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.