Tax laws are notorious for being difficult to deal with, but the laws regarding the taxation of marijuana are especially challenging. At present, 18 states and Washington D.C. have legalized the use of marijuana for medical purposes, and Colorado and Washington have even decriminalized recreational use. Even so, the IRS basically places legal marijuana dealers in the same category as dealers in the illegal drugs such as cocaine, methamphetamine, and heroin, requiring them to pay higher taxes and depriving them of tax benefits available to other business owners.
There are two reasons for this policy. One is the fact that marijuana is still illegal under federal law, even though the aforementioned states have legalized it on a local level. The second is Section 280E of the U.S. tax code that basically denies businesses the privilege of deducting taxes of they are involved in the trafficking of a controlled substance.
Passed into law in 1982, Section 280E was originally intended to prevent drug traffickers from claiming deductions on expenses related to running a business that is essentially illegal. Although this clause may have some benefit with regard to making an illegal drug business less profitable, it has also trampled the rights of thousands of dispensary owners in the United States–all of who run a legal business.
As expected, there has been clamor for changes to the outdated law. One of the main reasons why marijuana has been legalized in certain states is its recognized benefit in terms of helping patients deal with the symptoms of painful or chronic pain conditions, or the effects of chemo or radiation therapy. Many supporters of legalization therefore feel that there is a gross injustice in placing legal marijuana dispensaries–who provide an essential service–in the same tax category as dealers in illegal drugs.
Legalization is also seen by many as a means for government to generate much-needed income from levying taxes on the production and sake of marijuana. It has been estimated that taxing marijuana in the same manner as tobacco and alcohol would generate billions of dollars in revenue every five years.
Legalization will also save the government millions of dollars in the costs of going after marijuana “offenders”, subjecting them to the legal process, and finally incarcerating them. The money saved and the resources freed up could then be put towards dealing with more serious crimes and going after dealers of the more dangerous illegal drugs. Given this potential for revenue generation and savings, the stringent tax policies imposed on marijuana dispensary owners seems even more reprehensible.
There are some occasional bright spots in the struggle for more favorable tax policies for dispensary owners. The U.S. Tax Court has since passed a ruling that basically allows owners of such businesses to deduct taxes on income earned from business activities unrelated to actually dispensing marijuana. This ruling also allows dispensary owners who use only a small percentage of the premises for the sale of marijuana to take out a deduction on most of the property rent.