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IRS Cracks Down on Pot Clubs

March 14, 2011

The Internal Revenue Service has been getting tough in its audits of California medical marijuana dispensaries, denying them the ability to deduct many common business expenses.

The operator of one dispensary, the Marin Alliance for Medical Marijuana, told the Marin Independent Journal last week that the IRS is disallowing deductions such as hiring employees, buying supplies, and renting office space because of Section 280E of the Tax Code, which prohibits deductions for any business that traffics in illegal substances. The owner complained that the IRS is demanding millions of dollars in back taxes, which would effectively force her out of business.

A San Francisco attorney told the newspaper that he has been handling similar cases with about a dozen different marijuana dispensaries now. The IRS refused to confirm the audits, citing taxpayer privacy protections.

However, the IRS crackdown is coming despite a 2007 U.S. Tax Court ruling in which medical marijuana dispensaries were allowed to deduct expenses, except those specifically associated with distributing marijuana.

Separately, Los Angeles voters approved a ballot measure last week that would levy a 5 percent business tax on the gross receipts of medical marijuana dispensaries, an all-new high so to speak from the previous level of 0.59 percent. So while LA will be getting more tax revenue from the marijuana dispensaries for a while, the IRS may end up shutting them down altogether.

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