Cannabis Management Services Agreements and Brand Licenses: Structures for Non-Plant-Touching Participation

The cannabis sector presents a structural paradox that drives most of its sophisticated financing arrangements: state law licenses the commercial cultivation, processing, and sale of cannabis while federal law continues to classify it as a Schedule I controlled substance. This gap creates a category of investor, operator, and brand holder who wants economic participation in the cannabis industry without the direct exposure to state licensing requirements, federal criminal liability, or the banking and capital market restrictions that attach to plant-touching license ownership.

Management Services Agreements, brand licenses, IP licensing arrangements, real estate sale-leasebacks, convertible notes with acquisition optionality, and holding company structures built around Alternative Investment Vehicles have each evolved as tools for achieving this participation. None of them is categorically safe. Each creates a set of legal relationships that regulators, tax authorities, and federal securities law enforcers will evaluate on their substance rather than their label.

This sub-article is part of the Cannabis M&A: Navigating State Licensing, Section 280E, and Federal Illegality in Deal Structuring guide. It covers the full anatomy of non-plant-touching participation structures: MSA design, permissible fee models, the ownership and control analysis that determines whether a given arrangement is licensable without direct plant-touching activity, the distinction between brand licensing and operational control, real estate and sale-leaseback mechanics, deferred acquisition instruments including convertible notes and call options, Alternative Investment Vehicle strategies, multi-state MSO expansion through cross-jurisdiction stacking, federal securities law implications, and the 280E tax treatment that affects both the licensee paying MSA fees and the non-plant-touching provider receiving them.

Acquisition Stars advises cannabis operators, investors, brand holders, and MSO platforms on structuring these arrangements across multiple state licensing regimes. Nothing in this article constitutes legal advice for any specific transaction.

Why Non-Plant-Touching Structures Exist

Non-plant-touching structures emerged from the collision between state cannabis legalization and two categories of legal constraint that plant-touching license holders cannot fully escape: federal law and state licensing eligibility requirements. Federal illegality under the Controlled Substances Act means that cannabis licensees cannot access FDIC-insured banking on normal terms, cannot list securities on national exchanges, cannot deduct ordinary business expenses under Section 280E, and remain exposed to federal prosecution even where state law authorizes their operations. State licensing requirements impose additional barriers: residency requirements, background check restrictions, caps on the number of licenses a single entity may hold, and disclosure obligations that expose beneficial owners to regulatory scrutiny they may prefer to avoid.

Institutional capital, established consumer brands, and sophisticated operators with multi-state ambitions responded to these constraints by developing structures that park economic interest and operational expertise in non-plant-touching entities while the licensed cannabis operations remain in the hands of state-compliant license holders. The MSA is the primary mechanism for this separation: it allows the service provider to deliver accounting, compliance, marketing, human resources, real estate management, and financial services to a cannabis licensee in exchange for a fee that is calibrated to stay below the threshold at which a regulator would treat the service relationship as de facto ownership.

The appeal of these structures is real and documented. A consumer brand that has built equity in the beverage, wellness, or lifestyle sectors can extend that brand into cannabis through a licensing arrangement that earns royalties without taking on a cannabis license. A private equity fund with LPs that have investment mandates prohibiting direct investment in controlled substances can access cannabis sector returns through a holding company or Alternative Investment Vehicle that owns the MSA counterparty rather than the license itself. A national operator who has hit a state's license cap can continue to expand its footprint by providing management services to independent licensees under agreements that stop short of the ownership and control line.

The risk profile of these structures is equally real. Regulators in multiple states have pursued enforcement actions against MSA arrangements they determined crossed into unlicensed ownership. The IRS has challenged 280E deduction strategies built around cost allocation between plant-touching and non-plant-touching activities. Federal securities enforcement remains a live concern for any arrangement that constitutes a security under the Howey test, regardless of the cannabis industry context. Counsel who structures these arrangements without a complete analysis of all three legal frameworks is not managing risk, only deferring it.

Management Services Agreement Anatomy

A cannabis Management Services Agreement is a contract between a licensed cannabis operator (the licensee) and a non-plant-touching service provider (the manager) under which the manager delivers defined business services to the licensee in exchange for a fee. The agreement's structure must accomplish two objectives simultaneously: it must provide sufficient operational value to justify the fee and make the arrangement commercially rational, and it must stop short of giving the manager the operational authority that would constitute ownership or control of the licensed cannabis business under applicable state law.

The services menu in a well-designed MSA is organized around functions that are clearly separable from the licensee's plant-touching operations. Accounting and financial reporting services cover bookkeeping, financial statement preparation, accounts payable and receivable management, and financial reporting to regulators, but the licensee retains authority over its own bank accounts and the manager has no co-signature rights. Regulatory compliance services cover tracking regulatory changes, preparing license renewal applications, and advising on compliance program design, but the licensee's designated responsible party retains all regulatory certifications and signature authority on filings. Marketing services cover brand strategy, advertising design, digital media management, and customer acquisition campaigns, but the licensee controls its own customer-facing communications and retains authority over product claims that implicate regulatory compliance.

Human resources services, when included, cover compensation benchmarking, benefits administration, training program design, and HR policy development, but the licensee retains hiring and termination authority for all employees. Real estate and facilities management services cover lease negotiation support, facility maintenance oversight, and capital improvement planning, but the licensee holds the lease and owns or leases the physical premises in its own name. Financial services including treasury management recommendations, capital structure analysis, and lender relationship support must be structured so that the manager never controls the licensee's cash, payment decisions, or financing agreements.

The governance provisions in the MSA are as important as the service schedule. The agreement must not grant the manager a seat on the licensee's board, a veto right over material operational decisions, a right to approve or disapprove key personnel changes, or any right of first refusal or consent right over the licensee's third-party contracts. Each of these governance features, standing alone, has been cited by state regulators as evidence of impermissible control. The agreement should affirmatively preserve the licensee's right to make all final decisions regarding cannabis operations and expressly disclaim any intent by the manager to control, direct, or influence the licensee's plant-touching activities.

Permissible Fee Structures and State Variance

Fee structure is the aspect of cannabis MSA design that receives the most regulatory scrutiny, because the economic relationship between the manager's compensation and the licensee's cannabis revenue is one of the strongest indicators of whether the manager has a de facto ownership interest in the licensed business. The three primary fee structures used in cannabis MSAs are cost-plus pricing, flat monthly retainers, and percentage-of-net-revenue fees, and they carry materially different regulatory risk profiles that vary across state licensing regimes.

Cost-plus pricing is the most conservative approach. The manager invoices the licensee for actual costs incurred in delivering the defined services (salaries, technology, third-party vendor costs, allocated overhead) and adds a negotiated profit margin, typically between 10% and 20% above cost. Because the manager's compensation is tethered to verifiable expenses rather than the licensee's revenue performance, the economic relationship does not create the revenue-sharing alignment that regulators associate with ownership. Cost-plus arrangements are the most defensible fee structure in states that have issued formal guidance on MSA permissibility, but they require robust cost accounting systems and regular reconciliation between billed amounts and actual costs.

Flat monthly retainers provide fee certainty for both parties and avoid the revenue-tracking obligations of percentage-based structures. A well-documented flat fee arrangement that is calibrated to the scope of services delivered and benchmarked against market rates for equivalent services from non-cannabis service providers is generally permissible across most state licensing regimes. The risk of flat fees is that regulators may scrutinize whether the fee is disproportionate to the value of services delivered, which could support an inference that the excess compensation represents a disguised revenue share.

Percentage-of-net-revenue fees are commercially appealing because they align the manager's compensation with the licensee's performance, but they carry the greatest regulatory risk because they create the economic alignment between the manager and the cannabis business that regulators associate with ownership. Several states have issued guidance or enforcement actions indicating that percentage-based MSA fees above certain thresholds (which vary by state and are not always codified as bright-line rules) will be treated as evidence of unlicensed ownership. Counsel advising on percentage-based fee structures must analyze the specific state's ownership and control definitions and any published enforcement guidance before recommending this approach.

Avoiding Ownership or Control Triggers

The ownership and control analysis is the central legal question in every cannabis MSA, brand license, and non-plant-touching participation structure. State cannabis licensing statutes define ownership and control differently, but they share a common core: any person or entity that exercises meaningful authority over a licensed cannabis business is typically required to be disclosed as an owner and, in most states, licensed or approved as a suitability matter. The non-plant-touching structure fails if the arrangement, in substance, gives the service provider the authority that the statute reserves for licensed owners.

The most common ownership and control triggers in cannabis MSA analysis are financial control (co-signature authority over bank accounts or material payment decisions, authority to approve or withhold approval of the licensee's capital expenditures, loan guarantees that require the licensee to seek the manager's consent before incurring debt), operational control (authority over the licensee's cultivation, processing, or sales operations in any form, including production scheduling, pricing authority, or inventory management), and personnel control (hiring and termination authority for the licensee's key management, co-employment arrangements, or any right to disapprove personnel decisions made by the licensee).

Governance rights that are standard in commercial contracts outside the cannabis context can become ownership and control triggers in the licensing analysis. A manager's right to review and comment on the licensee's business plan is not itself a control trigger, but a right to approve the business plan before the licensee may implement it is. An advisory board seat granted to the manager is generally permissible, but a fiduciary board seat with voting rights is not. A management fee termination right triggered by the licensee's failure to maintain minimum revenue targets can be recharacterized as economic control if the threshold is set at a level where the licensee cannot realistically operate without the manager's consent to modify the targets.

Best practice in MSA drafting is to conduct the ownership and control analysis provision by provision, not just at the level of the overall agreement structure. A fee provision that is facially permissible may interact with a governance provision to create an aggregate control profile that crosses the regulatory line. Counsel should model the agreement's economic and governance terms together, against the specific definitions in each state where the licensee operates, and document the analysis contemporaneously so that it can be presented to a regulator if the arrangement is later questioned.

State Guidance and Cautionary Enforcement Actions

State cannabis regulators have taken materially different approaches to MSA oversight, ranging from formal guidance documents that describe permissible and impermissible arrangements to enforcement actions brought against MSA parties without advance published guidance. Understanding the enforcement posture of each state where a non-plant-touching structure will operate is a prerequisite for structuring advice, because the same agreement terms may be permissible in one jurisdiction and unlicensed ownership in another.

Colorado's Marijuana Enforcement Division has historically taken an active approach to MSA review, requiring licensees to disclose management service arrangements in their license applications and treating revenue-sharing fees above approximately 40% of net revenue as presumptive evidence of an undisclosed ownership interest. The Division has revoked licenses and imposed fines in cases where MSAs were found to give the service provider de facto operational control, including cases involving IT system access rights that allowed the manager to monitor and direct the licensee's point-of-sale operations in real time.

California's Department of Cannabis Control has focused enforcement attention on structures where the licensee lacks the capital and operational independence to function without the service provider, characterizing them as arrangements where the service provider is the true operator and the licensee is a regulatory front. California's licensing rules require disclosure of any person or entity that exercises management or control over the licensed premises, which creates a broad obligation that encompasses many MSA relationships. License applicants in California who have existing MSA relationships with non-plant-touching entities are advised to disclose those relationships and seek staff guidance on whether the specific terms are permissible before the application is submitted.

Illinois and Michigan have each issued administrative guidance that describes the factors regulators will consider in evaluating whether an MSA constitutes an undisclosed ownership interest, including the proportion of the licensee's revenue captured by the fee, the governance rights granted to the manager, the manager's control over the licensee's capital expenditure decisions, and the existence of any option or other deferred acquisition mechanism that gives the manager the right to acquire the license in the future. These factors are not applied as a mechanical checklist but as a totality of the circumstances analysis, which means that an arrangement that scores well on most factors can still be found impermissible if one factor reflects a sufficiently serious control relationship.

Brand Licensing vs. Operational Control Distinction

Brand licensing is one of the most commercially significant non-plant-touching participation structures in the cannabis sector, and it is also one of the most legally misunderstood. A true brand license grants the licensee the right to use the licensor's trademarks, trade dress, and associated intellectual property in connection with the licensee's cannabis products, in exchange for a royalty, without giving the licensor any authority over how the licensee produces, distributes, or sells those products. The distinction between a brand license that conveys trademark rights and an operational arrangement dressed up as a brand license is the dispositive legal question in the control analysis.

Trademark law creates a genuine tension with the cannabis control analysis: a trademark licensor is generally required to exercise quality control over licensed goods to avoid naked license invalidation, which would destroy the licensor's trademark rights. The quality control obligation under trademark law requires the licensor to have some mechanism for monitoring whether the licensee's products meet the licensor's quality standards. But cannabis regulators may characterize the same quality control mechanism as evidence of operational control over the licensee's plant-touching activities, particularly if the mechanism includes the right to inspect the licensee's production facility, access the licensee's compliance records, or condition continued license use on the licensee's compliance with the licensor's production standards.

Structuring a cannabis brand license that satisfies both trademark law and cannabis regulatory requirements demands a careful calibration of the quality control provisions. The licensor's quality control rights should be limited to review of finished product samples, consumer-facing marketing materials, and packaging that bears the licensed marks, without extending to the licensee's cultivation and processing operations. The licensor's right to terminate the license for quality failures should be triggered by the product's failure to meet defined standards (potency, safety testing, packaging compliance), not by the licensor's dissatisfaction with the licensee's production methods. And the quality standards themselves should be defined by reference to objective, product-level criteria rather than process specifications that would require the licensor to monitor the licensee's plant-touching operations.

Royalty structures in cannabis brand licenses are typically based on net sales of products bearing the licensed marks, expressed as a percentage of net revenue ranging from 3% to 10% depending on the brand's market recognition and the scope of the license (exclusive vs. non-exclusive, geographic scope, product category scope). Minimum royalty commitments, which guarantee the licensor a floor payment regardless of the licensee's actual sales volume, are standard in brand licenses and generally permissible in cannabis licensing regimes that scrutinize MSA fee structures, because the minimum royalty is recognized as a standard trademark licensing mechanism rather than a revenue-sharing arrangement.

Real Estate Sale-Leaseback and Rental Models

Real estate is one of the most straightforward non-plant-touching cannabis participation structures available to institutional capital because most state cannabis licensing regimes permit non-cannabis-licensed entities to own real property that is leased to cannabis licensees, provided the lease terms do not give the landlord operational control over the cannabis business. The sale-leaseback is the most common institutional real estate structure in cannabis: a cannabis licensee sells its cultivation, processing, or retail facility to a real estate investor and simultaneously enters into a long-term triple-net lease for the same premises, receiving immediate liquidity for the facility's value while retaining operational control of the business.

The sale-leaseback appeals to cannabis operators for several reasons. The operator monetizes the appreciated value of purpose-built cannabis real estate without disrupting operations, the proceeds can fund expansion or reduce senior debt, and the lease terms are typically structured with longer initial terms (10 to 15 years) and renewal options that give the operator predictable occupancy for the life of the business. The real estate investor receives a long-term income stream secured by a specialized asset, with the tenant typically responsible for all operating expenses, taxes, insurance, and maintenance under the triple-net structure.

The legal analysis for sale-leaseback structures in cannabis must address three areas: state licensing disclosure requirements, lease term restrictions that could create control issues, and federal tax treatment. On the disclosure side, most states require cannabis licensees to identify all parties with a financial interest in the licensed premises, and a landlord receiving rent should be disclosed as a real estate interest holder rather than an ownership interest holder, provided the lease contains no revenue-sharing, profit-participation, or co-management provisions. Lease terms that give the landlord operational oversight rights (such as the right to inspect the premises for compliance with cannabis regulations or to require the tenant to cease operations) may be characterized as control and require careful drafting to distinguish landlord property protection rights from operational authority.

The IRS position on real estate rental income from cannabis tenants is that such income is not subject to Section 280E disallowance because the landlord is not engaged in trafficking in controlled substances. This position, while not codified in formal guidance, has been consistently applied in IRS audit practice and gives the sale-leaseback structure a material tax advantage over structures in which the real estate is held by the cannabis licensee. Real estate investment vehicles structured to hold cannabis tenant properties should also analyze REIT qualification rules, which impose restrictions on the nature of income and assets that may be relevant when cannabis-tenant real estate represents a significant portion of the portfolio.

Convertible Notes, Call Options, and Deferred Acquisition

Convertible notes and call options embedded in cannabis MSA and investment structures serve a common purpose: they allow the non-plant-touching capital provider to establish a contractual right to acquire the cannabis licensee's equity at a defined price, without exercising that right until the conditions that make direct ownership permissible have been satisfied. These instruments are widely used in the cannabis sector as a mechanism for bridging the gap between the current regulatory environment (which restricts direct ownership) and a future state in which federal descheduling, rescheduling, or state law amendment removes the barriers.

A cannabis convertible note is a debt instrument issued by the cannabis licensee that carries the right to convert the principal (and accrued interest) into equity of the licensee upon the occurrence of defined conversion conditions: most commonly, a change in federal law that removes the Controlled Substances Act barrier to the note holder's direct ownership of a cannabis business, or the note holder's receipt of regulatory approval as a prospective owner in the relevant state. The note bears an interest rate negotiated at market terms for cannabis lending (which is elevated relative to conventional commercial lending to reflect the sector risk premium and the limited access to conventional financing), and the conversion price is typically set at a discount to the price at which the licensee's equity is expected to be valued at the time of conversion.

Call options in cannabis structures are typically documented as a separate agreement or as a provision of the MSA or investment agreement, granting the option holder the right to purchase a defined percentage of the licensee's equity at a fixed price or at a price determined by a formula tied to financial metrics at the time of exercise. The option price is typically determined by reference to EBITDA or revenue multiples established at the time the option is granted, with an adjustment mechanism if the licensee's actual financial performance departs materially from projections. The option term is set to extend beyond the expected regulatory change horizon, giving the option holder a meaningful window to exercise once the conditions are satisfied.

Both convertible notes and call options in cannabis structures are securities under the Howey test and must be issued in compliance with federal and state securities laws. The most common exemption used is Regulation D Rule 506(b) or 506(c), which permits sales to accredited investors without SEC registration, subject to disclosure and anti-fraud requirements. Issuers must maintain offering documents (private placement memoranda or investment agreements with appropriate representations) that would withstand scrutiny, and any marketing of these instruments to prospective investors must comply with the applicable Regulation D general solicitation rules. Cannabis illegality under federal law does not create an exemption from the Securities Act for instruments whose economic value depends on a cannabis business's performance.

Alternative Investment Vehicles and Holding Company Strategies

Alternative Investment Vehicles (AIVs) are used in cannabis structures to separate investors whose mandates or regulatory profiles prevent direct cannabis investment from the economic benefits of cannabis exposure. An AIV is a special purpose vehicle, typically a limited liability company or limited partnership, that holds the non-plant-touching assets (the MSA, the brand license, the convertible note, the call option, or the real estate) that provide economic exposure to the cannabis licensee's performance without requiring the AIV's investors to hold a direct interest in a cannabis business.

The holding company structure that most commonly supports AIV strategies involves a multi-level architecture: a top-level holding entity (typically a Delaware limited liability company or a Cayman Islands limited partnership for offshore capital) holds equity in one or more intermediate holding companies, each of which holds the non-plant-touching contracts and instruments associated with one or more cannabis licensees in a defined geographic region. The intermediate holding companies may be organized in the same state as the cannabis licensee to facilitate regulatory disclosure and to ensure that the entity holding the MSA or brand license is subject to the same jurisdiction as the licensee, simplifying the governing law analysis.

Investors in AIV structures should receive documentation that clearly describes the nature of the economic interest being sold: not equity in a cannabis business, but equity in an entity that holds contracts providing economic exposure to a cannabis business's performance. The disclosure must address the regulatory risks (that the MSA or other contract could be challenged or terminated by state regulators), the federal legal risks (that the arrangement could be characterized as facilitating trafficking in controlled substances), and the tax risks (that the IRS could challenge the cost allocation strategy used by the licensee to maximize 280E deductions on COGS). These risks must be presented in terms that a sophisticated investor can evaluate against their own risk tolerance and mandate constraints.

Holding company structures must also address the waterfall mechanics that determine how economic returns from the underlying cannabis business flow through the AIV layers to investors. MSA fees, royalty payments, interest on convertible notes, and real estate rental payments are each characterized differently for tax purposes and each requires its own analysis of the information reporting, withholding, and entity-level tax obligations that arise as the payments move through the holding structure. Counsel designing these structures should engage tax specialists with cannabis sector experience alongside the corporate and securities lawyers responsible for the structural documentation.

Cross-Jurisdiction Stacking and MSO Expansion

Multi-state operators (MSOs) in the cannabis sector build their footprint through a combination of direct license acquisitions (in states where they meet licensing eligibility requirements), management service relationships (in states where direct ownership is constrained by residency requirements, license caps, or background check issues), and brand license arrangements (in states where the MSO's brand has market recognition and a local licensee is available to produce and distribute under the brand). Cross-jurisdiction stacking refers to the practice of layering these different participation structures across multiple states to create a unified economic platform from which the MSO captures value from cannabis operations in each jurisdiction, regardless of whether the MSO holds the state license directly.

The legal complexity of cross-jurisdiction stacking arises from the fact that ownership and control definitions, MSA disclosure requirements, fee tolerance thresholds, and brand license permissibility standards vary materially across state cannabis licensing regimes. An MSA fee structure that is clearly permissible in one state may constitute unlicensed ownership in another, and a brand license quality control provision that satisfies the trademark law requirement for maintained licensor oversight may cross into impermissible operational control under the cannabis licensing rules of a different state. MSO counsel must conduct a jurisdiction-by-jurisdiction analysis of every agreement term in every state where the stacked structure will be operative.

Disclosure obligations in cross-jurisdiction MSO structures compound the compliance burden. Some states require licensed cannabis operators to disclose all management service, brand license, and financial arrangements with non-plant-touching entities in their initial license applications and in any change-of-ownership or change-of-control notification filings. An MSO that updates its MSA fee structure, adds a new brand licensee relationship, or closes a convertible note transaction with a licensee in one state may trigger disclosure obligations in that state that have no counterpart in the other states where the MSO operates, or that require different disclosure content. A centralized regulatory affairs function with jurisdiction-specific expertise is a prerequisite for managing these obligations at scale.

Interstate commerce restrictions add another layer of complexity. Cannabis products cannot legally be transported across state lines under federal law, which means that each state's operations must be self-contained at the cultivation and processing level. The non-plant-touching services that an MSO provides across jurisdictions (accounting systems, compliance software, marketing materials, brand standards) can be delivered from a central platform, but the product itself and the plant-touching operations that produce it must be organized on a state-by-state basis. The organizational architecture of a cross-jurisdiction MSO must reflect this constraint in both the entity structure and the service agreement frameworks that document each state relationship.

Securities Law and Investor Disclosure Implications

Cannabis MSA structures, brand licenses, convertible notes, call options, and AIV interests each create potential securities law issues that arise from the same fundamental analysis: whether the instrument or arrangement constitutes a security under the Securities Act of 1933 or the Securities Exchange Act of 1934. The federal definition of a security under the Howey test encompasses any contract, transaction, or scheme involving an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others. Passive investors in cannabis AIV structures, note holders whose returns depend on the cannabis licensee's revenue performance, and brand licensors whose royalties track the licensee's sales volume each potentially hold securities without regard to the form of the underlying instrument.

The SEC has not issued formal guidance indicating that cannabis-related securities are exempt from registration, and the agency's enforcement record confirms that securities law applies to cannabis investment arrangements. The most common exemption pathway for cannabis securities offerings is Regulation D, which permits sales to accredited investors (natural persons with net worth exceeding $1 million excluding primary residence, or annual income exceeding $200,000 for two consecutive years, or institutional investors meeting applicable asset thresholds) without registration, provided the issuer files a Form D within 15 days of the first sale and complies with anti-fraud provisions. Rule 506(c) permits general solicitation if all purchasers are verified accredited investors.

State blue sky laws apply to securities offerings in addition to federal law, and issuers relying on Regulation D must comply with each state's notice filing requirements for Regulation D offerings. Some states impose merit review standards that go beyond the federal registration exemption, requiring issuers to demonstrate that the terms of the offering are fair and equitable before the exemption is available. Cannabis securities issuers operating across multiple states must map their offering to the specific blue sky requirements of each state where sales will be made.

Investor disclosure in cannabis securities offerings must address risks that are specific to the cannabis sector: the federal illegality of the underlying business (including the risk that the federal government could enforce the Controlled Substances Act against the issuer or its affiliates), the risk that state licensing authorities could modify or revoke the licenses on which the business depends, the 280E tax risk that limits the licensee's ability to deduct ordinary business expenses and affects the financial projections on which the investment is premised, and the risk that the MSA, brand license, or other non-plant-touching arrangement could be challenged by regulators as unlicensed ownership. These risk factors must be disclosed in terms that are specific and meaningful, not generic boilerplate.

Tax Treatment and 280E Blow-Back Risk

Section 280E of the Internal Revenue Code is the single most significant tax constraint affecting cannabis businesses and the non-plant-touching structures built around them. The provision disallows deductions for all ordinary and necessary business expenses of a trade or business that consists of trafficking in controlled substances under federal law, and it has been consistently applied by the IRS and upheld by federal courts against cannabis operators who have argued that it violates the Sixteenth Amendment or constitutional due process principles. The practical effect is that cannabis licensees pay federal income tax on gross profit rather than net income, producing effective tax rates that can exceed 60% for operators with high selling, general, and administrative cost structures.

MSA fee structures have been used by cannabis licensees as a mechanism for shifting SG&A costs from the 280E-disallowed category into the non-plant-touching service provider's cost structure, where they can be deducted without 280E restriction. The IRS has scrutinized these arrangements under two theories. First, if the MSA fee is characterized as a cost of goods sold by the licensee (because the services covered include production-related activities), it may be includable in COGS and therefore not subject to 280E disallowance at the licensee level. Second, if the arrangement is characterized as a disguised profit-sharing or equity arrangement, the IRS may reallocate income and expense between the licensee and the service provider to eliminate the tax benefit.

For the MSA service provider, which is typically not itself a cannabis licensee and does not traffic in controlled substances, the fees received are ordinary income that is fully deductible for business expenses incurred in delivering the services. This is the structural tax advantage of the non-plant-touching model: the same economic activity that would generate a 280E-disallowed expense at the licensee level generates a fully deductible expense at the service provider level. But the IRS's economic substance doctrine and step-transaction doctrine give it tools to challenge arrangements where the service relationship lacks genuine business substance or where the parties have structured the arrangement primarily to shift income from a 280E-subject entity to a non-280E entity.

The 280E landscape may change materially if cannabis is rescheduled from Schedule I to Schedule III of the Controlled Substances Act, which is an active regulatory proceeding as of 2026. A rescheduling to Schedule III would likely remove cannabis businesses from 280E's scope, because the statute applies only to Schedule I and II substances. If rescheduling occurs, the tax advantage of non-plant-touching MSA structures diminishes, and some of the premium that investors in these structures pay for 280E avoidance will compress. Counsel advising clients on long-term MSA and AIV structures should model the economics under both 280E-applicable and 280E-inapplicable scenarios to ensure that the structure creates value across the range of likely regulatory outcomes.

Frequently Asked Questions