Pubdate: Thu, 09 Jun 2016
Source: SF Weekly (CA)
Column: Chem Tales
Copyright: 2016 Village Voice Media
Author: Chris Roberts


At least one part of Scarface is accurate - the part when cocaine 
dealers amass ungodly sums of money and use it to transform the Miami 
skyline. So much cash was flowing into southern Florida in the late 
1970s that, according to a U.S. Treasury analysis, the country's 
entire currency surplus could be traced to Miami banks.

To try to put a stop to this - or to at least grab a cut of the 
action - Congress amended the federal tax code in 1982 to include a 
section called 280E, which bars anyone dealing in controlled 
substances from claiming the cost of the drugs on their federal taxes.

It sounds absurd - did the Cocaine Cowboys really keep receipts for 
each cigarette boat shipment, and did they hire an accountant every 
April? - and maybe it was. (We have a Minneapolis-area drug dealer 
named Jeff Edmondson to thank for it. In 1975, convicted of 
trafficking, Edmondson filed a tax return listing the cost of 13 
ounces of cocaine, 100 pounds of marijuana, and over 1 million hits 
of amphetamine. Unsatisfied with his tax lien after his bust, he 
challenged his tax bill in court, lost, and led Congress to add 280E 
so nobody ever tried to dodge drug taxes again.)

But 280E has had a lasting impact. And for this reason, it's not true 
to say the federal government hates weed. The feds love cannabis - or 
at least the taxman does.

More than 30 years later, 280E continues to cause problems for the 
modern-day cannabis industry. Since cannabis remains a Schedule I 
controlled substance, it remains controlled by 280E. This means any 
business that touches the marijuana plant can't claim the cost of 
goods sold. Cannabis businesses unaware of this have been hit with 
severe penalties from the IRS.

While a serious threat to business, for a long time 280E was low on 
the list of priorities for the cannabis industry. Who can bother with 
tax court when there's a real risk of a law enforcement raid? But now 
that the legalization fight is slowly being won - and now that 
Congress has barred the DEA and other federal Justice Department 
officials from interfering with state-legal cannabis - the weed 
industry is challenging 280E.

In 2010, Oakland's Harborside Health Center - by reputation the 
nation's biggest cannabis dispensary - received a bill from the IRS 
for $2.4 million in back taxes, income it claimed on federal tax 
returns but couldn't under 280E. (Dispensary operators told Forbes 
that without being able to claim the cost of goods sold, the 
effective tax rate is between 60 and 90 percent.)

Fresh from winning a case against the Justice Department, which had 
been trying to shut the dispensary down since 2012, Harborside has 
been in court all week, trying to get a U.S. Tax Court judge to rule 
that a legal cannabis dispensary can claim the cost of goods on its taxes.

To do that, San Francisco attorney Henry Wykowski is going to raise a 
few arguments. For starters, he'll argue that 280E was never meant to 
apply to state-licensed cannabis dispensaries. (He has a point there, 
as they did not exist in 1981.)

"Ignoring the intent of Congress, the IRS has chosen to apply 280E to 
legitimate cannabis businesses," says Wykowski, who also points to a 
certain line in 280E that would seem to exclude a business that sells 
other, legal items as well as cannabis.

That may seem like a technicality - and it is. But that's what the 
tax code is all about.

Harborside has a few supporters, including the original sponsor of 
280E. Before he left government, former U.S. Rep. Pete Stark argued 
on the floor of Congress that the IRS is willfully misinterpreting 
280E by applying it to cannabis dispensaries.

If Wykowski wins and Harborside's tax bill is thrown out, it will be 
expensive for the government. It would mean Harborside does not owe 
the $2.4 million from 2010 - and it also means the dispensary, and 
every other dispensary in the country, could file for refunds on past 
taxes paid, Wykowski says. (If he loses, it could also be very 
expensive: Harborside would be on the hook for $10 million in back 
taxes, including the years since the original appeal was filed, he 
told Marijuana Business Daily.)

Other observers say it's most likely the tax court will do what most 
other courts have done on marijuana - kick the ball back to Congress, 
California U.S. Reps. Barbara Lee (D-Oakland) and Dana Rohrabacher 
(R-Huntington Beach) - the latter of whom became the first U.S. 
elected official to publicly say he uses medical marijuana - have had 
a 280E reform bill blocked in a Congressional committee.

That would mean no dispensaries could file for back taxes.

The trial is expected to run through Friday, though a decision may 
not come until 2017. By that time, cannabis could be legal throughout 
California - everywhere, except on tax returns.
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MAP posted-by: Jay Bergstrom