Pubdate: Sat, 03 Mar 2018
Source: Philadelphia Daily News (PA)
Copyright: 2018 Philadelphia Newspapers Inc.
Author: Sam Wood


You think your taxes are high?

For medical marijuana dispensaries in the United States, they can be
stratospheric. Cannabis retailers face an effective tax rate of up to
85 percent, and that won't be reduced by the new tax law.

Most mainstream businesses pay effective tax rates of about 15 percent
to 30 percent.

"It's a burden," said Chris Visco, co-owner of TerraVida Holistic
Centers, which opened one of Pennsylvania's first medicinal cannabis
shops on Feb. 17 in Sellersville. "People think that we're getting
rich. It's really not the case. The profit margins are going to be
really narrow after taxes. And you have to still pay local and state

Rent, salaries, utilities, and insurance are among the expenses any
other business can write off on their federal taxes. None of those
deductions is available to cannabis dispensaries.

Some of the items for sale at TerraVida Holistic Center, which is one
of the first medical marijuana dispensary's in Pennsylvania to open
Saturday, February 17, 2018 in Sellersville, Pennsylvania.

"There is no other business where you're not allowed to take your
other business expenses," said Jennifer Benda, a tax lawyer with Fox
Rothschild LLP who works out of the firm's Denver office.

Even other illegal enterprises can write off expenses related to

"Prostitutes and brothels, for instance, can write off their costs of
doing business," Benda said.

But not marijuana dispensaries, thanks to Section 280E in the IRS tax
code. Congress created it at the height of the War on Drugs to target
illegal drug traffickers. It prohibits any business that sells
Schedule 1 substances from taking deductions or credits.

In 1974, police busted a petty coke, dope and amphetamine dealer in
Minneapolis. After Jeffrey Edmondson's arrest, the IRS came calling,
looking to collect taxes on his undeclared income. Boxed in a corner
was Edmondson's late return, which attached a laundry list of
deductions that included the price he paid for the drugs. He also
wrote off the rent on his apartment, which he listed as his place of
business, car mileage, a business trip to San Diego, a $180 phone
bill, and the cost of a $50 scale.

Surprisingly, a U.S. Tax Court judge approved most of the deductions,
finding them "ordinary and necessary." An incensed U.S. Sen. William
Armstrong of Colorado introduced a bill that closed the loophole in

Federal law considers all forms of marijuana as illegal. The U.S. Drug
Enforcement Administration regards cannabis as being on par with
heroin and LSD, dismissing it as having no legitimate medical use. But
since Section 280E was enacted more than three decades ago, 29 states
and the District of Columbia have legalized some forms of marijuana
for medical or adult use.

Congress did not envision a state legal industry in conflict with
federal law when it passed 280E, said Neal Levine, chairman of a
cannabis industry lobbying arm, the New Federalism Fund.

The tax code also gives criminal markets a leg up on state-regulated
businesses. "I know of some compliant dispensaries that had tax bills
for more than they made," Levine said. "But on average, they're paying
more than 80 percent. The criminal competition pays no tax."

He estimated that the IRS collected more than $200 million from legal
marijuana businesses in 2016.

Bills are pending in both the U.S. House and Senate to strike down
280E, Levine said. "We had hoped it could be part of comprehensive tax
reform, but it didn't happen. Most members of Congress didn't
understand the issue."

Until the law can be changed, dispensaries are scrambling to find ways
to reduce their tax bills.

"Dispensaries can turn a profit if they're run correctly, but in every
state, we've seen businesses regularly go under," said Justin
Moriconi, an Elkins Park lawyer who specializes in marijuana law.
"Taxes are usually the nail in the coffin."

Because marijuana is federally illegal, dispensaries can't file for
federal bankruptcy protection.

"If you go under, you have to be bought out, or take an amazing loss,"
Moriconi said.

The ancillary sales and services allow the dispensaries to deduct some
of their real estate expenses, utilities, insurance, and other costs.
But in Pennsylvania, those options are prohibited by law.

"If we could sell other things, we'd be able to write off a portion of
our square footage," Visco, co-owner of TerraVida, said. "We're hoping
the state will allow us to do that by summer."

Another strategy is to separate the company that owns the dispensary
from the business that leases out the property, so that costs are
attributed to the real estate entity, Roark said.

"It's one of the many reasons that when people are looking at entering
the business, they need a long-term plan," Roark said. "Because
they're not going to have revenue if they haven't planned for the
brutal tax consequences."

If the taxes are so onerous, why does anyone bother with running a
marijuana dispensary?

"Half of it is waiting for legalization," Moriconi said.

When a state limits the numbers of dispensaries, there can be lots of
money to be made, he said.

In Connecticut, there are only nine dispensary licensees. Some of them
gross $15 million a year, Moriconi said.

"They all do very, very well," Moriconi said. "At the end of the day,
even if you're paying high taxes, as long as you're making enough
sales it can be very worthwhile."
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