Increasing, growers and sellers of legal marijuana see a huge bias against them on the part of the federal government, as well as a healthy amount of hypocrisy – and it’s coming primarily from the Internal Revenue Service.
“Companies in our business are paying anywhere from 40, 50, 60, 70 percent [in taxes], depending on what demographic they happen to be in,” said Derek Peterson, CEO of Terra Tech, a marijuana grower.
Some states legalize marijuana
The legal ambiguity stems from the fact that while a number of states have legalized various uses of marijuana, from medical uses only to both medical and recreational use, the latter remains illegal under federal law, despite the fact that President Obama said he wasn’t interested in upholding it after Washington State and Colorado voters approved ballot measures legalizing marijuana in 2012.
So, even a company that is selling pot legally is still barred from taking most standard business deductions. While federal tax statutes do allow some deductions for growing marijuana, if a grower sells his or her crop they cannot deduct expenses related to advertising, rent, payroll and other things. That results in millions of dollars of extra costs for marijuana businesses.
“If we’re licensed and legal in Colorado that should be good enough for the IRS,” says Colorado Harvest Co. CEO Tim Cullen, in the video. “They certainly cash our checks every month.”
In May 2015, Newsmax reported that Colorado’s marijuana shops, especially, are booming – and that the Obama administration remained uninterested in enforcing federal drug laws. However, the report said, the administration was enforcing other laws that were making life tough for pot sellers.
As Newsmax reported further:
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 a big hassle considering that shops can take in as much as $10,000 a day or even more. This invites tax evasion and employee theft as well; also, cash stuffed into safes create security issues.
Then there is the IRS, which seems to hate cash. In fact, the agency imposed a $30,000 penalty on one pot shot that tried to pay its payroll taxes in cash, Newsmax said. But there was little choice in the matter; the only alternative would have been to not pay any taxes at all – the shop couldn’t write a check because banks won’t take money made from drug sales.
While the shop successfully managed to challenge its penalties, the IRS turned to an obscure 1982 statute known as “280E,” which places a ban on all tax credits and deductions for any business that is engaged in “the illegal trafficking of drugs.”
But wait – it’s not illegal, at least in Colorado, right? After all, Obama said as much when he said he wasn’t interested in pursuing legal action against Washington and Colorado. “It would not make sense for us to see a top priority as going after recreational users in states that have determined that it’s legal,” he said (emphasis added).
And there is this: In any business, especially any other kind of small business, owners pay income tax on money earned – and they pay payroll taxes of employees.
IRS officials say they are merely following laws that Congress passed – and that is undoubtedly true. But when you have a president, an administration, that picks and chooses which laws it wants to enforce and which laws it wants to ignore, this is what happens – ambiguity, hypocrisy, and confusion.
This is bigger than just Obama choosing “prosecutorial discretion.” U.S. drug laws are vast and complex and they contain many tentacles – rules that stretch into several other federal agencies (like the IRS). What the administration should have done in 2012 is begin a congressional push to get marijuana laws either repealed or amended to reflect the reality of Obama’s “hands-off” policy and what was actually occurring in some states.