Pubdate: Sun, 10 May 2015
Source: New York Times (NY)
Copyright: 2015 The New York Times Company
Author: Jack Healy


DENVER - Money was pouring into Bruce Nassau's five Colorado 
marijuana shops when his accountant called with the bad news: The 
2014 tax season was approaching, and Mr. Nassau could not rely on the 
galaxy of deductions that other businesses use to reduce their tax 
bills. He was going to owe the Internal Revenue Service a small fortune.

"I had to write a check for $275,000," Mr. Nassau said. "Unbelievable."

The country's rapidly growing marijuana industry has a tax problem. 
Even as more states embrace legal marijuana, shops say they are being 
forced to pay crippling federal income taxes because of a decades-old 
law aimed at preventing drug dealers from claiming their smuggling 
costs and couriers as business expenses on their tax returns.

Congress passed that law in 1982 after a cocaine and methamphetamine 
dealer in Minneapolis who had been jailed on drug charges went to tax 
court to argue that the money he spent on travel, phone calls, 
packaging and even a small scale should be considered tax write-offs. 
The provision, still enforced by the I.R.S., bans all tax credits and 
deductions from "the illegal trafficking in drugs."

Marijuana business owners say it prevents them from deducting their 
rent, employee salaries or utility bills, forcing them to pay taxes 
on a far larger amount of income than non-marijuana businesses with 
the same earnings and costs. They also say the taxes, which apply to 
medical and recreational sellers alike, are stunting their hiring, or 
even threatening to drive them out of business.

The issue reveals a growing chasm between the 23 states, plus the 
District of Columbia, that allow medical or recreational marijuana 
and the federal bureaucracy, which includes national forests in 
Colorado where possession is a federal crime, federally regulated 
banks that turn away marijuana businesses and the halls of the I.R.S.

While President Obama and top federal officials have allowed states 
to pursue legalization, marijuana advocates say the dissonance 
between increasingly permissive state laws and federal prohibitions 
is creating a morass of complications and uncertainty.

The tax rule, an obscure provision referred to as 280E, catches many 
marijuana entrepreneurs by surprise, often in the form of an audit 
notice from the I.R.S. Some marijuana businesses in Colorado, 
California and other marijuana-friendly states have challenged the 
I.R.S. in tax court.

This year, Allgreens, a marijuana shop in Colorado, successfully 
challenged an I.R.S. policy that imposed about $30,000 in penalties 
for paying its payroll taxes in cash - common in an industry in which 
businesses rely on armed guards and cash-stuffed safes because they 
cannot get bank accounts.

"We're talking about legal businesses, licensed businesses," said 
Rachel Gillette, the executive director of Colorado's chapter of the 
National Organization for the Reform of Marijuana Laws and the lawyer 
who represented Allgreens. "There's no reason that they should be 
taxed out of existence by the federal government."

A normal business, for example, might pay a 30 percent federal rate 
on its taxable income, which would represent its gross income minus 
deductible business expenses. A marijuana business, on the other 
hand, might pay the same federal rate on all of its gross income 
because it cannot take these deductions. The difference can raise the 
rate on a marijuana business to 70 percent or more of its profits.

Ms. Gillette said she represented a dispensary owner who had taken in 
$1.7 million last year before expenses and had received a tax bill of 
$866,000. They are negotiating with tax officials, she said.

Colorado and a handful of other states have changed their tax laws to 
let legal marijuana businesses take deductions on their state 
returns. And this month, Senator Ron Wyden and Representative Earl 
Blumenauer, both Democrats of Oregon, which legalized recreational 
marijuana last year, introduced legislation that would allow 
marijuana businesses that are following their states' legalization 
laws to take regular deductions on their federal returns.

"It's affecting thousands of businesses, and it's doubling, tripling, 
quadrupling their taxes," Mr. Blumenauer said. "It just cripples them."

The current system, he said, encourages marijuana sellers to file tax 
returns that do not follow the law and simply hope the I.R.S. does 
not spot them.

But Kevin Sabet, president of Smart Approaches to Marijuana, a 
leading critic of legalization, said it made no sense to give "tax 
breaks to companies openly violating federal law by selling marijuana 
gummies and lollipops."

Accountants and tax lawyers, who are inundated with calls from 
marijuana shops these days, say the rules are murky and make little 
sense. If marijuana retailers dedicate parts of their stores to yoga, 
drug education or selling non-drug merchandise, can they deduct part 
of their rent? If employees split their time between cleaning the 
store and selling marijuana, are their salaries partly deductible?

"There's no clear direction," said Scott Levy, an accountant in 
Arizona who said that marijuana sellers made up about one-fifth of 
his business. "You find all these weird little strategies that people 
use to try to parse the definitions."

Oddly, accountants said, one expense that marijuana retailers can 
easily take off their taxes is the marijuana itself.

The wording of the tax laws and their interpretation since states 
began to legalize medical marijuana has allowed businesses to deduct 
the expenses of wholesale marijuana or growing the plant, from the 
price of the seeds or baby plants to the water and growing lights 
needed to produce it. Only when retailers go to sell those buds, 
brownies or marijuana-infused drinks do the tax restrictions kick in.

Dispensary owners who once feared raids by drug enforcement agents 
say they take pride in paying taxes like any other business. They say 
it brings them out of the shadows and distinguishes them from the 
black market. Marijuana advocates trumpet tax-collection numbers to 
show that the industry is pouring millions of dollars into state budgets.

"It is the last domino that has to fall for us to be treated like any 
other business in the country," said Tim Cullen, a co-owner of five 
marijuana shops in Colorado. "We're not a black-market cocaine 
dealer. We're totally on board and on the level. We'd like to be 
treated as such."

But every year, Mr. Cullen said, he attaches a cover letter to his 
tax returns explaining what kind of business he runs.

In Seattle, John Davis earned $53,369 in profits last year from his 
medical marijuana dispensary, the Northwest Patient Resource Center. 
Because he complied with all of the tax rules prohibiting deductions, 
he said, he ended up owing $46,340 in taxes.

"It hurt, and it hurt bad," he said. "Everyone thinks you're just 
rolling in dough. That may be the case if you're not being compliant. 
You're not making money. You're holding on, hoping for a better day."
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