The IRS War on Medical Marijuana Providers [FEATURE]

by cwalker, May 16, 2013, 11:24am, (Issue #784)

Posted in:

special to Drug War Chronicle by investigative reporter Clarence Walker, [email protected]

Dispensaries providing marijuana to doctor-approved patients operate in a number of states, but they are under assault by the federal government. SWAT-style raids by the DEA and finger-wagging press conferences by grim-faced federal prosecutors may garner greater attention, but the assault on medical marijuana providers extends to other branches of the government as well, and moves by the Internal Revenue Service (IRS) to eliminate dispensaries' ability to take standard business deduction are another very painful arrow in the federal quiver.

The IRS employs Section 280E, a 1982 addition to the tax code that was a response to a drug dealer's successful effort to claim his yacht, weapons purchases, and even illicit bribes as business expenses. Under 280E, individuals involved in the illicit sale of controlled substances -- including marijuana, even medical marijuana in states where it is legal -- cannot claim standard business expenses on their federal taxes.

"The 280E provision which requires certain businesses to pay taxes on their gross income, as opposed to their net income, is aimed at shutting down illicit drug operations, not state-legal medical marijuana dispensaries," said Kris Hermes, spokesman for the medical marijuana defense group Americans for Safe Access." Nonetheless, the Obama Administration is using Section 280E to push these local and state licensed facilities out of business."

The provision can be used to great effect. Oakland's Harborside Health Center was hit with a $2 million IRS assessment in 2011 after the tax agency employed Section 280E against. Harborside is fighting that assessment, even as it continues to try to fend off federal prosecutors' attempts to shut it down by seizing the properties it leases. Similarly, when the feds raided Richard Lee's Oaksterdam University that same year, it wasn't just DEA, but also IRS agents who stormed the premises. Lee said it was because of a 280E-related audit.

The attacks on Harborside and Oaksterdam were part of an IRS campaign of aggressive audits using 280E to deny legitimate business expenses, such as rent, payroll, and all other necessary business expenses. These denials result in astronomical back tax bills for the affected dispensaries, threatening their viability -- and patients' access to their medicine.

"Should the IRS campaign be successful; it will throw millions of patients back in to the hands of street dealers; eliminate tens of thousands of well paying jobs, destroy hundreds of millions of dollars of tax revenue; enrich the criminal underground; and endanger the safety of communities in the 17 medical cannabis states," said Harborside's Steve DeAngelo as he announced the 280E Reform Project to begin to fight back.

It's going to be an uphill battle. In the last Congress, Rep. Pete Stark (D-CA) introduced House Bill 1985, the Small Business Tax Equity Act, designed to end the 280E problem for medical marijuana businesses, but it went to the Republican-controlled House Ways and Means Committee, where it was never heard from again.

Still, something needs to happen, said Betty Aldworth, deputy director of the National Cannabis Industry Association, which this year is working with members of Congress to try to find a fix for the 280E problem.

"When Section 280E was created in the 1980s, no one imagined state-legal marijuana providers," Aldworth told the Chronicle. "Whether or not it is part of a larger effort to curtail the development of regulated models for providing marijuana, which is a model that is clearly preferable to leaving this popular and relatively safe medicine (or adult product) in the underground market, these onerous tax rates have severely hampered the development of the regulated market."

It's a brake on the overall economy, Aldworth said.

"Not only has it resulted in stymieing job development, but it also curtails other economic activity such as reinvestment in business and the rippling positive effects of that spending," she argued. "And in many cases, it has created a tax burden that is simply unbearable: many providers have had to close their doors and lay off their staffs because the tax burden was simply too great."

Because of this unintended application of 280E, medical marijuana providers are paying overall taxes at a rate two to three times those of other small businesses, Aldworth said.

"It's important to note that just as they want to apply for licenses, follow regulations, and otherwise participate in the legal business community, state-legal marijuana providers also want to pay their fair share of taxes," she pointed out. "Most small businesses pay an effective tax rate of between 13% and 27% on net income, according to the Small Business Administration. State-legal marijuana providers pay an average effective tax rate of 65-80%. An industry that can provide thousands of jobs is being held back by these crazy tax rates."

While the lobbyists look to Congress for a fix, one academic tax law expert thinks he has hit upon a novel solution, but not everyone agrees.

Benjamin Leff, a professor at American University's Washington College of Law, raised eyebrows at a Harvard University seminar this spring when he presented his report,Tax Planning For Marijuana Dealers, where he suggested that dispensaries get around 280E by registering with the IRS as tax-exempt social welfare organizations, known as 501(c)(3)s or 501(c)(4)s.

The IRS has already ruled that medical marijuana providers can be exempt under 501(c)(3) because its "public policy doctrine" does not allow charitable organizations to have purposes contrary to law, but in the paper, Leff argued that "a state-sanctioned marijuana seller could qualify as tax-exempt under 501(c)(4), since the public policy doctrine only applies to charities, and 501(c)(4) organizations are not charities."

The organization would have to be operated to improve the social and economic conditions of a neighborhood blighted by crime or poverty, by providing job training, employment opportunities, and improved business conditions for commercial development in the neighborhood, just like many existing community economic development corporations that run businesses.

"When taxes get too high, you can drive compliant dispensaries out of business," Leff told the Chronicle.

Americans for Safe Access' Hermes would agree with that, but he's not so sure about Leff's idea.

"The concept of medical marijuana dispensaries registering with the federal government as a 501(c)(4) in order to sidestep section 280E is novel and may be hypothetically valid," he said. "However, the IRS will refuse to grant tax-exempt status to a business that the agency believes is violating federal law. Perhaps, it would be possible for a dispensary to obtain 501(c)(4) status under false pretenses, but such status would not very likely withstand an IRS audit."

There are better ways, he said.

"A much more realistic and sensible approach -- pending a change to the federal classification of marijuana for medical use -- is to amend the tax code to exclude state-lawful medical marijuana businesses from Section 280E," Hermes recommended. "This is the kind of legislation that Congress should pass in order to allow states to implement their own medical marijuana laws, without undue interference by the federal government."

"I agree with everything he said," Leff replied. "But it's not just the Obama administration that is using 280E this way. The Supreme Court has held that there is no exception to the Controlled Substances Act for state-level legal marijuana sales, and since 280E makes references to Schedule I controlled substances, it applies to legal marijuana unless Congress changes the law. I totally agree that Congress should amend 280E to exempt marijuana selling that is legal under state law. Congress could also amend the Controlled Substances Act to remove marijuana from it, which would probably also make sense," he added.

Whether it is by act of Congress, internal policy shifts, or creative thinking by law school professors, some way has to be found to exempt state-permitted medical marijuana providers from the clutches of 280E and its punitive tax burden aimed at dope dealers, or there may not be any medical marijuana providers.

15 comments

Permission to Reprint: This article is licensed under a modified Creative Commons Attribution license.

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Federal BS..

by David McDonough (not verified), May 16, 2013, 12:13am

280E nothing ABOLISH the IRS and see what happens. Probably nothing. Abolish the DEA and save tons of money. Stop this Federal crap. States rights are supreme

States rights are the key?

by Jeff Brown (not verified), May 16, 2013, 03:10pm

Not sure what happened here. This is a DdC reply to
by Jeff Brown (not verified), May 16, 2013, 04:10pm

We Must Stop Appeasing Liars and Pleasing Impostors.

NO STATE CAN LEGALLY SELL GANJA.
Raich v Gonzales

FEDS CAN'T ENFORCE STATE JURISDICTIONS.
Determined by the Constitution or Supreme Court RvG

STATES CAN'T ENFORCE FED JURISDICTION.
They can zone clubs but not bust them.

States can only bust individuals. Feds have already set precedent on reasonable amounts with the CSA and IND programs. Unless states limit or set conditions. As they have done in the MMJ states. Not the Compassionate Use Act. So filling state jails is not better. Most of the 800,000 arrests, trauma and life long stigma are by states. Until the lies of Nixon are removed. There is no dignity or integrity with the drug worriers. This war is waged from Walls St. selling paraphernalia bought with a trillion tax dollars. Blaming politicians is moot without realizing who profits and who keeps a versatile competition off the markets with prohibition. Old trick, new audience. So until the extremely bogus CSA is revamped without cannabis. States can protect citizens with Prop 215 laws or persecute them with MMJ obstacles. Where the IRS selects who to whack a mole or bust for evasion.

Follow CA or Bust' by DdC
stopthedrugwar June 08, 2013, 03:41am

Eighteen states have determined that marijuana has medical use.

No thousands of years of using it medicinally has determined that. Research back to the Indian Hemp Commission has determined medicinal value as well as its safety and virtual non lethal dosage. Money and Lies perpetuate the longest war on Americans. Until the people find some integrity, money will probably rule. Koch private prisons are lobbying for all 50 states with max capacity contracts and MM sentencing for long term investors. Big Pharma and Big Ag greedy tiny fingers anxious to frankenseed it. Keeping Hemp lumped in preventing losses from poisoning people with 90 million pounds used on the cotton crops. Fossil fools plastic or veggie oil grown on hills to prevent mudslides. Thousands of cleaner alternatives to the crap Walmartians forced on us. So the states are important to incremental retardation keeping the war going in the MMJ states. Appeasing the prisons over the schools is bound to end badly.

The 'Virtues' of Ganja
The Politics of Pot
Got Hemp?

States have the right to determine medical use.

No, that is the FDA. They have to wait on the HHS to approve the IOM research done in 1999 that is in file#13 never to be seen. The IOM determined it had medicinal value by re-evaluating previous tests back to the late 1800's. Politics, not science.

Marijuana no longer meets the federal schedule I criteria of no medical use in the United States.

It never did, nor was it ever prohibited by the Marihuana Tax Act. The AMA made sure of that. Hemp was not banned either, although they both required stamps and not many if any were allocated as a sabotage maneuver, like marinol. Nixon rejected his own Shafer Commission re-evaluations of the same tests back to the late 1800's showing it was not a menace, was medicinal and no overdoses. Congress fast tracked ii and Wall St was happy and remain happy as long as we fight each other and blame hobgoblins including this "guvmint" that is a word, non tangible entity humans invented. The people elected to pass laws can be held accountable and we can remove this abomination and embarrassment. But not if we don't even recognize it. The Ganjawar is nothing more than a product. Stop buying it!

To secure ourselves against defeat lies in our own hands. But the opportunity of defeating the enemy is provided by the enemy himself. If you know the enemy, and know yourself, you need not fear the outcome of a hundred battles. If you know yourself, but not the enemy, for every victory gained you will also suffer defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
The Art of War - Sun Tzu

Why are the governments of the medical marijuana states not demanding that marijuana be removed from federal schedule I?

Federal jurisdiction. States can't influence other states or circumvent Federal laws. Not civil rights or the CSA. Other than what is not granted to the Feds. Individuals in CA but a catch 22 in MMJ states.

Why are not the residents of those states suing their states to stand up to the feds?

How does Cliarence Thomas stall restitution to dioxin victims 7 years as Monsanto lawyer and then grant Monsanto patents on their frankenfud? The ASA has been suing the DEA to reschedule cannabis and they have stalled for years and then make the queerest decisions no other issue would put up with. If memory serves the last case was decided that the DEA was not arbitrary and capricious by following the CSA even though the CSA was arbitrary and capricious. Nothing was determined about the medicinal value of cannabis and the IOM report. Next year, same bat time, same bat channel, stay tuned.

This is called government by the people and for the people.

Yea right...

Jack Herer’s “The Emperor Wears No Clothes”

Why Do You Think They Call it DOPE?
* Cannabis Hemp: The Invisible Prohibition Revealed
* The Elkhorn Manifesto
* Marijuana and Hemp: The Untold Story
* The Nation of Apathetic Puppets By John Pilger
* Maintaining Dysfunction

Billions available from banksters like those of HSBC

by Nemo (not verified), May 17, 2013, 06:30pm

Hundreds of billions, in fact. Why not RICO them and claim it?

You know the answer as well as I. The banksters are 'connected', they really run the DrugWar...and the IRS won't touch them. So the IRS, true to its' traditional role of political muscle, chases after dispensaries instead. The banksters and their cartel symbionts don't want the competition, you see...

Impeach Obama

by American who is tired of Government Lies (not verified), May 20, 2013, 12:41pm

He is the head liar, get rid of him. clueless liar.

Give me a break

by capitolalb (not verified), June 01, 2013, 03:38pm

Get real.

Sigh

by Matt B (not verified), June 07, 2013, 12:07pm

Look, our puppet president doesn't need any apologists. What did you accomplish by flaming this poster?

May as well impeach him, the next in line is dictating our country's direction anyways...

AL Capone

by JoeSmoe (not verified), May 23, 2013, 04:17pm

Was hit by the IRS as a last resort before alcohol prohibition died.

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