Cannabis Law Prof Blog

Editor: Franklin G. Snyder
Texas A&M University
School of Law

Friday, January 23, 2015

It's Tax Season for Marijuana Businesses: Welcome to the Hellmouth

Hard to believe, I know, but the Internal Revenue Service is making life difficult for, and extracting large amounts of taxes from, marijuana entrepreneurs.  Dealing with the IRS is difficult enough when rules are nice and clear--but when the rules get vague the agency turns into something you might find in Buffy the Vampire Slayer.  

It's almost like they don't want to help your business succeed.  CNBC has a rundown of a recent conference on the topic:

    Pot may be illegal in the eyes of the federal government. But the people selling it legally still have to pay their taxes.

    Owners of recreational "adult use" marijuana operations in Colorado and Washington are preparing to file their first federal tax returns, and they're learning some hard lessons. The IRS is not allowing all the usual business deductions under what's called section 280E. The cost of growing marijuana is deductible under the federal tax code, but not the cost of selling it.

    "Labor for rolling joints is deductible," said Denver CPA Jim Marty of Bridge West, who adds that retail rent, labor and advertising are not deductible. Why does the IRS differentiate the two? "They just are making it up," he said.

    Marty joined other accountants and tax attorneys at a marijuana tax symposium in San Diego put on this week by the National Cannabis Industry Association. Some CPAs and attorneys have started challenging the IRS' special treatment of the marijuana industry.

    "These folks want to comply, they want to be part of the system, they want to pay their fair share of taxes, they just don't want to be penalized," Marty said. He admits that pretax profits in the legal pot industry "are very good—you can sell a pound of marijuana for about three to four times what it costs you to grow," but he added that without deductions for retail expenses "it puts you, at best, in the 60-70 percent tax bracket, and at worse, your tax bracket can actually exceed 100 percent."

    "I think you have to be very careful in dealing with the IRS, because 280E is the biggest threat that is happening to the cannabis industry at this time," said Henry Wykowski, a former federal prosecutor who is now an attorney for the marijuana industry in California.

    He has taken the government to court twice on the tax code, and succeeded in coming up with some legal workarounds. For example, retail pot enterprises can deduct the cost of goods for non-cannnabis retail products in their stores, like T-shirts and pipes, to help offset the lack of other deductions. "If you do not handle your deductions properly," Wykowski said, "there's no way you can make enough money to remain in business."

    Then there's the issue of how to pay the IRS the taxes it's due when you're dealing with an all-cash business. Some stores find workarounds to avoid carrying bags of cash to IRS offices (none will divulge how they do it), though Marty said cash is accepted now in some places in Colorado. "Actually, at my suggestion the IRS in Denver got cash counting machines, and now they have a separate line for cash," he said.

    Aaron Justis is president of the Buds & Roses medical marijuana dispensary in Los Angeles, which has been filing tax returns since at least 2010. Justis came to the conference to learn more. He said paying taxes has put him at a competitive disadvantage with other dispensaries. "I would say in Los Angeles, 4 out of 5 are operating illegally, so chances are they're not paying their fair share of taxes." So why does he file returns? "I'm in it for the long haul."

My favorite part of the story is perhaps the least relevant.  The Internal Revenue Service refused to accept U.S. currency--"legal tender for all debts public and private"--for paying taxes?

Business, Federal Regulation, Taxation | Permalink


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