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Medical marijuana stores blocked from tax breaks

The roughly 2,500 medical marijuana dispensaries in the USA pay taxes to local, state and federal governments.

But they can’t take the same federal tax breaks that other small businesses take.

A section of the federal tax code known as 280E was meant to prevent tax write-offs for illegal drug activity. It was enacted in 1982, before medical marijuana was legalized in any state.

The Internal Revenue Service applies 280E to pot shops operating legally under state law.

The IRS says it follows the law in not allowing these deductions. Any changes to 280E would require Congress to amend either the Internal Revenue Code or the Controlled Substances Act, according to a 2010 letter from the IRS to members of Congress.

Although 20 states and D.C. have legalized medical marijuana, the Controlled Substances Act still lists marijuana as a Schedule 1 drug, the most dangerous category.

Because of 280E, the effective tax rate for many marijuana businesses is 50% or more, according to Taylor West, deputy director of the National Cannabis Industry Association, and Henry Wykowski, a lawyer representing marijuana businesses.

The majority of businesses audited by the IRS end up settling, but Canna Care, a medical marijuana dispensary in Sacramento, is fighting the IRS’ charge that it owes nearly $875,000 in back taxes.

“You’re paying the federal government protection money in order to operate,” said Lanette Davies, who owns Canna Care with her husband, Bryan.

Davies said the IRS has offered to settle the case for $100,000, but the couple refused on the principle that 280E should not apply to them.

The IRS declined to comment or be interviewed for this article.

The inability for marijuana businesses to write off the cost of payroll, rent and other expenses creates “extremely thin profit margins,” West said.

By Jolie Lee
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