Will Medical Marijuana Sellers Get the Capone Treatment?

Suppose you are lucky enough to operate a medical marijuana dispensary in a state that—unlike, say, Montana—explicitly authorizes such businesses. Then you would be "in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana," so you should not have to worry about federal drug charges, according to a policy announced by the Justice Department in October 2009. But that does not mean you won't have legal trouble with the federal government. In fact, a recent story in the Marin Independent Journal suggests that by the time the IRS gets through with you, you might wish you had only been raided by the DEA:

The Internal Revenue Service has notified the Marin Alliance for Medical Marijuana in Fairfax [California] 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.

Why can't a medical marijuana dispensary deduct business expenses? Because Section 280E of the Internal Revenue code says "no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business…consists of trafficking in controlled substances…which is prohibited by Federal law." At the same time, however, the fact that your business involves selling a Schedule I drug does not mean you don't owe tax on your illegal income. As the IRS helpfully explains, "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity."

[Thanks to Tom Murphy for the tip.]

Comments

[zoltan]

It should be illegal but we'll still take your money from that illegal activity.

[Hee-Hee Herman]

Fruit of the poisoned tree, though.

[Episiarch]

Richard Nixon's Head: My fellow Earthicans, we enjoy so much freedom, it's almost sickening. We're free to chose which hand our sex-monitoring chip is implanted in. And if we don't want to pay our taxes, why, we're free to spend a week with the Pain Monster.

The Pain Monster: See you April 15th, folks!

[IRS]

What 5th amendment?

[Fist of Etiquette]

You could look at it this way, IRS auditors are more than happy to fuck up the shit of more traditional businesses, so this tactic by the feds could be seen as another step toward legitimacy for medical marijuana. What? No? Yeah, I guess not.

[Paul]

Now let's try to see people write off the cost of their medical weed as "medical expenses".

[Mr Whipple???]

WTF. I own a business, and that is the most fucked up shit I have ever heard. Declaring income from illegal activities? That's like having to declare out-of-state purchases on the NJ income tax form so you can pay the sales tax that you saved by buying the shit in a sales tax free state, like Delaware.

[omg]

This is probably the biggest thing the government does that cements the constitution's place as a worthless scrap of paper.

You need to declare revenue from illegal sales. But if you declare that money, you will be telling the government that you are doing something illegal. Either way, you incriminate yourself.

[the government]

We're quite proud of this. Thanks so much for noticing.

[Tulpa]

You don't need to declare it as illegal revenue. You just need to declare it as income.

[Robert]

Legally in such a case what you have to file is a 5th amendment return. Most people don't have an excuse to file one, but congratulations in this case. I'm sure IRS wants the money, though, so they'll grant immunity.

[Lost_In_Translation]

The IRS wants the money, but there's no reason for them not to turn over the form to the DEA to indict someone with. its just Kafkaesque that they're using tax law to deligitimize a legitimate business.

[BladeDoc]

Yes. . . . Do I win a prize?

[Almanian]

I'm gonna eat a bullet if I read any more Reason tonight...

FUCK. ME.

[Colin]

I'm afraid that's an illegal activity.

No deductions for you!

[Wind Rider]

But, he's good to go (boom) as long as he fills out the proper forms?

[Number 2]

Holder's "Directive" to "cease" medical marijuana enforcement against those acting "in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana" lists several factors to use in determining whether you are, in fact, acting ""in clear and unambiguous compliance with existing state laws." Curiously, none of those factors has anything to do with the actual requirements of state medical marijuana laws. They include criteria such as firearms violations, having "excessive amounts of cash" on hand, and "evidence of ... financial gains." The latter criterion is a direct attack against profit-making marijuana suppliers, notwithstanding state laws that permit them.

[jasno]

Clearly another government policy intended to benefit one group of people(drug dealers) at the expense of another(dispensary owners).

[The Bearded Hobbit]

I think I filed my first tax return in 1972 and it was clearly stated that you had to declare income from illegal activity. I know this because the absurdity of that was a big push towards my distrust of the government.

Why is called a tax "return" anyway?

... Hobbit

[C P Ayyyy]

If you think that's absurd, you should see what I have to go through computing depreciation on illegal stuff.

[Dello]

"Why is called a tax "return" anyway?"

Because if you're lucky, you get some of your tax money returned to you.

[Episiarch]

Well, no. The ideal situation is to owe the government, at tax time, the maximum amount that they won't fine you for for underpayment. That way the whole year, you have had control of and can be earning money off of that before you give it to the government.

If you are getting a refund, it's the government who has been making interest on that money all year, and not you. You should adjust your withholding accordingly.

[Solanum]

I believe shriek's said this is what he does. He invests that extra cash in jackalope futures on etrade. He's a daytrading savant, you know.

[Episiarch]

I thought he was an idiot savant. Well, just an idiot.

[Lost_In_Translation]

If you are getting a refund, it's the government who has been making interest on that money all year, and not you.

I think that's optimistic. in reality they've already spent your money before you earned it...in 2050. Now, it just a matter of shoveling into the blackhole.

[Paul]

Why is called a tax "return" anyway?

Because you're returning your income to the government-- it's real rightful owner - via taxes.

[Tulpa]

It's not like you have to write it in a box labeled "illegal drug profits" on your tax form. You just add it to your income...they're not going to start snooping around to see why you claimed too much income.

IIRC, there was an attempt to tax marijuana (without legalization) in some state recently, that got struck down by the courts because it violated the 5th amendment's guarantee against self-incrimination.

[Robert]

Actually you do have to declare the source of income -- which is why you need to file a 5th amendment return if you have income from illegal sources. But in this case IRS already knows their activity, so the feds will grant immunity to get their money.

The thing I'm wondering about in the case of "business deductions" though, is, does it include the cost of goods sold?

Probably what the dispensaries have to do to get around this is to conduct some other business and apportion their expenses to that, selling med mj on the side. Either that or switch to a clearinghouse mode wherein they don't sell the goods at all but just hook you up with the supplier and rake off a cut of your payments.

[ChicagoSucks]

Probably what the dispensaries have to do to get around this is to conduct some other business and apportion their expenses to that, selling med mj on the side. Either that or switch to a clearinghouse mode wherein they don't sell the goods at all but just hook you up with the supplier and rake off a cut of your payments.

I believe the technical term for that is a "front".

[Colonel_Angus]

Why can't we do away with all of this deductions business?

[aging businessman]

assuming your question is not sarcasm. with no deductions you are taxed on your gross income . not being able to write off labor, materials etc. your taxes could be more than your profits.

[Tulpa]

I think he's sarcasming in favor of a flat tax with lower rates and no deductions.

[juris imprudent]

I once thought that Congress wrote the tax laws, but clearly no one but Kafka could've created this.

[Justin Michels]

IRS trying to collect tax revenue from medical cannabis provider because they are claiming it is an illegal drug? Show them scientific proof it IS MEDICINE, then show them the actual text of the Controlled Substances Act and kindly ask them to redirect their attention towards holding the Attorney General's office and President Obama accountable for following the law of the land. Medical cannabis is clearly NOT a dangerous or illegal drug--as the DEA recently proved when they requested permission to reschedule all synthetic and otherwise patented forms of THC to "schedule III", while simultaneously making the absurd claim that the cannabis plant itself has absolutely no medical value. A clearer contradiction can not exist. We must stand up and hold these fools accountable in a court of law if this is ever going to stop. Perhaps what's needed is a class action lawsuit on behalf of those involved with the American cannabis industries -- which are expected to keep growing almost exponentially for the foreseeable future..

[Paul]

Wow, a two-fisted, double punch of a story. The pitfalls of Medicalizing marijuana coupled with the inherent immorality of taxes on income. Wall-to-wall win.

[Clich? Bandit]

It's a Sheen!

[heller]

The federal government is just continuing in the fine tradition of Elliot Ness.

[Tulpa]

What was wrong with Elliot Ness? Please don't tell me Al Capone's in the libertarian heroes gallery next to Confederate secessionists.

[Abdul]

Dude, watch the movie, he threw a criminal defendant off a roof without the benefit of a trial!

[heller]

They convicted Al Capone on tax evasion.

[Business Loans]

whats illegal is illegal. I dont support drugs at any cost. We dont want our youngsters die before Obama.

[puma pas cher]

oh

[Wind Rider]

The Reason staff has obviously become enamored of the kudos Balko garners for the whole "nut punch" concept. . .

[Hacha Cha]

So according to them Section 280E should exclude pharmacies and the pharmaceutical industry from getting deductions/credits.

[Idiots]

The thing is what are you spineless ppl going to do about it...

hahahah..thats right NOTHING but whine and go buy a new iPad 2

Fuckin twats...

[John]

This action by the DEA is a clear violation of the State of Montana's sovereign right to duly enact state laws in accordance with the will of its people. The Montana Medical Marijuana law was duly processed via democratic process and duly enacted into Montana law. For the DEA, or any other Federal Government agency, to override that authority is a clear violation of our Sovereign right to govern our state. By this action, the DEA has usurped our Governer's authority; rendering him nothing more than a figurehead and spokesperson for the Federal Government. I think it is time for the Governer of Montana and the Montana State Attourney General to stand up and prosecute the DEA for acts of treason, violation of Constitution, and violation of State's rights to govern according to the will of the people.

Of course, this is just my opinion; I could be wrong