News » IRS to Audit and Potentially Shut Down Dispensaries

As if we needed another reason to hate the Internal Revenue Service.. now they’re auditing some of California’s largest dispensaries, including Harborside Health Center in Oakland. The audits aren’t a part of normal business, the IRS has made clear, but are targeted to enforce section 280E of the Federal Tax Code.

This bit of code, specifically, was created in 1982 under Reagan’s War on (some) Drugs push. This portion of the tax law explicitly forbids businesses or individuals from declaring deductions related to trafficking in controlled substances. Up to now, of course, most drug dealers and suppliers have been operating outside the law, so they weren’t likely to declare to the feds that they were “trafficking.” But with the fast-growing MMJ business, that’s changing.

If the law were used to the letter on these dispensaries – and it likely will be – it could effectively shut then down. After all, business is about inlay and output – you take in product at a price and then sell it at a higher price. The profit is what you are taxed on. Remove the ability to subtract sales price from purchase price (to get your profit) and the IRS is taxing all of your sales. That’s ruinous to any business.

Let’s take a hypothetical example for illustration here. A cannabis dispensary sells $200,000 in product in a year. They spent $120,000 on the product itself plus business expenses (building, utilities, employees, etc.). Of that $120,000, $80,000 was for product and the other $40,000 was for everything else. Under section 280E, they are only able to write off the $40,000, making their taxable income $160,000 instead of $80,000. That’s double.

Upscale that to the Harborside facility, which does about $22 million in annual sales and you’re getting an idea of what’s potentially at stake here.

It appears that this may be the federal government’s “back door” into shutting down medical marijuana.

[source Mercury News]

Tags: dispensary, Harborside Health center, irs, tax audit