Marijuana

IRS Fines Marijuana Merchants for Refusing to Commit a Felony

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Jacob Sullum

State-licensed marijuana stores, which began serving recreational customers in Colorado at the beginning of the year and in Washington this week, are criminal enterprises under federal law. But as Al Capone could have told you, Uncle Sam still wants his cut: Selling marijuana is a felony, and so is failing to pay taxes on the money you earn by selling marijuana. The government does not make it easy to comply with federal tax laws, however. Section 280E of the Internal Revenue Code, for example, bars marijuana merchants from deducting standard business expenses (although they are, rather counterintuitively, allowed to deduct the "cost of goods sold," including the cost of growing or obtaining marijuana). And when a business pays federal taxes withheld from employees' paychecks, along with the employer's share of payroll taxes, the Internal Revenue Service insists that it be done via the Electronic Federal Tax Payment System (EFTPS), which requires a bank account. Cannabusinesses have trouble obtaining bank accounts, what with being criminal enterprises under federal law. The IRS does not consider that a good excuse, so when marijuana merchants pay the monthly taxes in cash, they are charged a 10 percent penalty. That is how Allgreens, a Denver dispensary, ended up owing the IRS more than $20,000 in penalties.

In a petition filed last month with the U.S. Tax Court, Allgreens argues that the IRS should waive the penalties, as permitted by law "for reasonable cause," because the store's inability to make electronic payments is "due to circumstances completely outside of [its] control." After all, writes Allgreens' lawyer, Rachel K. Gillette, "the taxpayer is unable to secure a bank account due to the nature of its business, which is explicitly legal under Colorado State law. With no bank account and no access to banking services, the taxpayer is simply incapable of making EFTPS payments or to utilize the EFTP System."

The IRS argues that businesses like Allgreens have other options. For example, "Taxpayer may use a currency exchange/same-day loan establishment, to convert cash (often times for a fee) into a money order to deposit and then use a financial institution to complete a same-day wire transaction (often times for a fee)." Alternatively, "Taxpayer may utilize/authorize a third party such as a tax professional, accountant, payroll service firm, etc., to make the deposit on their behalf. Using the third party service, the deposit is made through the batch provider software using the third parties' bank account."

The problem, as Gillette points out, is that such tricky maneuvers can be treated as money laundering, a crime punishable by up to 20 years in prison under federal law. "An alternative should not force a taxpayer to engage in a potentially unlawful activity under a federal statute," she writes, concluding that "the IRS's decision in this case is arbitrary and capricious." 

[Thanks to Marc Sandhaus and Christopher Hesse for the tip.]

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  1. So, we’ve barred them from having bank accounts AND require that they pay taxes from a bank account.

    I’m sure when Obama reads this in the paper, he’ll fix it.

    1. If comrade Stalin only knew!

    2. So if/when a cannabis business takes the steps the IRS recommends to pay the taxes electronically, and then the Feds bring down the hammer and jail them for laundering money, is it entrapment?

      1. Actually, there could be an interesting estoppel defense there, if you can get the IRS to say that its legal for you to do what they state is an alternative.

    3. 0bama doesn’t give a fuck.

  2. The IRS does not consider that a good excuse, so when marijuana merchants pay the monthly taxes in cash, they are charged a 10 percent penalty.

    Is this a result of IRS bureaucratic regulations or of the U.S. Tax Code or of some other legislation?

  3. Catch 4/20.

  4. Is there a case to overturn the law based on the supremacy clause? Because there seems to be no real way of not doing something illegal and also selling pot in either Colorado or Washington even if you ignore federal drug laws.

    1. If by “the law” you mean the state laws legalizing pot, yeah, I think there’s a case to be made, unfortunately, that they are invalid under the Supremacy Clause. The argument would come down to whether a state law explicitly legalizing X is in “conflict” with a federal law explicitly outlawing X.

      1. It would appear that the justice dept. doesn’t think it would make much of a case. Though I suppose they could have other plans. Or they could just be stupid.

        1. The law around what constitutes a “conflict” is tricky.

          But, I suspect they don’t want a frontal assault on these laws because (a) it would be politically costly and (b) they think they can submarine this by other means.

          I mean, its not like having a weak argument has stopped the DOJ before, so it must be something else.

          1. its not like having a weak argument has stopped the DOJ before

            Yeah, good point.

      2. However, the federal government has no constitutional authority to outlaw pot in the first place.

        1. I’m just speaking from a practical point of view. I get the feeling that if this went before the Supreme Court, it would be a 9-0 overturning the state law…shitty.

  5. I just checked the currency in my wallet. Yep, it still says “legal tender for all debts public and private”.

    Meaning, if you take a bag of cash to the IRS office, they have to accept it. Regulations be damned.

    1. Well, it’s not really a penalty. More of a, uh, “convenience fee”.

      Justice Roberts, could we get a little assist here?

      1. Justice Roberts, could we get a little assist here?

        PENALTAX!!1!!!

  6. How the fuck can the IRS not accept cash? A government agency should have to accept government currency. It pretty much says so on the cash itself.

    Here’s a question for the lawyers. How does Leary vs. the US not apply here? That’s the case where the Marihuana tax act was struck down because complying with the law and paying the tax required self-incrimination. Doesn’t complying with the federal tax code here require you to incriminate yourself under federal law? Or did that magically change when outright federal prohibition suddenly became constitutional?

    1. Or did that magically change when outright federal prohibition suddenly became constitutional?

      It’s the magical FYTW clause.

  7. U.S. Tax Court? Sounds like the court of exchequer. All we need now is a Court of Star Chamber, and the transition to medieval England will be complete.

  8. THE + IRS = THEIRS

    1. Whose?

      That’s pretty good. Almost up there with BLUE+RED=BE RULED.

  9. Isn’t there some way for the marijuana merchants to collectively charter a bank at the state level, with no FDIC insurance, to manage these transactions?

  10. I think some private companies can charge a fee if you don’t pay electronically and insist on mailing them a check.

  11. At least we can all be safe in knowing that the IRS isn’t talking about this stuff over email.

  12. I refuse to buy my dope from boot-licking statists.

    1. Especially if it costs way more than it would on the black market because of artificially limited supply.

  13. I don’t see why they don’t file 5th amendment returns, and then wait to see if IRS grants them immunity.

  14. “Sorry, the information for my tax return was on a hard drive that crashed, and that I then shredded. You guys are cool with that, right?”

  15. And, of course, payday loan places have been having some trouble keeping bank accounts too….

  16. Remember you do not write your check to the IRS. You write it to US Treasury. You do not owe the taxes to the IRS, they just enforce the tax code. You owe the money to the US Treasury. Try tendering your cash payments directly to the US Treasury. If they refuse to take it, your debt is extinguished because Federal Reserve Notes are “LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”.

    1. Ed – good point, but in this case they are referring to “monthly” payroll taxes – a completely different and more insidious can of worms where you literally need to pay at set periods based-on payroll and receive nastygrams from the IRS if even a day late…

  17. As a small business owner, I loathe and despise the IRS; these same EFTPS rules apply across-the-board, and are yet another example of absurd business regs (particularly for small business).

    BUT – this story DOES NOT ring true to me. I find it hard to believe that neither the business, nor any owners can secure a bank account…are they paying ALL their vendors in cash.

  18. US Tax Court; functionally equivalent to allowing muggers to decide whether you are the valid owner of the property he wants to steal.

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