A once-thriving San Francisco pot shop forced to close this week is also on the hook for a serious IRS bill, following a new U.S. Tax Court decision that could complicate life for others in the medical marijuana business.
Call it a precedential bummer; or, perhaps, a rational application of tax law.
For businesses and consumers in the 17 states that permit medical marijuana use, the ruling quietly issued Thursday certainly goes well beyond the facility formally called the Vapor Room Herbal Center. In particular, the Vapor Room ruling could squeeze pot operations that claim deductions for “care-giving” services.
“The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law,” Tax Court Judge Diane L. Kroupa noted. “Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business. This is true even if the business is legal under state law.”
The ruling means Vapor Room owner Martin Olive owes Uncle Sam a lot of money, although it is unspecified and less than the $2.1 million the Internal Revenue Service originally sought. More broadly, other medical marijuana dispensaries could have a harder time securing valuable tax deductions; particularly if, as in the case of the Vapor Room, they keep unreliable records.
“In the end, it’s going to be very important,” Las Vegas-based tax expert Russell Clayton said of the ruling in an interview Friday. “This is going to have a major impact on medical marijuana (operations).”
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