Tuesday, February 25, 2014
Time: Christian Pot Dispensary Takes on IRS: A Business Touting Christ and Cannabis Takes a Stand Over Dispensaries' Awkward Tax Status:
At Lanette Davies’ shop in Sacramento, everyone stops what they’re doing at 6 p.m. Some patrons come especially for this moment in the day, while others just happen to be there. “We have prayer every night, for our community and our patients,” she says. And those patients are all taking at least one of the same prescriptions: medical marijuana. Her shop, Cana Care, is a “Christian-based dispensary,” where the owners believe in both the powers of Christ and cannabis.
The not-for-profit dispensary has a rare mix of messages, but it might also be on the verge of setting a new precedent for the marijuana industry. On Feb. 24, Davies and her husband Bryan will face the Internal Revenue Service in tax court over disputes about business deductions. A ruling in their favor could help pull dispensaries like hers out of a legal limbo—in which states view them as legitimate businesses but the IRS continues to view them as aiding in drug trafficking.
Federal law defines pot as a controlled substance, and that is the law that the IRS follows, even after 20 states and Washington, D.C., have legalized medical marijuana. “The tax law is grossly unfair,” says San Francisco-based tax attorney Robert Wood, who has written extensively about the issue. “Whether you think dispensaries are a good idea or not, if they’re lawful businesses under state law, they should be able to deduct their business expenses like anybody else.”
So far, courts have ruled that dispensaries can’t do that. Businesses like Canna Care aren’t eligible for what would normally be routine deductions like payroll expenses and rent, because of a section of the federal tax code known as 280E, which dates back to 1982—more than a decade before California became the first state to legalize medical marijuana in 1996. When Davies’ filed her taxes in 2006, 2007 and 2008, she listed $2.6 million in such deductions. The IRS, which has repeatedly pursued dispensaries using that section of the code, came knocking with an audit in 2011 and refused to accept those deductions, levying nearly $875,000 in additional taxes on Canna Care.
(Hat Tip: George Yin.) Prior TaxProf Blog coverage:
- IRS Tries to Bogart Medical Marijuana Club's Deductions (Mar 13, 2011)
- Voters Say Yes to Marijuana, IRS Says No (Nov. 8, 2012)
- Medical Marijuana Providers Face 75% Federal Tax Rate (Feb. 25, 2013)
- Leff: Medical Marijuana Providers Can Beat Oppressive Federal Taxes by Operating as Non-Profits (Mar. 5, 2013)
- Leff Presents Tax Planning for Marijuana Dealers Today at Harvard (Apr. 24, 2013)
- HuffPo: Marijuana Industry Lobbies Congress on Taxes (June 20, 2013)
- Roche: Taxation of Medical Marijuana Businesses (Aug. 28, 2013)
- Leff & Hackney: Tax Planning for Marijuana Dealers (Oct. 29, 2013)