SAN FRANCISCO — Unable to claim routine deductions, marijuana dispensaries are burdened by large federal tax bills that a new lawsuit is attempting to change.
The lawsuit seeks to overturn a rule in the tax code unknown as Section 280E. The rule was established back in 1982, following a famous case in which a drug dealer prevailed in deducting business expenses such as scales and rent in tax court. Tax breaks associated with the sale of illegal drugs became outlawed.
This was decades before legalization became a reality, of course. In order to succeed, most American businesses rely upon theses tax breaks. While it may have made sense in the early 1980’s to deny federal benefits to drug dealers, times appear to have changed.
The federal law barring dispensaries from business deductions apply to write-offs for rent, payroll, insurance and marketing. Specifically, the law states that business operations consisting of “trafficking in controlled substances” aren’t eligible for the same deductions offered to other businesses. Dispensaries are only able to deduct the costs of goods sold or “expenses a business incurs to make its sales,” which is little help to marijuana entrepreneurs.
One such outfit is the Bloom Room Cannabis Collective in San Francisco. Owner Stephen Rechif says that his tax burden is enormous. He is unable to reinvest profits into his fully legal operation, he says, as most of what he clears goes to employee benefits. There is no surplus to invest in growth opportunities, media buys, advertising or digital media.
Dispensaries like Bloom Doom Cannabis may be forced to devote considerable amounts of time and energy to avoid not only 280E, but federal audits as well. A dispensary operator audited by the IRS was recently required to pay a $250,000 bill for taxes plus interest and fines. The owner had to raise money from investors at terms that were unfavorable.
“We’re simply asking for cannabis businesses to be taxed fairly, like any other business,” said Taylor West, deputy director of the National Cannabis Industry Association. “These are businesses who are trying to play by the rules and pay their federal taxes, and they get penalized for no justifiable reason.”
Meanwhile, Harborside Health Center in Oakland and its attorney are determined to get Section 280E thrown out entirely. By arguing that the federal law was not meant to apply to dispensaries, they are suing the Internal Revenue Service in the hope of getting the regulation lifted.