It’s safe to assume most drug dealers don’t attempt to pay taxes on their transactions. Cooperating with the government—and providing authorities with a ledger’s worth of damning evidence—sort of defeats the purpose of being a drug dealer. Nonetheless, at the height of the country’s era of cocaine cowboys, Congress passed an amendment to the tax code, section 280-E, that prohibits businesses trafficking in narcotics from deducting related expenses from their federal tax bills.
In other words, you could have the cigarette boat, the Miami Beach penthouse condo and the extremely dangerous personal relationships; you just couldn’t claim the cost of doing so on your taxes.
More than 30 years later, it should be obvious to everyone that 280-E didn’t do much to stamp out the illegal drug trade, no more so than mass incarceration did. But it is causing havoc to legitimate, tax-paying medical and recreational marijuana dispensaries, who can’t claim the same expenses on their taxes as other retail outlets.
The result is effective tax rates of up to 70 percent for businesses who engage in the retail sale of cannabis, according to tax attorneys. And if the IRS happens to give a break to a business by not sending them an enormous tax bill one year, they can always go after them later.
Recently, Oakland, California-based Harborside, by reputation America’s biggest marijuana dispensary, went to court to challenge a $2.4 million bill for back taxes—taxes levied by the IRS because of 28o-E. (To make things truly nonsensical, the tax code does allow a marijuana business to deduct the cost of the marijuana itself, just not the other costs associated with selling it.)
Though the country has clearly moved on from the drug war, the federal government has not, and “[t]hey are still using the tax code to destroy companies,” attorney James Thorburn told Slate last year.
In a nod to the significant role the cannabis industry plays in the economy of its state—to the tune of more than $20 billion, by some estimates—California Democrats are sick of this silliness, and are on record demanding someone put a stop to it.
At its most recent executive board meeting, California’s state Democratic Party (which is a formal way of saying “California’s political party”) passed a resolution calling out the IRS for applying 28o-E to cannabis businesses rather than international drug smugglers.
Doing so has resulted in “ruinous and unfair tax bills… resulting in bankruptcy and undue hardship,” the party declared.
Now, with marijuana a significant industry in several states and several more due to begin retail sales within the next year to 18 months, California Dems want the IRS’s application of 28o-E to otherwise-lawful businesses suspended.
The resolution is both sensible and practical—why is a statute designed for Scarface types being applied to businesses following state law?—and a sign of the legitimate respect now enjoyed by the cannabis movement. The resolution was offered by the Brownie Mary Democrats, an officially chartered Democratic club founded by a Southern California cannabis activist with a cannabis-first mission, and accepted by the state party’s mainstream leadership.
Dropping 280-E enforcement against marijuana outlets is also what the statute’s original author wants. Former U.S. Rep. Pete Stark says using the IRS to go after cannabis “punishes” medical marijuana patients.
Before he left office, Stark introduced legislation that would have expressly allowed marijuana firms to deduct business expenses on their taxes. That bill was never called for a committee hearing and has been in bill limbo ever since.
Now that Barack Obama will exit office without any amendments to the tax code, fulfillment of the resolution’s desire now rests with President-elect Donald Trump. Since Trump’s infamous loss in the popular vote is largely due to California and since forging close relationships with Democrats isn’t something the soon-to-be president is known for, it may be wishful thinking. But this is the era of golden showers, so truly: all bets are off.
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