Could Medical Marijuana Get the Al Capone Treatment?

Could the IRS use the tax code to shut down medical marijuana dispensaries?

In 1931, mobster Al Capone was finally put behind bars because he was convicted of multiple tax-evasion charges, and the IRS is taking a similar approach with medical marijuana today. Many dispensaries in California now face audits that could result in their owing millions of dollars in back taxes.

According to Forbes columnist Robert W. Wood, the agency is relying on Internal Revenue Code Section 280E, which “precludes deductions for any business trafficking in controlled substances.” While dispensaries are legal in some states, including California, marijuana trafficking remains illegal on a federal level. The IRS is arguing that normal business expenses that most companies can deduct on their taxes are not applicable to dispensaries.

The Marin Alliance for Medical Marijuana in Fairfax, Calif., was the first dispensary to be hit with this ruling earlier this month. Founder Lynette Shaw told the Marin Independent Journal of California that the IRS audited the company’s returns for 2008 and 2009 and disallowed all of the alliance’s business deductions such as buying marijuana, hiring employees, and renting office space. Shaw did not disclose the amount the IRS told her she owes, but she described it as “a staggering sum” totaling several million dollars.

“Every dispensary in the nation, past, present and future is dead if this is upheld,” Shaw said. An IRS spokesperson declined to discuss the case. Shaw is currently planning an appeal.

According to a report from The American Independent, at least 12 dispensaries in California are currently being audited by the IRS.

As columnist Wood points out, the law isn’t completely clear. A previous tax court ruling allowed dispensaries to deduct expenses for activities not directly related to dispensing marijuana, such as caregiving, counseling, education and advocacy.

Allen St. Pierre, executive director of the National Organization for the Reform of Marijuana Laws (NORML), told The American Independentthat the immaturity of the medical marijuana industry could have opened the door for these audits, since dispensaries are trying to take normal business deductions while also asking for special treatment for their product’s medicinal value.

“Not many people show up in the newspapers screaming that they make millions of dollars and don’t want to pay taxes,” said St. Pierre.

John Platt writes for the Mother Nature Network.

– Article from Forbes.



  1. Anonymous on

    This Scientology reformer Minster Rev. Dennis L. Erlich has the right idea. He badgered the IRS back in 1998 to give him “church” tax-exempt status because his was a breakaway Scientology minister.

    Now he runs a Palm Springs, CA marijuana collective, and has actual registered “informer Ministry Collective” with the IRS. What bravado! Not sure how it is gonna turn out for this marijuana holy man registered with the IRS.

  2. nhfoos on

    Stop paying the FEDS taxes, they want their cake, don’t let them have it.

  3. B on

    Somebody needs to take the government to court over this and sue them for violating their 5th amendment rights. These actions are almost the same as the illegal 1937 Cannabis Tax Stamp Act. This act required that persons trafficking in cannabis acquire a tax stamp to do so. To get a tax stamp you had to physically possess the cannabis you intended to traffic, which you had to report to the taxing authority before you could get your stamp. In other words, you had to break the law, then admit to breaking the law, to get a stamp to make your actions legal. The courts overturned this law, deciding it was a violation of our 5th amendment rights. In this case, again, the government is requiring that people report an illegal activity in order to pay taxes legitimately. Clear violation of our 5th amendment right against self-incrimination. As long as cannabis remains federally banned, the federal government has no right to collect taxes on it, as doing so requires people to self-report illegal activity to the government. These dispensaries should be paying taxes to the local and state governments; if they refuse, the owners should be arrested. Local and state governments which have legalized cannabusiness have the right to tax that business. If the federal government wants the same right, the federal government needs to legalize cannabis.