Paul L. Caron

Sunday, March 13, 2011

IRS Tries to Bogart Medical Marijuana Club's Deductions

Marijuana Marin Independent Journal, IRS Tells Fairfax Medical Marijuana Dispensary It Owes Millions in Unpaid Taxes:

The IRS has notified the Marin Alliance for Medical Marijuana in Fairfax that it owes millions of dollars in unpaid back taxes, according to the alliance's founder and director, Lynnette Shaw.

Shaw said the IRS audited the alliance's tax returns for 2008 and 2009 and disallowed all of its business deductions. She said that although dispensaries throughout the state are being audited by the IRS, the alliance is the first to be told it can't deduct business expenses. "Every dispensary in the nation, past, present and future is dead if this is upheld," Shaw said. ...

Shaw said the IRS disallowed her deductions โ€” for buying marijuana, hiring employees, securing office space and more โ€” based on ยง 280E of the federal tax code, which states that no deduction shall be allowed for any business trafficking in controlled substances.

Under federal law, marijuana is classified as a schedule I controlled substance, a category of drugs not considered legitimate for medical use โ€” despite voters' 1996 approval of Proposition 215, which legalized the use of marijuana for medical purposes in California.

(Hat Tip: Bob Kamman.) The title is courtesy of Country Joe and the Fish:

Don't bogart that joint, my friend
Pass it over to me.
Don't bogart that joint, my friend
Pass it over to me.

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» More Trouble for Marijuana Dispensaries from the IRS from Taxable Talk
Back in 2007, the Tax Court ruled that a non-profit that supplied medical marijuana to terminally ill patients could not deduct business expenses related to that activity but could deduct the expenses related to their counseling and caregiving activiti... [Read More]

Tracked on Mar 13, 2011 9:19:40 PM


It is so unfair to still see people fighting over a state rule that was established nearly 15 years ago!

Posted by: Vaporizers | Mar 15, 2011 3:54:01 PM

"Every dispensary in the nation, past, present and future is dead if this is upheld," Shaw said.

* * * * * * * * * * *

Whatever. This is just hyperbole. The fact that they can't deduct business expenses sucks for them, but in the end is just a cost of the business at this point in time. The cost of the product will have to be increased to account for this. Volume of sales will decrease until an equilibrim is established.

Posted by: ed | Mar 14, 2011 3:02:45 AM

I have a few ideas on how to get over this obstacle:

1 - lower costs relating to growing/selling the drugs by vertical integration

2 - hire independent contractors for all non "trafficking" work you need done, because they can write it off

3 - find a way to get buyers to incur the costs. If 100% of the money buyers are giving you is the purchase price, that's all income. But if the buyers were required to invest in your business to buy supplies and otherwise pay costs early on, and then you later sold the MJ to them at a lower price, maybe you could get away with saying only the "purchase price" at the end is income? I understand that some buyers would not want to be contractually involved in a business enterprise that the federal government says is illegal, even though they are willing to make illegal purchases, so this option might scare customers away.

4 - could you set it up as a "nonprofit" organization, with the idea that employees/management would all draw healthy salaries?

I'm not a tax lawyer though, so I don't know if they would work.

Posted by: Daryl Herbert | Mar 13, 2011 11:15:48 AM