Tax Problems Plague Marijuana Industry

Although it was originally intended as a way to prevent traffickers of illegal drugs from benefiting from tax deductions, Section 280E has since become a thorn in the side of legal marijuana dealers all over the United States. Implemented in 1982, the provision in the U.S. tax code was originally intended to prevent dealers in illicit hard drugs from claiming deductions in business related expenses. Given the recent crackdown by the IRS on dispensaries however, it seems that medical marijuana providers are in the line of fire as well.

In Colorado, which is one of the 18 states where marijuana is legal for both medical and recreational use, owners of marijuana dispensaries pay taxes as much as 70% more than taxes paid by owners of other businesses. One of the main reasons for this is Section 20E, which the IRS applies to dispensaries because marijuana remains illegal under federal law.

This policy has come under fire from many sectors, especially give the recognized health benefits of marijuana. Essential for dealing with the symptoms of many chronic conditions and for easing the side effects associated with chemo or radiation therapy, marijuana is used for medical purposes by patients with cancer, glaucoma, HIV/AIDs, arthritis, glaucoma, and many others. Given the benefits of marijuana to millions of people in the United States, the continued tax restrictions seem unwarranted to many pro-legalization advocates.

Other supporters of legalization claim that legalizing marijuana will help generate billions of dollars that can contribute to state and national budgets. Most of the revenue generated will come from the taxation of marijuana dispensaries, although a significant portion will come from reduced law enforcement, judicial, and incarceration costs as well.

For marijuana dispensaries that operate what is considered a legitimate business in their respective states, the exorbitant taxes charged against according to the guidelines of Section 20E are nothing short of irrational. Most such businesses have no choice but to accept the federal law, although this has made it more difficult to remain in business. One Colorado-based dispensary failed to make a profit for three years running, and was still required to pay $300,000 in taxes the following year.

At present, there is little that the growing community of marijuana dispensaries can do other than to accept the situation. While the U.S. tax code offers a legal loophole of sorts (which essentially allows owners of marijuana dispensaries to claim deductions on services other than selling marijuana), many see these measures as a case of “too little, too late”. It also doesn’t help much that dispensary owners can claim deductions on rental costs if the percentage of the property used for selling marijuana is less than 10%.

The federal government has also remained largely noncommittal about the issue, and it seems that the laws won’t be changed any time soon. For owns of marijuana dispensaries, there seems to be little choice but to pay the taxes in order to continue running a useful business, or to seek some other line of work.

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