Unlike most every other legal business out there, medical marijuana shops owners aren’t allowed to take any deductions on their federal income taxes – leaving many facing federal tax rates of 50 percent or higher.
According to a CNN Money story earlier this week, the high tax rate is due to a 1982 change in federal tax laws known as 280E. It seems back in the 1980s some enterprising drug runner was able to successfully claim his guns, boats and money used in bribes as business expenses. In response to that, the IRS pushed a law saying that “drug trafficking organizations” can’t deduct from their taxes.
Since the federal government considers state-legal medical marijuana operations as illegal drug trafficking, those dispensaries can’t take any of the normal deductions – travel, equipment, etc. That leaves them with a bill nearly twice as high as a similar-sized, federally-legal business would have.
|Denver Relief lobby.|
Denver Relief dispensary owner Kayvan Khalatbari tells CNN the high rate prevents him from giving his 15 staff members raises. He estimates that his shop does about $1 million annually in sales, but that he’s sending as much as 50 percent of that back to state and federal governments. The story also quotes Colorado medical marijuana accountant Jim Marty who says he has a client that was hit with a $300,000 tax bill in 2012 despite not turning a profit from 2009 through 2011.
In Colorado, dispensaries have been getting a double-dose of this tax treatment. Currently, a Colorado return relies on the federal taxable income; therefore it is illegal for owners of state-legal medical marijuana businesses to claim business deductions on state income taxes. There is currently legislation before the Colorado legislature – House Bill 1042 – that would allow medical marijuana dispensary owners to make deductions at the state level.
The IRS has said they are merely following the law, and that congress would have to make any changes to federal tax codes. Past attempts, like 2011’s Tax Equity Act which would have created a medical marijuana exemption, failed to get enough support. One group working to reform the law, 280E Reform, says it is a necessary step in legitimizing what is otherwise a legal and authorized industry in the 18 states (including Washington D.C.) that have authorized it’s use.
“Should the IRS campaign be successful; it will throw millions of patients back in to the hands of street dealers; eliminate tens of thousands of well paying jobs, destroy hundreds of millions of dollars of tax revenue; enrich the criminal underground; and endanger the safety of communities in the 17 medical cannabis states,” said Steve DeAngelo, high-profile Oakland dispensary owner and spokesman for the campaign.
A Time Business & Money article from last week ponders the same outcome: would higher taxes mean higher prices in shops, thus forcing patients back out to the black market? They point out that if a 50 percent tax were enacted at the federal level, it could triple the cost of cannabis for the consumer.
|Durban Poison from Denver Relief.|