With the sale of medical marijuana and recreational cannabis in States that have legalized their sale, I am often asked whether a seller must pay federal tax on its sales proceeds. As a former IRS Agent, I tell them that the sale of marijuana generates taxable income. They respond by saying "how can this be? It is still illegal under federal law to sell marijuana! Do I really have to report those sales to the IRS?" The problem for these sellers is that the Internal Revenue Code (the "Code") taxes all income, even if derived from the "trafficking in controlled substances." Then I tell them the really bad news. Not only do businesses selling marijuana have to pay taxes on their sales revenues, but Section 280E of the Code prohibits tax deductions for ordinary and necessary business expenses such as rent, wages and other such expenses.