Week Ten TWB Business Guide – Taxes

Welcome to WEEK TEN of the 10 week Marijuana Business Training Course!

This week’s course will cover: TAXES

Taxes on the sale of Marijuana come in two basic different ways. The business owner pays taxes that contribute to the local community and the consumers (recreational and medicinal) pay taxes at point of sale.

Sales Tax

An ounce of recreational Marijuana sells for $500 with taxes.

Commonly referred to as a vice tax or sin tax, recreational Marijuana is taxed in Colorado at a rate of 36%. The exact same product, when sold for medicinal purposes is taxed at 8%. Other states have vice taxes, like for lottery, tobacco and alcohol, but the average rate of taxation pales in comparison to Marijuana.

Washington has a 25% tax for producers and processors plus 25% added to the price of the product on top of the buyers’ additional 6.5% state sales tax. The revenue will be channeled toward a variety of services, including social and health programs, a marijuana use hotline and the Alcohol and Drug Abuse Institute at the University of Washington. The state’s Liquor Control Board was set to begin issuing permits for marijuana retail locations starting Nov. 18. 2013, with up to a maximum of 334 retail locations. The legal sale of Recreational Marijuana went live in Washington on July 8. The Washington State Liquor Control Board issued licenses to 24 retail shops on July 7. Shops are allowed to open 24 hours after the owners finish the licensing process, but sales are generally allowed to take place between 8 a.m. and midnight. In Denver shops close at 7pm.

In January, Colorado’s retail sales totaled 14 million dollars. The state collected 1.4 million from a special 10 percent sales tax on recreational marijuana, plus another $416,690 from the state’s standard 2.9 percent sales tax to total almost 2 million dollars in one month of sales. This means a potential for 24 million dollars in annual tax revenue for the state. The 10% special sales tax that will also help fund marijuana enforcement plus the 2.9% sales tax (the same tax added to retail sales). Included in the ballot measure is a 15% excise tax on marijuana producers to raise revenue for school construction. Numbers are still being gathered about the tax benefits in Washington, but stores sold out on opening day so tax revenues are expected to be high.

Recreational marijuana businesses paid $195,318 in excise tax during January, which will be put toward school construction. In total, 59 recreational marijuana businesses filed returns in January.  Both Gov. John Hickenlooper’s budget office and legislative analysts have predicted recreational sales for the first six months of 2014 would top $190 million. The first $40 million of the excise tax must go to school construction. Colorado has about 160 state-licensed recreational marijuana stores, and the state could collect about $134 million in taxes from recreational and medical marijuana for the fiscal year beginning in July. He proposed to spend $99 million on programs including substance-abuse treatment, preventing marijuana use by children and teenagers, public health and law enforcement. For marijuana advocates, taxes were one of the major selling points of legalization. They have said that expanding the market for the federally prohibited plant could give states money for school construction, health care, substance-abuse programs and public health.

Anyone with a red card can purchase medical marijuana at an MMJ dispensary. And patients are definitely purchasing marijuana: According to data from the Colorado Department of Revenue, there was a whopping $34.4 million in medical marijuana sold here in March, generating about $1 million in sales-tax revenue for the state. Of that total, $16.7 million was sold in Denver County alone. In comparison, sales of retail cannabis were much lower. Colorado retailers sold $19.6 million worth of marijuana in March, with $8.9 million of that in Denver. Recreational marijuana tax revenue was much higher, however, due to a 15 percent excise tax and 10 percent special sales tax on top of the 2.9 percent state sales tax. In total, Colorado collected about $3 million in tax revenue from recreational marijuana in March.

Without a doubt, Marijuana sales have a positive impact on generating revenue for communities in which the dispensaries reside.

Perhaps it is the higher taxation rate on Recreational Marijuana that keeps people applying for their Medical Cards, although one person I spoke with in the Recreational waiting room said he was letting his card expire, because, after the time and money spent going to the doctor o get his recommendation and paying state fees to get licensed, he actually felt it was just cheaper -m and certainly more convenient – to pay he taxes and purchase his medicine through the recreational storefront. $17.4 billion is the estimated total amount that marijuana prohibition costs state and federal governments every year, according to a 2010 study by Harvard University economist Jeffrey Miron.

The Colorado Medical Marijuana Patient Registry continued its slow but steady climb in March according to statistics released by the Colorado Department of Public Health and Environment. As of March 31, there were 115,208 active red cards in the state — up 1,767 people from the month before. As has been the case for nearly a year now, the number of children under the age of eighteen on the medical marijuana registry increased, from 248 to 285 patients between February and March. But even with that rise in the number of minors, the average age of medical marijuana patients increased from 41 years old to 42 years old in March. Despite additional red cards, some people are still dropping off the registry, though. Once again, the state reported receiving more new patient applications than the number of new red cards issued, indicating that as many as 1,900 people left the registry or let their cards expire without renewal. While roughly 11 percent of applications are rejected because they need to be corrected, actual denials are rare.

Regardless of your feelings about legalizing marijuana, it’s hard to deny that legal weed would be a bonanza for cash-strapped states, just as tobacco and alcohol already are.

Paying Taxes as a Dispensary Owner

According to tax code § 280, expenditures in connection with the illegal sale of drugs. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Enacted in 1982, the year that President Ronald Reagan declared the “War on Drugs,” Section 280E of the federal tax code bans tax deductions related to “trafficking in controlled substances.” This tax code was put into effect prior to the decriminalization of medical marijuana in California in 1996. Since then 20 other U.S. states and the District of Columbia have legalized or decriminalized medical cannabis, but 280E has remained intact and in direct conflict with a growing number of state laws.
You must take 280E into account when filing your federal income taxes. While there are different approaches to handing the issue, failure to address 280E in your income tax returns could leave you vulnerable to large back taxes and penalty. If you are being audited, how you handle 280E will in large part determine the size of your assessment. A failure to effectively plan for 280E could result in your receiving tax bills that are beyond your ability to pay, and ultimately lead to the closure of your dispensary.

We’ve already covered the importance of diligent record keeping, and tax season is just another reason to be on top of this. If you do not have proof of purchase receipts and payments your expenses can be disallowed, resulting in taxes due. For this reason, keep all your records. Hang on to your purchase receipts, even if you have credit card statements to prove the purchase. Hang on to your receipts especially if you paid by cash. Bookkeeping is the ideal way to keep accurate records in the industry. We can help you each step of the way, from setting up your books to preparing and presenting you with the proper financial statements.

The tax court has upheld the IRS’s actions. In one recent case, for example, the tax court unanimously found that the owner of the Vapor Room Herbal Center, one of San Francisco’s largest and most profitable dispensaries, was not allowed to take business deductions because the business was trafficking in a controlled substance. However, the dispensary was allowed to deduct the cost of the goods it sold because, technically, this is not a business deduction; rather, it is subtracted from gross receipts in determining a taxpayer’s gross income. Thus, the dispensary owner could deduct the cost of purchasing marijuana from growers. However, due to poor records, the dispensary owner was allowed only a portion of his claimed costs. This decision highlights the importance of keeping good records. (Olive v. Comm’r, 139 T.C. 2 (2012).)

Another tax court case gives medical marijuana dispensaries at least a glimmer of tax hope. The court ruled that a dispensary effectively had two businesses–selling medical marijuana and giving care to patients. The director there was an experienced health professional and he operated the dispensary with caregiving as the primary feature and the dispensing of medical marijuana (with instructions on how to best consume it) as a secondary feature. Thus, the court held he could deduct his expenses for the caregiving business. (Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r (CHAMP), 128 T.C. 173 (2007).)

The upshot of these tax cases is that a medical marijuana dispensary that only sells marijuana will not be entitled to any tax deductions for its business expenses. But if a dispensary also provides substantial caregiving services–such as patient counseling, drug education, and advocacy–all expenses arising from these activities can be deducted.

There are several strategies that can be used to meet the 280E challenge in your tax filings:

  • push as many costs as possible into Cost of Goods
  • demonstrate non-drug-trafficking activity
  • use dual legal entities
  • eliminate obvious cannabis references in returns
  • Push as many staff members as possible into job classifications that fall outside the realm of drug-trafficking actions
  • Job descriptions should be written to minimize references to any tasks that could be construed as drug-trafficking actions
  • Where drug-trafficking actions are unavoidable, they should be mixed with non-drug-trafficking tasks
  • 280E is part of the civil tax code, and by itself cannot result in criminal charges
    • For criminal charges to be filed, the IRS must show an intent to evade taxes
    • As long as you honestly describe your business activities, and account for 280E in your tax returns, it should not lead to criminal charges

However, the only real and permanent solution to the 280E problem is convincing the IRS to change its position on medical cannabis.

280E is a remote and little-known section of the IRS Code. You should make certain that your accountant and tax attorney either have depth of expertise in 280E, or that they contact other professionals who do have such experience. One of the services provided by this website is professional forums, where your advisers can confer with other professionals who are developing 280E solutions.

Marijuana Banking

July 16, 2014, the US House passed a bipartisan amendment (231–192) that prevents the Treasury Department and the Securities and Exchange Commission from spending any funds to penalize financial institutions that provide services to Marijuana businesses that are legal under state law.

It is expected that there will be positive reform for filing taxes and enable normal business expending when this legislation is finally official.


READ THE TWB GUIDE FOR MORE INFO ON- Raising City Revenue by Ending the ‘Wasteful War on Drugs’ ; Grass Roots Legalization: Measure Z and State Prop 215 ; Improving Law Enforcement, Reducing Crime

We are here to help and want to see you succeed! If you have questions you can email The Weed Business directly at info@theweedbusiness.com.

Happy Trails!

The Green Ninja, DANKO and the Weed Business Team

The Green Ninja has business experience from owning two companies, has operated The Weed Business since 2009, and follows news providers to stay as current on issues and business laws of Medicinal and Recreational Marijuana use in the United States. DANKO is from a Medical Marijuana state and has many card carrying friends providing first hand insights from patients and caregivers, in addition to researching and writing in-depth articles about the most current issues of the industry. Combined, we have spent hundreds of hours looking into different states’ medical Marijuana laws and the industry to make sure the information included is the most cutting-edge and up to date information there is. The Weed Business has a number of other contributors and a large support network, so if you have a question we can’t answer there’s a good chance we know someone who can.