The country’s rapidly growing marijuana industry (including physicians who write the recommendations) has a tax problem.
Even as more states embrace legal marijuana, shops and dispensaries say they are being forced to pay crippling federal income taxes because of a decades-old law (26 U.S.C. § 280E) aimed at preventing drug dealers from claiming their smuggling costs and couriers as business expenses on their tax returns.
The latest audits are not just aimed at dispensaries but at medical marijuana physicians. Imagine being audited and finding out that all your deductions are being disallowed and you are to pay hefty taxes on gross revenue even if seventy-five percent of it went to pay employee wages, rent, supplies, costs of goods sold, etc. You get the picture of what the IRS is doing here.
Congress passed that 280E in 1982 after a cocaine and methamphetamine dealer in Minneapolis who had been jailed on drug charges went to tax court to argue that the money he spent on travel, phone calls, packaging and even a small scale should be considered tax write-offs. The provision, still enforced by the I.R.S., bans all tax credits and deductions from “the illegal trafficking in drugs.”
This has caught many in the medical marijuana business including physicians by surprise. Many people invested in dispensaries only to find out this fact after they invested millions of dollars.
Here is the text of 26 U.S.C. § 280E, Expenditures in connection with the illegal sale of drugs:
“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.”
This week’s New York Times article on this issue by Jack Healy highlights the issues. “Marijuana business owners say it prevents them from deducting their rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-marijuana businesses with the same earnings and costs. They also say the taxes, which apply to medical and recreational sellers alike, are stunting their hiring, or even threatening to drive them out of business.”
The gap between the federal position on this issue and the states is hitting business owners hard. Remember that 23 states, plus the District of Columbia, allow medical or recreational marijuana. The federal government does not and this affects businesses in many ways. For example, banks will not allow medical marijuana businesses to have accounts since marijuana possession is a federal crime in national parks (including those in California and Colorado).
As Jack Healy of the NYT writes, while “President Obama and top federal officials have allowed states to pursue legalization, marijuana advocates say the dissonance between increasingly permissive state laws and federal prohibitions is creating a morass of complications and uncertainty.” It is time for the federal government to not use this as a revenue generator but to engage in fairness and consistency. The tide is turning and this is nothing less than extortion on small to medium size businesses since they know that large companies have avoided this business for this exact reason. Either that or the medical marijuana business needs to get together and lobby Congress on a states’ rights issue which is certainly popular in the South and Southwest.
Posted by Tracy Green, Esq.
Green and Associates, Attorneys at Law
800 West 6th Street, Suite 450
Los Angeles, California 90017