(Photo: Courtesy of Lanette Davies)
The roughly 2,500 medical marijuana dispensaries in the USA pay taxes to local, state and federal governments.
But they can’t take the same federal tax breaks that other small businesses take.
A section of the federal tax code known as 280E was meant to prevent tax write-offs for illegal drug activity. It was enacted in 1982, before medical marijuana was legalized in any state.
The Internal Revenue Service applies 280E to pot shops operating legally under state law.
The IRS says it follows the law in not allowing these deductions. Any changes to 280E would require Congress to amend either the Internal Revenue Code or the Controlled Substances Act, according to a 2010 letter from the IRS to members of Congress.
Although 20 states and D.C. have legalized medical marijuana, the Controlled Substances Act still lists marijuana as a Schedule 1 drug, the most dangerous category.
Because of 280E, the effective tax rate for many marijuana businesses is 50% or more, according to Taylor West, deputy director of the National Cannabis Industry Association, and Henry Wykowski, a lawyer representing marijuana businesses.
The majority of businesses audited by the IRS end up settling, but Canna Care, a medical marijuana dispensary in Sacramento, is fighting the IRS’ charge that it owes nearly $875,000 in back taxes.
“You’re paying the federal government protection money in order to operate,” said Lanette Davies, who owns Canna Care with her husband, Bryan.
Davies said the IRS has offered to settle the case for $100,000, but the couple refused on the principle that 280E should not apply to them.
The IRS declined to comment or be interviewed for this article.
The inability for marijuana businesses to write off the cost of payroll, rent and other expenses creates “extremely thin profit margins,” West said.
The only cost that dispensaries can write off is the marijuana itself.
NCIA lobbied members of Congress last week to change 280E and support a bill that would allow marijuana businesses to take standard business deductions.
Sponsored by Rep. Earl Blumenauer, D-Ore., the bipartisan bill has an unlikely ally in Grover Norquist, president of Americans for Tax Reform.
Industry members frame the bill as an economic investment issue.
“These are small businesses that are part of the local economy, but because of this tax burden, it makes it dramatically more difficult to invest in their people and in their property,” West told USA TODAY Network.
The marijuana industry has received a boost in attention with Colorado’s retail locations opening Jan. 1. Colorado made $3.5 million in marijuana tax revenue and fees, $2 million from recreational, in January. Washington is the only other state with legal recreational marijuana, and a store will open this summer.
Wykowski said it’s a myth that this business produces quick, easy profits.
People think “it’s a business that all you have to do is open up and make a million dollars. Maybe if you weren’t paying taxes,” said Wykowski, who represents Harborside Health Center, an Oakland dispensary that claims to be the country’s largest dispensary. The IRS says Harborside owes $2.4 million in back taxes.
Marijuana businesses can write off expenses of sales and services not related to the actual marijuana product — such as pipes and T-shirts or yoga and acupuncture. That precedent is based on a marijuana tax case Wykowski argued in 2007.
The case was a victory for the industry, but Wykowski said,”If all you’re doing is running a store that has cannabis, you don’t have much to work with.”
Medical Marijuana Stores Blocked from Tax Breaks
Article by Jolie Lee for USA Today