IRS Fines Marijuana Merchants for Refusing to Commit a Felony


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.]