How the Tax Code Could Destroy Medical Marijuana

The IRS has told California's largest cannabis provider it doesn't qualify for normal deductions, but a congressman is trying to change that

The IRS has told California's largest provider of cannabis that it doesn't qualify for normal deductions, but a U.S. congressman is trying to change that

The slick video above is a testament to the professionalism and savvy of the folks at the Harborside Health Center, the largest medical marijuana dispensary on the West Coast. They're popular in their community, Oakland, among both their 83,000 members and city officials who appreciate the $1,081,450 tax bill the nonprofit organization recently paid into municipal coffers. But Luigi Zamarra, Harborside's chief financial officer, says that a tax problem with the IRS may force the operation to shut its doors if the federal agency's current ruling stands.

At issue is whether Harborside should be able to write off expenses as any other business would, or if selling marijuana changes everything. The Bay Citizen explains the specifics in its coverage. "The IRS insists that medical marijuana dispensaries must obey a section of tax code that prohibits companies from deducting most expenses if they are 'trafficking in controlled substances.' The section, 280e, was designed as a tool for fighting drug trafficking," writes reporter Zusha Elinson. "Zamarra said that the IRS letter states that Harborside can't deduct rent, payroll, health insurance or worker's compensation insurance -- deductions that are standard for many other industries. The only two things the IRS says the dispensary can deduct are the cost of buying marijuana and the cost of alternative health care services such as yoga, he said."

Isn't that odd? The product, marijuana, is legal in California. It's illegal under federal law, but IRS rules permit the cost of the product itself to be deducted anyway. What isn't permitted is selling marijuana and making standard deductions. It's a story about the clash between federal and state drug laws, but as much an instance of nonsensical tax laws that Congresses pass and that the IRS then enforces, becoming hated in the process when really lawmakers are to blame.

The Bay Citizen identifies the obvious solution: "East Bay Congressman Pete Stark introduced a bill this spring that would change the federal tax code to allow medical marijuana dispensaries to make the same deductions as normal businesses." It goes on to note that "with the federal opposition to marijuana dispensaries, it's unclear whether the president would sign the bill."

If you're pondering where you stand on the issue, it's worth thinking through what will happen if there is no fix and the dispensary closes. Suddenly 83,000 people, or a substantial fraction at the very least, will start obtaining medical marijuana either from a less scrupulous dispensary (Harborside is known even at the IRS for keeping accurate books) or one of the East Bay's many marijuana dealers. They'll no longer know the potency of what they're getting or its origin. The City of Oakland and the United States government will each take in a lot less tax revenue. And the decades-long, obviously unwinnable War on Drugs won't be any closer to being won. That doesn't seem like an optimal outcome from a policy perspective, does it? If only the federal government would stop trying to regulate intrastate commerce in this area we'd all be better off.