Big Court Defeat For Marijuana Despite Record Tax Harvests

[n2doc]

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.

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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.

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http://www.forbes.com/sites/robertwood/2015/07/13/big-court-defeat-for-marijuana-despite-record-tax-harvests/