Decision in U.S. Tax Court Has Ramifications for Medical Marijuana Dispensaries

A new U.S. Tax Court decision could complicate life for medical marijuana businesses across the country, as well as putting a former San Francisco dispensary on the hook for a huge tax bill.

"The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law," Tax Court Judge Diane L. Kroupa said. "Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business. This is true even if the business is legal under state law."

The ruling means Vapor Room owner Martin Olive owes Uncle Sam a lot of money, although the amount is unspecified, but less than the $2.1 million the Internal Revenue Service wanted at first. Beyond that, the ruling means other medical marijuana dispensaries could have a harder time securing valuable tax deductions.

"In the end, it's going to be very important," Las Vegas-based tax expert Russell Clayton said of the ruling in an interview Friday. "This is going to have a major impact on medical marijuana (operations)."

In other words, the federal government is sure to increase the use of the IRS against medical marijuana dispensaries, especially if they do not close voluntarily.

Olive had gone to court to challenge the IRS's determination that he owes more than $1.8 million in taxes, and about $378,000 in penalties, for the years 2004 and 2005. Olive reported the Vapor Room had gross receipts of $1 million in 2004 and $3.1 million in 2005. But tax investigators subsequently concluded that Olive had underreported his income, and that the Vapor Room really grossed $1.9 million in 2004 and $3.3 million in 2005.

Dispensaries nationwide should fear the coming of the tax man.

Source: http://www.miamiherald.com