Voters in Oregon, Alaska, and Washington, D.C., will decide
Tuesday whether to legalize the sale of recreational marijuana. But any new pot
shops that voters approve may not be able to survive a drug war-era tax code
that already threatens many businesses in Colorado and Washington state. Under
this tax code the federal government stands to make more money from the sale of
marijuana than those legally selling it. And that could be enough to shut down
many shops.
Mitch Woolhiser first opened shop in 2010, selling medical
marijuana. He started selling recreational pot when it became legal in Colorado
at the start of this year. Last year, his business didn't earn a profit. Had he
been selling anything but cannabis, he would not have owed federal income tax,
as he ended up with a loss. Instead, he ended up paying close to $20,000 to the
IRS because of a 1980's tax code called 280E.
It's unclear that the federal government is actively
enforcing this tax code in an effort to undermine the legal business, but that
is the effect.
No one from the U.S. Department of Justice, Drug Enforcement
Administration or Internal Revenue Service would comment for this story.
However, an IRS spokesperson provided a 2010 letter written in response to
several lawmakers in Arizona, California, Colorado and Massachusetts who had
asked the IRS to stop enforcing the tax code in states that legalized the sale
of marijuana. The IRS letter pointed out that only Congress could make that
change.
Though multiple members of Congress received the letter,
there has been little effort to amend the code. Instead, the federal government
collects taxes on what it considers an illegal drug because the Supreme Court
ruled more than 50 years ago that everyone has to pay taxes — even those who
make their money illegally.
Then, in 1982, Congress amended the U.S. tax code to include
280E, which says businesses selling a Schedule I or II drug — like marijuana,
heroin, methamphetamine or cocaine — cannot deduct all of their regular
business expenses.
The rule means that the "costs of the product,"
like the soil and fertilizer used to grow plants, are deductible. But the
"costs of selling," like advertising, rent and utilities — even
salaries for employees — are not deductible.
But that quirk in the tax code has helped many cannabis
companies stay in business over the last several years in Colorado. Medical
marijuana stores were required to grow their own product, and therefore had
some associated deductions.
Since Oct. 1, nearly 100 new cannabis companies got licenses
to operate in Colorado and will no longer have to grow the products they sell.
But without growing, many may soon find that they will have very few, if any,
business deductions when filing federal taxes in April.
For Woolhiser, whose sales have increased dramatically since
he began selling recreational marijuana Jan. 1, the confusing nature of the
code means he has no idea how much he will owe in taxes — just that it will be
far more than what it might be if he was selling anything else. Woolhiser is
hoping that increased sales this year will make up for the loss he took last
year — but he is still paying off his debt to the IRS.
More states may legalize marijuana this year, but state laws
don't change federal laws. And barring any changes from Congress, new cannabis
businesses in those states, along with the established shops in Colorado and
Washington state, face a large, and possibly ruinous, tax bill come April 15.
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