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Marijuana dispensaries are very much in a grey area of legality. A marijuana dispensary in Colorado is subject to employment and income taxes, does daily business, and abides by local and state laws just like every other business. On the federal level, however, they are still considered illegal due to drug trafficking laws. Because of this, dispensaries are subject to interference from federal organizations like the IRS. A system hasn’t been implemented which eliminates federal tax issues for dispensaries quite yet, but thankfully, we’re finally beginning to see clarity in the laws surrounding dispensaries.
IRS Code Section 280E
Code 280E has been a thorn in the side of marijiuana dispensaries ever since states began legalization. It specifies that any business involved in drug trafficking is not allowed to take tax deductions, with the exception of the cost of goods sold. This results in business owners paying massively higher tax rates than similar, non-marijuana stores. In addition, the IRS has on several occasions conducted investigations into the financial records of dispensaries, claiming that they did not properly disclose their tax information. This was challenged by several business owners, who claimed that the IRS does not have the authority because dispensaries are not permitted in the tax code.
The business owners fighting Code 280E have created an opposition between them and the authority of the IRS, in hopes of eliminating the code and paying federal taxes as every other business does. If the IRS continues to exclude marijuana dispensaries from the tax code, they argue, then they should not have the ability to use the tax code to conduct investigations.
In every decision, the courts have ruled against the business owners, on the basis that it is within the authority of the IRS to conduct the investigations. However, in June 2021, U.S. Supreme Court Justice Clarence Thomas gave a statement where he wrote “The federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.” His statement reflected this sentiment, later specifying that he understands why these dispensary owners would expect their business to operate just like any other.
Extending an olive branch
In September 2021, the IRS created an initiative to make compliance with federal tax law easier for marijuana dispensaries. Their goals include working with taxpayers to increase knowledge of new tax codes and making information easily available on how to properly file their taxes. They’re also working to make sure that there is more consistency across the board, to avoid legal grey areas. While this is a good step forward, it seems that dispensaries will have to wait for federal legalization of marijuana to be able to take advantage of the same tax deductions as other businesses.
Weisberg Kainen Mark, PL has decades of experience in tax law and will work to defend you and your business. To schedule a consultation, call us today at (305) 374-5544.
Weisberg Kainen Mark, PL
