Taxing Medical Marijuana

While California among other states has legalized the sale and use of medical marijuana, marijuana remains a federal offense which has led to the current debate. Although it remains to be determined whether medical marijuana dispensaries may be criminally prosecuted according to federal laws, in early 2009 the United States Department of Justice announced raids of such dispensaries that complied with state laws, regulations, and ordinances would cease.

Since the legalization of medical marijuana numerous dispensaries have sprouted all along the state of California. Presently, the city of San Jose has approximately one hundred dispensaries and three largest dispensaries in Oakland have accumulated an estimated of $35 million to $38 million dollars in revenue in 2010, increasing its revenue from $28 million dollars in 2009.

Recently, Oakland’s largest and most reputable medical marijuana dispensary, Harborside Health Center (Harborside), has allegedly been scrutinized by the Internal Revenue Service (IRS), according to Harborside’s Chief Executive Officer Stephen DeAngelo. The IRS is apparently auditing dispensaries such as Harborside under Section 280E of the United States Code enacted in 1982, which states:

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 (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. (26 U.S.C. 280E)

Section 280E explicitly bans any deduction or credit related to “trafficking in controlled substances,” such as marijuana and many dispensary owners distress, if strictly applied this section could in turn effectively extinguish the growing medical marijuana industry! Further, this section predates the legalization of medical marijuana by individual states, and moreover, considering the revenue produced by such dispensaries during this difficult economic climate, the IRS should contemplate whether revision of current tax codes, regulations, and policies should be executed.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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