An obscure tax code provision crafted for drug dealers is giving state-licensed medical marijuana dispensaries a headache.

In Colorado, federal income tax rates for dispensaries can soar as high as 70 percent because of a tax code section that does not allow businesses to claim certain deductions.

The section is known as 280E, and it was originally written for illegal drug traffickers. But today it’s a thorn in the side of licensed dispensary owners like Erica Freeman.

Freeman is co-owner of Choice Organics in Fort Collins, Colo. Two tax court decisions over the last six years have sent confusing messages about which deductions the industry can make. In 2012, Freeman wrote off the costs associated with growing pot, but she didn’t deduct anything related to the sale of medical marijuana like advertising costs.

“We all feel like we are legitimate businesses. We have licenses … but yet I’m still unable to write these things off and I’m still treated as an illegal business,” Freeman says.

Freeman says existing tax code could make Colorado’s expansion to recreational marijuana use very tricky for business owners. The uncertain tax climate is the direct product of state and federal law clashing on medical marijuana policy in the 18 states where it’s legal. The end result right now, according to Colorado accountant Jim Marty, is income taxes rates that are much higher compared to other small businesses.

“If they were in a normal business, their top bracket would be about 45 percent. But if you have to pay tax on your gross profit and not your net income, the calculations I’ve done puts the federal and state income tax at about 70 percent,” Marty says.

The financial picture translates into some soul searching for dispensaries, Marty says.

He’s an accountant for 75 dispensaries in the state. Some take a conservative approach to deductions. Others are claiming all deductions as a type of protest. In true IRS fashion, Marty explains there’s a form for that.

“And if they chose to go down that road, we do include that form with the tax return and tell the IRS that we agree to disagree with them,” Marty says.

Doing that, he says, means basically expecting an IRS audit.

Marty is actively working on six audits with the Internal Revenue Service. He expects at least one of his clients to challenge the IRS deduction policy in Colorado court this year. For its part, the IRS has been relatively quiet on the topic while it continues to apply the 280E tax rule to dispensaries. The agency declined interview requests for this story. The silence has been frustrating to San Francisco Attorney Henry Wykowski, an expert on the topic.

“This is inherently unfair,” Wykowski says.

Wykowski has represented sellers in the two existing court cases that provide the only guideposts on how the law applies to dispensaries. And the results have been mixed. He says he’s repeatedly sought more specific guidelines from the IRS but has come up short.

“It punishes the dispensary owners who are trying to comply with the law and rewards those that ignore their obligation to file tax returns,” he says.

In the meantime, Colorado dispensary owner Erica Freeman says she’ll continue to meet all her tax obligations. But she says a fix is desperately needed.

“Those people that 280E was written for didn’t have a license hanging on their wall from the state of Colorado that says you are legal to do business,” Freeman says.

Medical or recreational marijuana use is now legal in one-third of all states. The legal limbo can either be resolved by Congress or the courts. Until then, dispensary owners will have one more reason to dread income tax day.

Copyright 2013 KUNC-FM. To see more, visit http://www.kunc.org.
 

Comments are closed.

News

Getty Images
October 24, 2014 | NPR · Following two high-scoring games in Kansas City, Game 3 of the World Series turned into a bit more of a pitcher’s duel as the Royals prevailed in San Francisco.
 

AP
October 24, 2014 | NPR · The massive auto recall announced this week is different from most. It affects more than one-third of air bags on the road and there are no simple fixes, short of a full air bag replacement.
 

AP
October 24, 2014 | NPR · The announcement follows the positive Ebola test that came back Thursday night for Dr. Craig Spencer, who recently had returned to New York City after a stint with Doctors Without Borders in Guinea.
 

Arts & Life

October 24, 2014 | NPR · The midterm elections are less than two weeks away. Writer Michael Schaub recommends a book that explores what it’s like to run for office and live through all the dramatic ups and downs.
 

Getty Images
October 24, 2014 | NPR · In her memoir, The Woman I Wanted to Be, Diane von Furstenberg says she owes her success to her mother, a strong, strict Holocaust survivor who called Diane her “torch of freedom.”
 

Courtesy of Magnolia Pictures
October 24, 2014 | NPR · NPR film critic Bob Mondello reviews Listen Up Philip and Force Majeure — two movies, he says, with compelling lead men who are impossible to empathize with.
 

Music

Courtesy of the artist
October 24, 2014 | NPR · Join host Fiona Ritchie as she showcases new music from established artists and emerging talent.
 

Redferns
October 24, 2014 | NPR · Brown was one of the pioneers of R&B. In a 1993 session, she sang to host Marian McPartland’s accompaniment in “Skylark” and “Fine And Mellow.”
 

Tinnitus Photography
October 24, 2014 | NPR · Our recurring puzzler for careful listeners, this week featuring a selection of handpicked fills from Sleater-Kinney drummer Janet Weiss. Hear the drum fill (or intro) and match it to the song.
 

Get the KRCC iPhone App

The Writer's Almanac

Radiolab