Marijuana dispensaries in the United States may be operating within the bounds of state law, but they might as well be illegal as far as the IRS is concerned. Although allowed to conduct business in 18 states in the U.S. and in Washington D.C., hundreds of dispensaries are subject to exorbitant tax rates–as much as 75% higher than average–due to a law intended for criminals in the illegal drugs business.

The current policy of the IRS with regard to dealing with marijuana dispensaries stems from Section 20E of the tax code, which basically restricts those involved in the illegal drugs trade from filing deductions on business-related expenses. This provision was added to the tax code in 1982, following an incident wherein a known drug trafficker managed to claim tax deductions on yachts, bribes, and even weapons expenses.

While the policy may be beneficial in terms of curtailing the activities of people involved in the dangerous drugs business, marijuana dealers who are otherwise working within the boundaries of state law now find that they are subject to the same restrictive tax laws, with costly results.

The owner of one such dispensary in Denver estimates that the taxes entailed running his business is as much as 50% higher than what should be levied against a legitimate business. This particular business pays tens of thousands of dollars in taxes every year since it falls under the scope of Section 280E.

While this Denver dispensary is large enough to weather the high taxes, other dispensaries aren’t as lucky. In Colorado, there is reportedly a marijuana dispensary that failed to make a profit for three years straight, only to face a huge tax bill from the IRS amounting to $300,000.

These examples illustrate the challenges faced by marijuana dispensaries all over the country, all of which are not guilty of any wrongdoing according to the laws of their respective states. As the tax attorney working for the Colorado dispensary mentioned previously said, entrepreneurs who are involved in otherwise legitimate businesses are being given the same treatment as criminal drug dealers under the outdated federal tax laws.

The IRS has yet to respond to the issues surrounding Section 20E head on, with officials saying only that the organization was simply enforcing existing federal law, and that it was up to Congress to make the necessary changes if legal marijuana dealers are to be spared from its scope.

At present, there are several groups lobbying for Congress to make such changes, although there has been no indication that the laws will be amended in the near future. The White House itself has not expressed interest in supporting such amendments, which causes many to believe that the situation will not change any time soon.

There are certain loopholes in the U.S. tax code that allows marijuana dispensaries to file for deductions against certain business expenses that don’t have a direct bearing on marijuana sales. However the benefits of these loopholes are marginal at best, and dispensaries will continue to work under these restrictive laws until Congress passes the necessary measures.

280E, Federal Taxes, IRS