If you want to support the cause of medical marijuana in the face of crushing and unjust taxation by the federal government, you have one easy option: “Buy more t-shirts,” said the nation’s leading dispensary tax attorney, San Francisco’s Henry Wykowski. “I’m not being facetious.”
This July, the federal Ninth Circuit Court of Appeals gave the medical marijuana a billion-dollar piece of legal clarity.
Dispensaries still face crushing tax burdens for selling cannabis, but everything else they sell in the store – t-shirts, hats, bubblers, vaporizers, ash trays — is officially tax-deductible as a business expense.
Basically every dispensary that is selling schwag … if it’s for sale, the expenses associated are deductible.”
“It has great significance,” said Wykowski, who keynotes the Oregon Marijuana Business Conference Sept. 12-13.
“This is good for the industry,” he said. “You’re entitled to take some expenses.”
Until the verdict came out, the Internal Revenue Service had been arguing that all business expenses at a dispensary were disallowed, under a Reagan-era, drug trafficking clause in the tax code. The result is audits, huge, business-ending tax bills, and patients locked out from life-saving formulations.
In the case of plaintiff Martin Olive, the founder of The Vapor Room in San Francisco, the Ninth Circuit affirmed he still owes about $650,000 for two years of running The Vapor Room in 2004 and 2005.
The 9th Circuit upheld the drug trafficking section of the tax code — Section280E — to Olive’s city-permitted business. That $650,000 tax bill consists of business deductions the IRS dis-allowed. The IRS applies the tax code the same way if you’re Al Capone, Pablo Escobar, or a licensed, state-legal medical cannabis dispensary, Wykowski said. “A law meant to disallow the deductions of street dealers is being applied to licensed dispensaries.”
The Ninth Circuit’s ruling looks bad on the surface. Olive still owes the dough. Section 280E remains an existential crisis to the pot industry. Pioneer provider Olive’s tax burden is something “he will have to live with. We will try to negotiate a resolution with the IRS,” Wykowski said. “If not, he’s just going to have that that liability for the rest of his life.” But ruling’s schwag tax break is already reverberating into business plans.
The court used an example of two different bookstores. One sells books and has a free coffee station. The other sells books, but also has a cafe that sells coffee.
“If you charge for the coffee and cookies, the separate business expenses are deductible,” Wykoswki said. “It allows all the other deductions in running the dispensary.”
The ruling lends weight to future arguments for allowing some business deductions and could add up to tens of billions of dollars per year. So did the Ninth Circuit essentially hand pot clubs a tax break?
“I think the Ninth Circuit confirmed they are entitled to it,” he said. “This puts that issue to rest, so it’s good.”
Wykowski said more lawsuits will be coming. “The IRS has become quite aggressive in San Francisco. In more and more cases, we’re going to have to go to tax court for trial.”
Congress needs to change the law, and disallow Section 280E from applying to lawful state-licensed cannabis businesses, he said.
“It hasn’t happened because of Congressional paralysis. … but people are introducing legislation that would say, ‘In medical marijuana states, lawful business are exempt from 280E.’ That step is a big step and it would be the beginning of the end.”
Until 280 relief happens, remember to buy those T-shirts.
The Vapor Room remains open — if delivery only — plans to re-open a walk in location soon.