Big Court Defeat For Marijuana Despite Record Tax Harvests

 

 

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Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question. Virtually every business in every country pays tax only on net profits, after expenses. But the topsy-turvy rules for marijuana seem to defy logic. And taxes are clearly a big topic these days under both federal and burgeoning state law.

Many observers and legislators suggested that legalizing marijuana would mean huge tax revenues. With legalized medical marijuana now giving way to more and more states legalizing recreational use, the cash hauls look ever more alluring. Washington state regulators say the state collected $65 million in first-year taxes from recreational marijuana sales in just 12 months on cannabis sales of over $260 million from June 2014 to June 2015. In Colorado, the governor’s office estimated that it would collect $100 million in taxes from the first year of recreational marijuana.

In the end, Colorado’s 2014 tax haul for recreational marijuana was $44 million, causing some to say that Colorado’s marijuana money is going up in smoke. Still, that isn’t bad for the first year. Colorado was first to regulate marijuana production and sale, so other governments are watching. Colorado also collected sales tax on medical marijuana and various fees, for a total of about $76 million. Still, not all sales are going through legal channels.

Now, in another blow to the budding industry, is the IRS has convinced the influential Ninth Circuit Court of Appeals that marijuana dispensaries cannot deduct business expenses, must pay taxes on 100% of their gross income. The case, Olive v. Commissioner, was an appeal from a U.S. Tax Court decision. Martin Olive sold medical marijuana at the Vapor Room, using vaporizers so patients do not even have to smoke.

But even good records won’t make vaporizers or drug paraphernalia deductible. The Ninth Circuit upheld the Tax Court ruling that §280E prevents legal medical marijuana dispensaries from deducting ordinary and necessary business expenses. Under federal tax law, the Vapor Room is a trade or business that is trafficking in controlled substances prohibited by federal law.

Indeed, the New York Times had stressed that legal marijuana faces another federal hurdle when it comes to taxes. The problem is major, for federal law trumps state law. Even legal medical marijuana businesses continue to have big federal income tax problems. It is a classic Catch 22–tax evasion if they don’t report, and a risk of criminal prosecution if they do. More imminent, though, is the risk of being bankrupted by their IRS tax bill.

On the question whether marijuana businesses should pay tax on their net or gross profits, the tax code says the latter. Indeed, Section 280E of the tax code denies even legal dispensaries tax deductions, because marijuana remains a federal controlled substance. The IRS says it has no choice but to enforce the tax code.
One common answer to this dilemma is for dispensaries to deduct expenses from other businesses distinct from dispensing marijuana. If a dispensary sells marijuana and is in the separate business of care-giving, for example, the care-giving expenses are deductible. If only 10% of the premises is used to dispense marijuana, most of the rent is deductible. Good record-keeping is essential, but there is only so far one can go. For example, in the case of the Vapor Room and Martin Olive, with only one business, the courts ruled that Section 280E precluded Mr. Olive’s deductions.

Recently, the IRS issued guidance about how taxpayers “trafficking in a Schedule I or Schedule II controlled substances”—by which the IRS means Marijuana dealers–can determine their cost of goods sold. After all, you have to report your profit, but how do you do that? If you buy goods for $10 and resell them for $20, your profit is $10. Your cost of goods sold is $10.

The IRS guidance (ILM 201504011) is complex, but tries to answer how dealers can determine cost of goods sold, as well as whether the IRS auditing a dealer can make them change. There is considerable tax history in the IRS missive. The IRS is clear that you can deduct only what the tax law allows you to deduct. The trouble started in 1982, when Congress enacted § 280E. It prohibits deductions, but not for cost of goods sold.

Most businesses don’t want to capitalize costs, since claiming an immediate deduction is easier and faster. In the case of marijuana businesses, the incentive is the reverse. So the IRS says it is policing the line between the costs that are part of selling the drugs and others.

Sure, deduct wages, rents, and repair expenses attributable to production activities. They are part of the cost of goods sold. But don’t deduct wages, rents, or repair expenses attributable to general business activities or marketing activities that are not part of cost of goods sold.

2013′s proposed Marijuana Tax Equity Act would end the federal prohibition on marijuana and allow it to be taxed–at a whopping 50%. The bill would impose a 50% excise tax on cannabis sales, plus an annual occupational tax on workers in the field of legal marijuana. Incredibly, though, with what currently amounts to a tax on gross revenues with deductions being disallowed by Section 280E, perhaps it would be an improvement. More recently, Rep. Jared Polis (D-Co.) and Rep. Earl Blumenauer (D-Or.) have suggested a phased 10% rate here, ramping up to 25% in five years.

For alerts to future tax articles, follow me on Forbes. You can reach me at [email protected]. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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Study: Arrests For Marijuana Offenses Increasing In Many States –

by Paul Armentano, NORML Deputy Director July 30, 2014

 

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Law enforcement in many states are making a greater number of marijuana arrests than ever before despite polling data showing that the majority of Americans believe that the adult use of the plant ought to be legal.

According to a just published report, “Marijuana in the States 2012: Analysis and Detailed Data on Marijuana Use and Arrests,” which appears on the newly launched RegulatingCannabis.com website, police made an estimated 750,000 arrests for marijuana violations in 2012 – a 110 percent increase in annual arrests since 1991. Yet, despite this doubling in annual marijuana arrests over the past two decades, there has not been any significant reduction in marijuana consumption in the United States the report found.

In 2012, marijuana arrests accounted for almost half (48.3 percent) of all drug arrests nationwide. Marijuana arrests accounted for two-thirds of more of all drug arrests in five states: Nebraska (74.1 percent), New Hampshire (72 percent), Montana (70.3 percent), Wyoming (68.7 percent) and Wisconsin (67.1 percent).

From 2008 to 2012, seventeen state-level jurisdictions experienced an average annual increase in marijuana arrests, the report found. South Carolina (11.6 percent) and the District of Columbia (7.7 percent) experienced the highest overall percentage increase in arrests during this time period. By contrast, annual marijuana arrests fell nationwide by an average of 3.3 percent from 2008 to 2012.

Overall, the study reported that the five state-level jurisdictions possessing the highest arrest rates for marijuana offenses are the District to Columbia (729 arrests per 100,000 citizens), New York (577), Louisiana (451), Illinois (447) and Nebraska (421). District of Columbia lawmakers decriminalized the adult possession of marijuana earlier this month.

The two states possessing the lowest marijuana arrest rates are California and Massachusetts, the report found. Both states decriminalized marijuana possession offenses in recent years.

Stated the report’s author, Shenondoah University professor Jon Gettman, “After a generation of marijuana arrests, nearly 19 million and counting since 1981, the results are that marijuana remains widely used, not perceived as risky by a majority of the population, and widely available. The tremendous variance in use and arrests at the state level demonstrate why marijuana prohibition has failed and is not a viable national policy.”

Full text of the report is available on the NORML website here or from: RegulatingCannabis.com.

– See more at: http://blog.norml.org/2014/07/30/study-arrests-for-marijuana-offenses-increasing-in-many-states/#sthash.l9sfun7e.MOcw3eNJ.dpuf

Ron Paul wins if Supreme Court strikes Obamacare

Saturday, 31 March 2012 21:09

BY MURRAY SABRIN
COMMENTARY

How did it get this far?  Even a naturalized citizen like me and tens of millions of others who took an oath to uphold the Constitution can clearly see that the United States is no longer a constitutional republic with limited powers

Article I Section 8, which enumerates the federal government’s powers, has been ignored by Congress and the Supreme Court for nearly two centuries. Congress has passed laws that presidents from both major parties have signed that egregiously expanded federal power.

Cleverly, big government advocates have hung their hat on the Commerce Clause instead, which gives the federal government the power to “regulate” interstate commerce.  By invoking the Commerce Clause, statists have created America’s unsustainable welfare state–Medicare, Medicaid, Social Security, etc.

An accurate historical reading of the Commerce Clause turns this interpretation on its head.  As Judge Napolitano has pointed out, the Founders wanted to make commerce “regular” in the fledgling republic by removing trade restrictions and other burdens so commerce could flow seamlessly between the states.  In other words, the Commerce Clause was not intended to give the federal government open-ended power to interfere with business activity.

Moreover, a free society requires freedom. The ability of the people to invent, produce, trade, consume, save and enjoy the fruits of their labor is supposed to be the essence of America.  In other words, a limited government, free enterprise republic needs the government to secure the borders and protect liberty, not order people how to live their lives.

If all the Supreme Court justices who heard the challenge to Obamacare this past week were faithful to their oaths to uphold the constitution, they would have excoriated the Solicitor General who was defending Obamacare, and castigated the President and the Congress for creating a law that was an affront to the Constitution—and an assault on the American people’s liberties.  In addition, the Supremes should have taken one giant step for liberty by stating that they will strike down all laws that have been enacted that are inconsistent with Article I Section 8 of the Constitution.  Maybe they will do so in their ruling about Obamacare that is due in June.  However, I would not hold my breath that all nine justices will “see the light,” namely, that Obamacare is the latest statist piece of unconstitutional legislation that must be struck down.

If the Supreme Court strikes down Obamacare, root and branch, the march to liberty could accelerate.

That would mean that Ron Paul has won, even if he is not elected president this year.  The Ron Paul Revolution, the movement to restore the Constitution, is gaining strength day by day. 

We have a long way to go to recreate a free society, but like all great journeys, we must agitate for what is right and honorable, a limited government republic, and not give up the fight worth fighting.

Murray Sabrin is a professor of finance at Ramapo College and blogs at www.MurrarySabrin.com.

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