Commentary: Medical Marijuana and Taxes

Sep 14, 2012

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. Cecelia Gilboy owns Col­orado Qual­ity Col­lec­tive, the first whole­sale mar­i­juana bro­ker­age licensed by the state. Source: Boul­der Weekly (CO) Author: Cecelia Gilboy Pub­lished: Sep­tem­ber 13, 2012 Copy­right: 2012 Boul­der Weekly Con­tact: letters@​boulderweekly.​com Web­site: http://​www​.boul​der​weekly​.com/

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