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IRS Files Legal Marijuana Dispensaries Under Drug Trafficking Code

Image: IRS Files Legal Marijuana Dispensaries Under Drug Trafficking Code Medical marijuana patient Ezekiel Muses, who uses the drug for back pain, checks out a jar of medical marijuana at Canna Care in Sacramento, Calif.

By Aaron Stern   |   Monday, 17 Mar 2014 06:15 PM

Dispensaries of legalized marijuana are finding out the hard way this tax season that they can’t benefit from many of the same tax breaks that other small business owners get.

That’s because an amendment to the federal tax code enacted in 1982 to close a loophole that allowed a Minneapolis drug dealer to write off his scale, telephone charges and apartment rent is now blocking the businesses that sell medicinal and recreational marijuana from writing off many of the expenses associated with producing their chief commodity.

"These are small businesses that are part of the local economy, but because of this tax burden, it makes it dramatically more difficult to invest in their people and in their property," Taylor West, deputy director of the National Cannabis Industry Association, told USA Today.

The Internal Revenue Service uses code 280E to tax illegal, drug-related income. Marijuana has been legalized for medicinal or recreational purposes in 20 states and the District of Columbia, but it is still classified under the federal government’s Controlled Substances Act as a Schedule 1 substance, the most dangerous classification of a drug. West estimates that 280E creates tax obligations for legal marijuana dispensaries that can be 50 percent or more of their revenue.

The IRS has said that the only way to change the law is for Congress to revise either the tax code or the Controlled Substances Act, but the California Supreme Court heard a case in February that could have a far-reaching impact. Sacramento marijuana distributor Canna Care declined what it says was a $100,000 settlement offer from the IRS and instead appealed nearly $875,000 in back taxes, challenging the validity of Code 280E, Time magazine reports. Canna Care is fighting to have employee salaries and benefits and the company’s rental and insurance costs considered tax-deductible expenditures.

"I could have settled this and walked," Laurie Davies, who owns Canna Care with her husband, told Time, "but it would have been morally and ethically wrong to do so."

The NCIA is lobbying Congress to pass legislation that would amend Code 280E and treat legal cannabis companies as legitimate small businesses, USA Today reports. The bill is sponsored by Rep. Earl Blumenauer, Oregon Democrat, and has also been backed by Grover Norquist, the president of Americans for Tax Reform.

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