Jun 17, 2016 9:00 AM

Tax Law Paradoxes: Marijuana Tax Revenue Legal, Tax Deductions Outlawed

When it comes to legalizing weed, there is a certain contradiction between the federal and local laws. While marijuana remains classified as a Schedule I drug and is illegal at the federal level, 25 states plus the District of Columbia have legalized it for either medical, or recreational purposes, or both. And even despite the fact that the legalization of marijuana tax revenue has already proved to be profitable for the economy, some government agencies continue to treat marijuana dispensaries as illegal organizations.

The latest example—one of the biggest California medical marijuana dispensaries, Harborside Health Center. Last week, Harborside started the next round of legal arguments with the IRS. This time, the opponents met each other in San Francisco Tax Court.

The Harborside tax case lasts over six years. In 2010, there was an IRS audit of the Oakland Harborside dispensary. Although the company claimed it has paid all the taxes required by the local marijuana tax policy, the IRS sent it a bill for $2.4 million. The reason for the back-taxes bill was unexpected—the IRS declared Harborside to be not a legal medical marijuana dispensary (which it is under the California law) but a drug trafficking organization. Using the Section 280E of the Internal Revenue Code, the IRS insisted that in contrast to other legal businesses, Harborside Health Center had no right to deduct certain expenses from its income.

Federal Government Dismisses Case Against Harborside
Federal Government Dismisses Case Against Harborside
The U.S. Attorney office has recently made an announcement about a case dismissed against Harborside Health Center, which is one of the country’s biggest dispensaries.

Section 280E was passed over 30 years ago when the War on Drugs was in full swing and there were no legal medical cannabis dispensaries in the U.S. The section insisted on prohibiting drug trafficking organizations from taking any deductions allowed to legal businesses within the country. But today's interpretation of the Section 280E coming from the IRS puts in danger the entire industry because, as Steve DeAngelo, the executive director of Harborside recently said Forbes, “without the benefit of those deductions, … the federal tax rate can hit as high as 60%-90%”.

Ironically, one of the biggest supporters of Harborside Health Center in its battle against the IRS is Rep. Pete Stark (D-CA), the original sponsor of the controversial tax code section. Stark says that not only the IRS “undercuts legal medical marijuana dispensaries” but also “punishes the thousands of patients” who rely on medical marijuana dispensaries as a safe and legal source of medical weed. Moreover, five years ago, in 2011, Pete Stark introduced the Small Business Tax Equity Act of 2011 meant to correct the IRS' improper interpretation of 280E, but the initiative failed.

As for the latest Harborside tax case, according to Steve DeAngelo's post in Twitter, the trial concluded on June 9, 2016, but we will not hear the verdict until next year.

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