Pubdate: Thu, 13 Sep 2012
Source: Boulder Weekly (CO)
Copyright: 2012 Boulder Weekly
Contact:  http://www.boulderweekly.com/
Details: http://www.mapinc.org/media/57
Author: Cecelia Gilboy
Note: Cecelia Gilboy owns Colorado Quality Collective, the first 
wholesale marijuana brokerage licensed by the state.

MEDICAL MARIJUANA AND TAXES

Colorado Faces Historic Shakedown

An obscure tax law, intended to prevent cocaine kingpins from 
deducting yachts and other necessities, may alter Boulder's landscape.

Experts say it may shutter dispensaries nationwide.

Fourteen years before any medical marijuana laws existed, US Tax Code 
was amended because a convicted coke dealer had successfully deducted 
guns, boats, and bribes. Ever since, Section 280E has banned 
deductions related to "trafficking in controlled substances."

Because marijuana is a "controlled substance," dispensaries are taxed 
on all revenue - without subtracting rent, payroll, or supplies. The 
IRS has embarked on an auditing spree, slapping some dispensaries 
with tax bills in the millions. (The representative who sponsored 
280E in 1982, observing its current invocation, now leads the effort 
to reform his own law.)

Aware of the threat, Colorado dispensaries have tread carefully. Some 
calculated the square footage used for selling meds, versus the area 
used for discussing and observing said meds -- and wrote off rent for 
the latter. Some claimed that their employees multi-tasked, and 
deducted a portion of payroll for non-trafficking pursuits.

These number-crunching taxpayers were abiding Tax Court's 2007 
decision (C.H.A.M.P. v. Commissioner): Caregiving services were 
separate from trafficking, the court had ruled, and could be 
deducted. Dispensaries pay a higher tax rate than other businesses - 
but they've been able to keep the doors open.

Until now. In August, the Tax Court unanimously reached its second 
decision on 280E: It precludes dispensaries "from deducting any 
expense related to the business in that the business is a single 
business that consists of trafficking in a controlled substance."

No more multi-tasking staff or separate "wellness spaces." Your 
stores' rent, employees, marketing, supplies - what might seem like 
normal business expenses - are all part of your trafficking. Growing 
controlled substances (still just as federally illegal as trafficking 
them) was somehow omitted by the lawmakers who wrote 280E in 1982. So 
you can deduct rent and supplies for your grow operation - great 
news, if you operate your dispensary out of your warehouse, or poorly 
maintain your storefront and pay your employees terrible wages. In 
Boulder, your dispensary and warehouse must be separate, and running 
a retail establishment isn't cheap. It's a troubling choice: "We 
either change our 2011 taxes, and suddenly owe the IRS far more than 
we earned this year," says one Boulder dispensary owner who for 
obvious reasons would rather not be identified, "or we leave them and 
wait for an audit." If audited, he'll likely receive a tax bill high 
enough to sink his small business.

Owning a dispensary here was costly already. To comply with state 
regulations, you must: Install enough state-of-the-art surveillance 
to capture each moment of your plants' lives from every angle; build 
the appropriate number of doors, bathrooms, and hallways for the 
amount of marijuana you plan to grow; fork over at least $10,000 in 
fees every time you need to change your dispensary's name, location, 
or owner/investor lineup - and at least $10,000 annually to remain 
open, whether or not you've adjusted your name/location/ownership to 
comply with other changing regulations.

Now it's even harder for Colorado dispensaries to profit, thanks to 
their multiplying taxes. One small-business owner in Boulder expects 
to owe an additional $100,000 a year - money he doesn't have, because 
he's invested it in his business.

Yes, our country needs tax dollars. But dispensaries aren't the only 
businesses selling controlled substances: Others sell Oxycodone, 
Vicodin, morphine. In 2007, the US pharmaceutical industry collected 
$315 billion, and their revenue keeps rising. If 280E was enforced, 
their taxes would go a long way towards reducing our national deficit.

But the pharmaceutical industry enjoys a relaxed tax rate, about 40 
percent less than other industries, according to a Public Citizen 
report. Those companies get tax breaks for paying their executives 
high stock-option-supplemented salaries. (At least one pharma giant 
paid its CEO more than it paid the government in taxes last year.) 
They receive tax credits and subsidies for research and development. 
Tax dollars fund most pharmaceutical R&D, so how much is the industry 
really spending? None of your business. Thanks to a nine-year legal 
battle the industry fought and won in Supreme Court (Bowsher v. Merck 
and Co.), they don't have to disclose R&D records.

No disclosure needed: It's just medicine. Dispensary owners only have 
to sign away privacy rights and submit a 22-page application 
measuring their "moral character." (Question #672D: What is the value 
of your spouse's great-aunt's stock portfolio divided by the average 
age of your pets?) Even extraneous MMJ folks like me can't escape the 
disclosure demands. The state department of revenue has, currently on 
file, a diagram mapping of the bodily locations of my tattoos. (Not a joke.)

Pharmaceutical giants justify their secrecy and skimpy taxes by 
citing the high "risk" they face. If only the marijuana industry was 
riskier. Like, if crop failures due to pests were increasing because 
inspectors now tramp through grow after grow without changing 
clothes; or if MMJ grows were now especially vulnerable to break-ins, 
due to state regulations now requiring that their locations be made 
public. Or if, say, dispensaries could be shut down by the federal 
government at any moment.

Both the marijuana industry and the federal government face changes 
in November, when Colorado votes on legalizing marijuana, and the 
country decides between candidates whose campaigns focus on taxes and 
small business. In a safer, healthier, more economically-stable 
America, marijuana would be legal - or would at least be a Schedule 
II drug like Oxycodone, not a Schedule I drug like heroin. That 
wouldn't be a full victory for MMJ - but at least the taxes would be easier.
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MAP posted-by: Jay Bergstrom