Taxing Medical Marijuana Dispensaries out of Business

medical marijuana, medical marijuana taxThe Federal Government’s Latest Weapon in the War on Medical Marijuana
Although medical cannabis for use by seriously ill patients has been legal in California for more than 15 years, marijuana is not legal for any use under federal law. In an effort to curb the proliferation of medical cannabis in California, the federal government has utilized several tactics, including raids on grow operations, threatening asset forfeiture, and most recently, imposing severe tax consequences on medical marijuana dispensaries.

Internal Revenue Code §280E prohibits any tax deduction or credit if it is, “in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances.” Because of its classification as a Schedule I drug on the federal level, marijuana is considered a controlled substance within the meaning of Section 280E. For dispensary operators and others involved with medical marijuana on a large scale, this means that even if they are compliant with all California laws, they are still not entitled to the tax benefits afforded all other California business entities, including the ability to deduct business expenses. Without the tax considerations, dispensaries are subject to audits and being hit with tax bills for hundreds of thousands of dollars from the IRS, and most do not have the means to pay such hefty fines.

To date, there has been only one Court challenge to the tax bills assessed a dispensary based upon Section 240E, Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue (2010) 128 T.C. No. 14 (“CHAMP”). In that case, a dispensary was audited and hit with a huge IRS tax bill, and the IRS disallowed all of the dispensary’s business deductions. The action was brought through U.S. Tax Court, which is not binding on any other federal courts, or any state courts. The CHAMP decision held that a dispensary can in fact make business deductions, so long as the deduction can be separated from the actual “trafficking” of medical cannabis.

The CHAMP case caught the IRS off guard, and it has learned from its mistakes. For example, in CHAMP, the IRS failed to bring a substantiation challenge (i.e. requiring all expenses claimed as deductions to be substantiated) until just before trial, so the presiding judge did not allow it. Today, it is routine practice that when dispensaries are hit with audits and tax bills, a substantiation challenge is made contemporaneously. From a tax liability perspective, this means that dispensaries ought to keep diligent records of sales and receipts. However, in so doing, the same dispensary may run into trouble with law enforcement, federal or local, for running a commercial enterprise, which can lead to raids and criminal charges.

There is no perfect solution, especially given the current crackdown climate and the conflicting areas of the law. Anyone operating within the medical marijuana field is strongly advised to seek out both the advice of a CPA and an attorney to make the most informed decisions possible about what is going to be best for their individual situations.
Beck Law P.C. is located in Santa Rosa and offers an entire scope of Medical Marijuana related services to clients in Santa Rosa, Petaluma, Cotati, Rohnert Park, Sebastopol, Healdsburg, Sonoma, Kenwood, Glen Ellen, Windsor, Bodega Bay, Ukiah, Willits, Clearlake, Lakeport, Kelseyville and throughout Sonoma County, Mendocino County and Lake County California.

Beck Law P.C. can furnish the experience and knowledge to help guide you through the complexities of California Medical Marijuana law.

Making an appointment to meet with us is an investment in exploring what options may or may not apply to your particular situation. Your visit to Beck Law P.C. is confidential as is the information discussed. You can contact our office at 707-576-7175 or contact us online.


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