Tags: Colorado | IRS | marijuana | bank

Legal Weed Dealers Facing Bank and IRS Nightmare

Wednesday, 20 May 2015 01:19 PM Current | Bio | Archive

If you think the IRS is merciless, be glad you aren't a marijuana dealer — the legal kind. Their problems make others look like minor mosquito bites.

Colorado legalized marijuana for recreational use in 2014, but it is still a controlled substance under federal law. That means the Feds could swoop in and arrest everyone involved. The Obama administration says it won't do that, so for now the state's marijuana shops are thriving.

Actually, "thriving" may be an understatement. The state's new industry is raking in cash, as visitors pay top dollar for a Rocky Mountain High. Yet the same Obama administration that lets these merchants flout federal drug laws zealously enforces two other problematic statutes.

The first one is actually a banking law. Regulations prohibit banks from accepting deposits linked to drug activity. The fact that the activity is perfectly legal in Colorado doesn't matter. Hence, Colorado's marijuana retailers and growers have to do business in cash.

This means they can't take checks or credit cards, and they can't deposit their revenue in bank accounts. Buyers give them paper dollars, and the shops pay their expenses the same way.

This is an enormous hassle when stores can routinely take in $10,000 a day or more. It invites tax evasion and employee theft, and their cash-stuffed safes are security hazards.

Enter the IRS. The agency hates cash. It imposed a $30,000 penalty on one marijuana shop that tried to pay its payroll taxes in cash. What was the store supposed to do? The only other choice was not to pay the tax at all. They could not write a check because banks won't take their money.

The store successfully challenged the penalties in that case, but the IRS doesn't give up easily. It is also enforcing an obscure 1982 law called "280E," which bans all tax credits and deductions for any business engaged in "the illegal trafficking in drugs."

What does that mean? If you own any other kind of small business, you pay income tax on the revenue you take in, minus your business expenses: rent, employee salaries, utilities, etc.

Legal marijuana shops can't take those deductions, says the IRS. Strangely, they can deduct the "cost of goods sold" for the same product. (No one ever said tax laws have to make sense.) The result is that these businesses face federal taxes that are double and triple what they should be.

IRS officials say Congress makes the law and they just enforce it. Not being a tax lawyer, I can't say how much legal wiggle room the agency has. I still think it's odd that President Obama lets certain businesses break federal drug laws, but insists those same businesses comply with federal tax laws and federal banking laws.

Now, you might say those potheads are just getting what they deserve. Perhaps so — but that's not the point.

The people of Colorado democratically decided to allow recreational marijuana, yet the federal government believes it can override the election that made this business legal.

If they can do it in this case, what will happen when your state decides to allow something Washington forbids?

That is the real question, and we are setting the precedent right now.

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If you think the IRS is merciless, be glad you aren't a marijuana dealer — the legal kind. Their problems make others look like minor mosquito bites.
Colorado, IRS, marijuana, bank
Wednesday, 20 May 2015 01:19 PM
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