News » IRS to Audit and Potentially Shut Down Dispensaries
February 18, 2011 by Aaron Turpen
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As if we needed another reason to hate the Internal Revenue Service.. now they’re auditing some of California’s largest dispensaries, including Harborside Health Center in Oakland. The audits aren’t a part of normal business, the IRS has made clear, but are targeted to enforce section 280E of the Federal Tax Code.
This bit of code, specifically, was created in 1982 under Reagan’s War on (some) Drugs push. This portion of the tax law explicitly forbids businesses or individuals from declaring deductions related to trafficking in controlled substances. Up to now, of course, most drug dealers and suppliers have been operating outside the law, so they weren’t likely to declare to the feds that they were “trafficking.” But with the fast-growing MMJ business, that’s changing.
If the law were used to the letter on these dispensaries – and it likely will be – it could effectively shut then down. After all, business is about inlay and output – you take in product at a price and then sell it at a higher price. The profit is what you are taxed on. Remove the ability to subtract sales price from purchase price (to get your profit) and the IRS is taxing all of your sales. That’s ruinous to any business.
Let’s take a hypothetical example for illustration here. A cannabis dispensary sells $200,000 in product in a year. They spent $120,000 on the product itself plus business expenses (building, utilities, employees, etc.). Of that $120,000, $80,000 was for product and the other $40,000 was for everything else. Under section 280E, they are only able to write off the $40,000, making their taxable income $160,000 instead of $80,000. That’s double.
Upscale that to the Harborside facility, which does about $22 million in annual sales and you’re getting an idea of what’s potentially at stake here.
It appears that this may be the federal government’s “back door” into shutting down medical marijuana.
[source Mercury News]
Tags: dispensary, Harborside Health center, irs, tax audit
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They did the same to Mexican dispensaries who were selling apricot seeds. My cousin said she could not get any apricot kernels there although the hospitals have them for their cancer patients.
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Lame
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Aaron I know that you know this but I am posting for your entire base. When freedom loving people sit by and allow someone, ANYONE, with a political agenda to use the IRS as a whipping tool then it will be a matter of time before they you the same tool on you. The current administration loves this tool and will use it again and again and again and again.
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That’s the truth. Individuals in powerful positions will always use “authority” to crush opposition to their position. It is the way of gunvernment.
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To be fair, dispensaries in CA are supposed to be Not for Profit organizations. I have read that many are running themselves as for profit. That’s a good way to let the IRS shut you down for sure.
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Agreed – the entire bullshit about “medical” cannabis frustrates me. Let’s just call it what it is – a loophole for people to get great pot. The state has not collapsed. Revolt has not occurred. People still go to work, still love their kids, and Cheetos sales are up.
So regulate and sell it without a wink and a nudge already. Don’t accept anything less than complete regulation, and you won’t have to deal with them fucking with you on half-measures like this.
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Just because *you* don’t use it medically, does not mean it is bullshit.
I agree with everything else you’ve said.
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Let’s address the actual issue here: Why even bother to brand anything as “medical” when the majority of society knows that this isn’t the reason everyone wants it? Alcohol has some medical uses, but we don’t sell it as medicine. (Lets not count the “pharmacy” whiskey from the prohibition era). I love cannabis and use it daily for no other reason than personal enjoyment. I think that this should be the stance taken on the subject as well. Might as well not beat around the bush.
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Indeed, are we free individuals or do our neighbors and governments own our bodies and minds?
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Came here to say this.
Additionally, some clubs are pretty shady. Random ass names and price markups are not uncmmon. Sure beats the fuck out of not having a card and going to a shady dealer all the same, but but still, if I can have them be like they should be then I can hope
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IRS to Audit and Potentially Shut Down Dispensaries
#mmj #mmot #weed #marijuana #cannabis
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wtf lets stop this somehow. for real. my family would be dead if it wasnt for it being legal…
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The IRS is a criminal organization that has long been used for political purposes and to imprison those that have no evidence against them.
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It’s the only way the Feds brought down Al Capone.
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The government did not have the evidence, so they made up shit on Capone and falsified history to codify immoral IRS regulation so that those regulations can be used on political opponents.
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bs just leave us be go after some tweekers or somethin
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wtf I am just waiting for an uprising in this country!
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But, they aren’t “trafficing” drugs since they are selling them legally in California.
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I don’t see the big deal? Having to pay taxes on your earnings… That’s pretty standard
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It’s standard to first deduct your business related expenses before declaring your taxable income. This law code doesn’t allow for that. Rather than taxing based on profit, this code says you must tax based on revenue. It’s a very completely different method from an accounting standpoint.
Most businesses don’t have the profit margin to sustain paying taxes based on revenue rather than on profit. Prices would either have to go way up to cover the increased tax expense, or the business would have to shut down.
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That doesn’t seem to make much sense to me. If your business is selling Cannabis and you were able to write off your expenses (the majority being cannabis bought from growers) then most of your sales would be tax free and you would hold a great advantage over most any other business. It would be like a retail store writing off all of its products that it sells because it bought them from a manufacturer..
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> It would be like a retail store writing off all of its products that it sells because it bought them from a manufacturer
That’s pretty much [the definition](http://en.wikipedia.org/wiki/Cost_of_goods_sold#Cost_of_goods_for_resale) of cost of goods sold. It’s a standard accounting practice to deduct this from gross profit before taxing out tax.
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Except most of these dispensaries are operating at non-profits, so they are supposed to be tax exempt regardless. Sales tax is not collected on prescriptions in most states and MMJ requires a prescription…
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You’ve got it slightly wrong.
Let’s say I’m running a hardware store. Every month I pay $10k for the store space, $20k on staff, and $70k on merchandise. Every month I collect $100k on merchandise sales. My profit is $100k-$70k-$20k-$10k, so my profits are $10k. I’m taxed on that $10k. Let’s say I have 30% taxes. I pay $3k in taxes and I go home with $7k each month. Congratulations I have a functional business.
Let’s say instead I want to sell marijuana. Every month I pay $10k for the store space, $20k on staff, and $70k on merchandise. Every month I collect $100k on merchandise sales. My profit is $100-$70k-$20k-$10k, so my profits are $10k.
Unfortunately, since my business is related to controlled substances, I can’t take deductions on product. I’m taxed on $100k-$10k-$20k=$70k of sales, not my $10k of profits. The same 30% taxes mean I’m paying $21k in taxes, so I’m in the hole for $11k each month, and my business quickly shuts down – I’ll have to jack up my prices by 30% to equal the same profits as the hardware store.
Assuming the article is correct, this is a tax situation that only marijuana dispensaries have to deal with.
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I’m certainly no tax expert but isn’t each sale taxed? not just the percent of profit? Maybe I’m thinking of state sales tax…
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That’s sales taxes, yeah. Those are theoretically a tax on the person buying the item, not on the seller. Corporations get an extra tax on any profits they make (and yes, this means if they’re not making any profits, they don’t have to pay taxes.)
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Shut one down, another one opens. You think our illustrious government would get tired of pissing in the wind. They’re never going to win with marijuana prohibition.
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>Shut one down, another one opens.
Until the IRS strongarms local jurisdictions.
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The US government is never going to win on marijuana prohibition because they are wrong.
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The government doesn’t need a backdoor to shut down dispensaries, they’re kicking down the the front doors pretty well right now. Although it’s sad for the patients, I really don’t care if the IRS shuts down these big dispensaries. Many opposed 19, NEVER FORGET, and they need constant reminders of how truly stupid and greedy they are. Maybe they’ll learn their lesson in 2012.
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So opposing 19 makes you stupid and greedy? How old are you?
Look 19 sucked for everybody, it was the worst bill presented. When it comes back without so many fucked limitations and provisions for small growers and small business it will work… BUT if you want to fuck the northern california economy worse than you are fucking it now? Pass a bill that wiil cater to the large dispensary douchebags in Oakland that created 19. That’s all that was…
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I don’t respond to straw man or ad hominem fallacies. Please rephrase your questions.
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What happened to the almighty Obama NOT going after states that have Marijuana legality rules in place? Oh well, add another lie onto the pile.
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[...] Now the bad news: immediately after the Senate had deadlocked, the feds raided 10 dispensaries and related businesses around Montana, including the state’s largest greenhouse cannabis grower. It wasn’t just the DEA either. The raids involved the Drug Enforcement Agency, and the Federal Bureau of Investigation, the Bureau of Alcohol, Tobacco, Firearms and Explosives. All with guns drawn. All intent on shutting down operations and seizing all material having to do with them. About the only evildoer alphabet agency not involved was the IRS, who’s probably poised on the periphery waiting for the records. [...]
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