New CO Bill Attempts to Get Taxman Off Dispensaries’ Back
A tax code written for illegal drug dealers is giving medical marijuana dispensaries a headache, and Colorado lawmakers are considering whether to intervene.
HB 1042 would allow medical marijuana dispensaries to make certain business deductions on their income taxes. On Tuesday, the bill passed its second reading in the House.
The issue stems from an obscure section of the IRS code known as 280E, which was originally written for illegal drug traffickers. The law is a thorn in the side of licensed dispensary owners like Erica Freeman, co-owner of Choice Organics in Fort Collins.
“We all feel like we are legitimate businesses, we have licenses. I have the first state license in the state of Colorado. But yet I’m still unable to write these things off and I’m still treated as an illegal business,” she says.
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.
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.
Dispensaries Pay More Taxes
The end result right now according to Colorado Accountant Jim Marty is income taxes rates that are much higher for dispensaries compared to other small businesses. Marty is an accountant for 75 dispensaries in the state.
According to Marty, a normal small business has the top income tax bracket of 45 percent for state and federal income taxes. But dispensaries can pay as much as 70-75 percent in taxes.
The financial picture translates into some soul searching for dispensaries, Marty says.
Some take a conservative approach to deductions. Others are claiming all deductions as a type of protest.
Marty is actively working on 6 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.
Industry Seeking Reform
For its part, the IRS has been relatively quiet on the topic while it continues to apply the 280E tax rule to dispensaries across the country. The agency declined interview requests for this story. The silence has been frustrating to San Francisco Attorney Henry Wykowski, an expert on the topic.
Wykowski has represented sellers in the two existing court cases that provide the only guideposts on how the 280E tax law applies to dispensaries. And the results have been mixed. Wykowski 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.
Federal clarity on 280E tax law could come from Congress. Colorado Representative Jared Polis introduced a bill this year that would overhaul federal marijuana policies. But more than likely it will come from the courts. Wykowski is waiting for the 9th Circuit Court of Appeals to reconsider his 2012 case. Oral arguments could be heard as early as 2014.