The Internal Revenue Service has notified the Marin Alliance for Medical Marijuana in Fairfax that it owes millions of dollars in unpaid back taxes, according to the alliance’s founder and director, Lynnette Shaw.
Shaw said the IRS audited the alliance’s tax returns for 2008 and 2009 and disallowed all of its business deductions. She said that although dispensaries throughout the state are being audited by the IRS, the alliance is the first to be told it can’t deduct business expenses.
“Every dispensary in the nation, past, present and future is dead if this is upheld,” Shaw said.
Shaw would not disclose the exact amount she is being ordered to pay but said, “It’s a staggering sum, millions and millions.” She is also negotiating with the state Board of Equalization regarding sales tax that was not paid in 2005 and 2006.
Shaw said the IRS disallowed her deductions — for buying marijuana, hiring employees, securing office space and more — based on section 280E of the federal tax code, which states that no deduction shall be allowed for any business trafficking in controlled substances.
Under federal law, marijuana is classified as a schedule I controlled substance, a category of drugs not considered legitimate for medical use — despite voters’ 1996 approval of Proposition 215, which legalized the use of marijuana for medical purposes in California.
Jesse Weller, an IRS spokesman, said, “We can neither confirm nor deny there is an examination or audit of any taxpayer, because of the disclosure and privacy laws.” Weller declined all other comment.
Henry Wykowski, a San Francisco lawyer who represents marijuana dispensaries, said, “I’m personally involved in over a dozen audit cases now, and I’ve been consulted on a number of others.” Wykowski said all of the audits are in California.
Steve DeAngelo, director of the Harborside Health Center in Oakland, one of the largest dispensaries in the nation, said the IRS began auditing Harborside’s books a year ago.
DeAngelo said section 280E “is the major issue in the Haborside audit.”
“If the IRS were to aggressively interpret 280E, it has the potential to close down every medical cannabis dispensary in the United States,” DeAngelo said. “If you can’t deduct your rent, your payroll, licensing fees, et cetera … you’re going to be taxed out of existence.”
Shaw said previous legal battles with the federal government have prepared her for this challenge. She said she plans to mount a legal defense based on the reasoning that there is no rational basis for classifying marijuana as a schedule I drug.
Wykowski said a U.S. Tax Court judge ruled in 2007 that dispensaries can legally deduct expenses associated with all activities except for dispensing marijuana. Wykowski worked on the case, called “Californians Helping to Alleviate Medical Problems Inc. v. Commissioner of Internal Revenue.”
For example, Wykowski said people who work at dispensaries often advise people on which type of marijuana will best treat their medical problem. He said this constitutes counseling, not trafficking, so deducting at least a portion of that employee’s salary should be allowed.
DeAngelo said, “280E should not apply to us. It was designed for cocaine kingpins, not nonprofit community service organizations. But if it is applied to us, the IRS needs to take into account that the vast bulk of what we do is education, counseling and advocacy, not the actual handling of cannabis.”
– Article from Marin Independent Journal.