a maximum of 0.4 milligrams of THC per container.

That hemp date is not section 280E, and it is not the Schedule III question. The Office of Cannabis Management's September 3, 2026 materials are covered in the Hub's federal hemp changes guide. The Continuing Appropriations and Extensions Act of 2027, signed September 2, 2026, extended key provisions from November 12, 2026 to December 11, 2026. OCM's September 3 bulletin dates that signature September 3. A hemp-product limit and an income-tax disallowance can both affect a Minnesota business. They are different statutes, and finalizing a Schedule III rule would not, on the words of section 280E, rewrite the hemp definition.

What operators and shoppers can do with this

Operators who want a listing, a claim, or the Hub's dispensary services can start at for dispensaries. The federal tax position of a specific license is a question for a cannabis tax adviser, not for a directory page. Section 280E turns on the activities that make up the trade or business and on the schedule of the substances those activities involve. A shop with more than one activity, or with medical and adult-use activity under different rules, needs someone who can apply the statute to that return. The Messenger's advice from co-owner Boland, in the same story, was about dealing with government as people. It was not a tax opinion. "The best thing you can do for your business is engage with some of them," he said.

Shoppers who want to know what flower and edibles cost now, rather than what they might cost after a federal rule is finalized, should use the dispensary directory and the price index pages. Levitated's address in the Messenger is 4145 Hiawatha Ave. in Minneapolis. The directory is the Hub's list of shops. A neighborhood profile is not a live menu.

If the rule Paulsen is watching is finalized, the question for a Minnesota customer is empirical: did register prices move, and at which shops? This page will not invent that movement in advance. The sentence worth keeping is the one he gave the Messenger, tied to the statute that makes the sentence plausible. Ordinary costs that section 280E currently keeps out of the deduction column would, if the Schedule I and II test no longer applied, be eligible for the deductions and credits the section now denies. That is a change in the seller's federal tax math. Paulsen said it should reach the register at dispensaries across Minnesota. The state 15 percent gross receipts tax described in the Hub's tax breakdown would still be Minnesota law unless Minnesota changes it.

Frequently Asked Questions

What does IRC section 280E actually prohibit?

Section 280E says no deduction or credit is allowed for any amount paid or incurred in carrying on a trade or business that consists of trafficking in Schedule I or Schedule II controlled substances, when that trafficking is prohibited by federal law or by the law of the state where the business is conducted. The text is at 26 U.S. Code section 280E.

Why would Schedule III status change 280E for a dispensary?

The disallowance applies to trafficking in substances within Schedule I and Schedule II. Schedule III is outside that parenthetical. The Longfellow Nokomis Messenger, on October 2, 2026, said cannabis remains Schedule I and is moving to Schedule III. If that move is finalized for the activity a shop is taxed on, the 280E bar would not apply to that activity under the statute's own words.

What did Levitated's owners say about Minnesota shop prices?

The Messenger quoted Paulsen: "Once this rule change is finalized, we should see prices at the register start to come down at all dispensaries across Minnesota." He added, "That's needed. Everyone wins there." The paper's photo captions name Mark Paulsen as a co-owner. The body also spells the name Mark Paulson once.

Is Minnesota's 15 percent cannabis tax the same thing as 280E?

No. The Hub's cannabis tax breakdown describes a 15 percent gross receipts tax on adult-use retail sales, plus state and local sales taxes. Those are taxes on the sale. Section 280E is a federal income-tax rule about the seller's deductions and credits. A schedule change would not, by itself, repeal the Minnesota retail taxes.

Does Schedule III automatically cut the price on a dispensary receipt?

Not by statute. Section 280E does not set a retail price. If operating costs become deductible, a shop's federal income tax can fall, which can leave room to charge less. Paulsen told the Messenger he expects register prices to come down across Minnesota once the change is finalized. That is his statement, not an automatic markdown.

Where is the Minneapolis shop in the Messenger story?

The Longfellow Nokomis Messenger places Levitated Dispensary at 4145 Hiawatha Ave., Minneapolis, MN 55406, and describes an opening celebration in September 2026. The story ran October 2, 2026.

Sources

• Tesha M. Christensen, "Dispensary opens along Hiawatha Ave.," Longfellow Nokomis Messenger, posted October 2, 2026: https://www.longfellownokomismessenger.com/stories/dispensary-opens-along-hiawatha-ave,179320
• 26 U.S. Code section 280E, "Expenditures in connection with the illegal sale of drugs," Legal Information Institute: https://www.law.cornell.edu/uscode/text/26/280E
• Minnesota Office of Cannabis Management materials on the December 11, 2026 federal hemp date, as summarized in the Hub's federal hemp guide: /blog/federal-hemp-changes-december-2026

This page is educational. It is not legal, tax, accounting, or business advice. A dispensary's federal return depends on facts this article does not have.