There have been many instances throughout history when state governments find themselves on the opposing sides of the federal government. One particular issue that has become increasingly prominent recently is the legalization of marijuana.
At present marijuana has already been legalized for medical use in 18 states and in Washington D.C. In fact, Washington and Colorado have both taken the further step of decriminalizing its recreational use. Given these developments you would think that marijuana dispensaries would be able to ply their trade much as any other legitimate business would. This is not the case however, and operators of marijuana dispensaries often find themselves on the losing end of outdated tax laws that force them to pay up to 75% higher taxes than other businesses.
The particular provision in the U.S. tax code that is at the root of this problem is Section 280E. Approved for inclusion in the tax code in 1982, the provision was passed in response to a landmark case in which a convicted drug trafficker was able to file tax deductions on several business expenses, including the purchase of a yacht, and even weapons. Section 280E was therefore passed with the goal of preventing drug dealers from enjoying the same tax benefits as legitimate business owners.
The problem that the thousands of legal marijuana dispensaries all over the United States face is that although marijuana may be legal in their respective states, it remains a controlled substance under federal law. This essentially places marijuana in the same category as the illegal hard drugs from a taxation standpoint, and legal marijuana dealers in the same category as criminal drug dealers.
One way legal marijuana dispensaries have gotten around Section 280E is by filing for deduction on expenses that are not associated with the dispensing of marijuana. This legal loophole comes by way of a decision by the U.S. Tax Court itself, and it provides operators of legal dispensaries some relief against the restrictive tax policies imposed by the IRS.
In a landmark decision, the court ruled that owners of dispensaries involved in some other type of business may file for deductions against costs incurred in these businesses. Furthermore, owners of dispensaries may be eligible for deductions on rent if only a small percentage of the property is used in dispensing marijuana. A dispensary that also offers counseling or educational services for instance, may be eligible for tax deductions on these aspects of the business.
In order to benefit fully from this legal loophole, owners of dispensaries should be especially thorough with regard to keeping records of income and expenses, perhaps even more so than with any other type of business. It might also be worthwhile to explore other related revenue streams that have nothing to do with dispensing marijuana and therefore don’t fall under the scope of Section 280E. With the absence of federal government indication that the tax laws will be amended soon, it seems that this is the only recourse for operators of legal marijuana dispensaries to help deal with the restrictive tax laws.