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
Office: 213-233-2260
Mobile: 310-710-6434
Email: tgreen@greenassoc.com