Sacramento Pot Shop Refuses to Negotiate with IRS

It has been a while since I have seen news about the tax problems of medical marijuana dispensaries.  The one I saw today involves a Sacramento-based pot shop by the name of Canna Care.  The IRS has imposed an $873,000 penalty under a 30-year-old tax code known as “280E.”  The IRS is refusing to allow standard business expenses such as those incurred for payroll and rent.  This has always been the sticking point.

What makes this story a little different is that Canna Care is not the least bit interested in negotiating with the IRS.  The IRS has expressed a willingness to settle for $100,000 but apparently this pot shop has morals and will not pay a dime until ordered by a judge to do so in tax court.  After all, Canna Care is known as an “evangelical medical marijuana provider.”  Well, this is according to the Sacramento Bee article.

When I visited the Canna Care website ( I could not verify this unique designation.  In fact, many of the links on the website don’t work at all.  And probably the most frustrating is a video thumbnail of “the first commercial in history to be played on … a major US television station” (which I have to believe is really meant to read “the first medical marijuana commercial in history…”).  This “private video” can only be viewed with a password.  I suppose if I knew we would be going to court, I would want my client to keep quiet and minimize their internet footprint for a while too.

Colorado Can't Tax Pot Sales Without Voter Approval

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On November 6th, Colorado voters approved a constitutional amendment (Amendment 64) legalizing recreational marijuana.  Over 54 percent of voters were in favor of the constitutional amendment, but it would be interesting to know how many of those people are “non-smokers.”  I would guess that a majority of those who voted in favor of legalization were more interested in the “fringe benefits” than they were in getting high with their friends.  For example, now the state’s law enforcement personnel will be able to spend more time on violent crimes rather than small-time drug possession.  Also, now the state will be able to collect an estimated $40 million per year from a 15% tax on marijuana sales.  Or will it?

The Taxpayer Bill of Rights in Colorado prohibits any kind of new tax burden without voter approval.  According to Colorado Attorney General John Suthers, the tax must first be approved by the state legislature and then the voting public.  Perhaps the best way to avoid this tax problem would have been to include precise tax language directly in the pot legalization bill, but for whatever reason, that didn’t happen.

Voters Have Spoken: They Like Their Pot and Soda

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Medical marijuana has been legal in California and other states for some time now, but Washington and Colorado are the first states to legalize recreational pot.  Do they realize the tax problems that they will face in the future?  The problems that medical marijuana dispensaries in California have faced time and time again are likely the same problems in store for Washington and Colorado, only on a larger scale.  At the root of the controversy is the fact that the federal government still classifies marijuana as a controlled substance and they will not always turn their head the other way just because the people have passed a state ballot measure.  One of the ways this emerges in the tax world is the “pot shops” are not allowed the same business expenses that other businesses would be allowed, so their tax bills are higher.  At least in California, the IRS has made it clear that there will be no tax relief for pot shops as long as the federal government still sees the drug as a controlled substance.

The Soda

Would a soda tax help reduce obesity?  We won’t know now — soda tax measures were shot down in the California cities of El Monte and Richmond.  Of course soda companies are filthy rich, and they spent an estimated $3.5 million to dissuade voters from passing tax increases on sugary beverages in these two towns.  As with any controversy, there are often attractive arguments to be made on both sides, and the groups with the most money and power are normally better able to get their message out.  At least that’s how the proponents of the soda tax see it.  The opposition (“Big Soda”) sees a soda tax as harmful to small businesses and not the right way to fight obesity.

Governors Seek Marijuana Reclassification

In October the federal government took California medical marijuana dispensaries by storm, intent on shutting them down permanently. You may recall that even the IRS was involved in this operation, hitting them with audits and seemingly creating tax problems out of thin air.

The problem in California is not unlike the problems encountered in other states that have legalized medical marijuana. The state laws clash with the federal governments classification of the drug. The US Drug Enforcement Administration (DEA) still classifies marijuana as a controlled substance with no accepted medical use (Schedule I). But two governors are trying to get that changed.

Gov. Christine Gregoire of Washington and Gov. Lincoln Chafee of Rhode Island have filed a petition asking the DEA to reclassify marijuana as a Schedule II drug (one with some legitimate medicinal properties). The DEA has not yet responded to this petition, but has rejected prior petitions to reclassify the drug.

Pot Permits Suspended in Sacramento

Tonight the Sacramento City Council voted to halt issuance of any new medical marijuana dispensary permits until the dust settles from the federal crackdown. But don’t take this to mean that the city will be surrendering to the bullying of the feds, not as long as there is revenue to be collected from the pot shops. In fact, tonight’s vote actually extended the deadline to submit new permit applications until May 2012 and it extended the final day that dispensaries can operate without a permit from January 2012 to August 2012. Read full story here.

Landlords are on Frontlines of Pot War

Federal prosecutors are shutting down California pot dispensaries with the efficiency of a nuclear bomb.

Instead of chasing around the dispensary operators, they are focusing on those who lease commercial spaces to them. Even though California legalized marijuana for medicinal purposes 15 years ago, the federal government still considers it a controlled substance. And landowners are subject to federal law which prohibits any owner, lessee, agent, employee, occupant, or mortgagee, to knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, any place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance. Title 21 U.S.C. Section 856(a).

And what are the consequences for violating 856(a)?  Forfeiture of the property to the federal government. Furthermore, violating federal law is a felony and carries a penalty of up to 40 years in prison. Each new forfeiture action serves as a strong deterrent for other property owners around the state.  Full story here.

CA Medical Pot Crackdown: AG Gives Her Two Cents

A few weeks ago, Washington bullies swept in on California’s medical marijuana playground, intent on shutting them down permanently.  Today in comes Big Sister to see if she can break up the fight a bit.  CA Attorney General, Kamala Harris, issued a statement warning the feds to show some restraint:

an overly broad federal enforcement campaign will make it more difficult for legitimate patients to access physician-recommended medicine in California

The question is whether a focused approach will be sufficient to curb the “proliferation of gangs and criminal enterprises that seek to exploit the medical marijuana law.”

Feds Say CA Pot Shops are Just Fronts for Illegal Trafficking

Today the US Attorneys announced that they are cracking down on marijuana dispensaries in California, not because they are illegal under federal law (although they are) or because they are not paying their taxes.  No, the real problem is that many of them, as they are currently operating, are illegal under California law.

Federal prosecutors have evidence that many of the pot dispensary storefronts are just that —fronts for illegal drug trafficking operations. They say that these operations have reached levels that were never intended when medical pot was legalized back in 1996.

Here’s what makes them illegal:

  • large-scale commercial operations
  • drug trafficking across state lines
  • owners reaping huge profits
  • non-medical usage of product

Not all pot shops in California fit this description, and that’s why only certain shops are being targeted by the feds. But today’s announcement was certainly meant to shake things up in an industry that was never meant to become an industry.

Feds Threaten to Shut Down CA Pot Shops

It seems the recent IRS audit of Harborside Health Centerwas only foreshadowing of something bigger. The tax problems were the least of their worries.

Several California marijuana dispensaries received love letters this week from the US Attorneys Office demanding that they shut down in 45 days or face criminal charges. Pot dispensaries operate legally under California law, but they are in violation of federal drug laws, and we all know which law prevails in situations like these.

Letters also went out to landlords graciously giving them the option of evicting their pot-selling tenants or risk seizure of their property by the federal government. Those who have followed this power struggle for the last few years are not surprised by what is going on; they see it as the United States simply following through on its threats.

Those who operate pot dispensaries understand that only a limited segment of the population will accept the position that they provide an indispensable service to society. Instead they focus on all the tax dollars that they have generated over the years. Even so, I think they’re wasting their breath. The feds have sent a very strong and clear message lately, through multiple agencies, including the FBIIRSDEA, even the EPA.

See full AP story here.

There should be more information tomorrow because the US attorneys are supposed to make a special announcement.

Weed Wars in Oakland, CA

Oakland’s Harborside pot dispensary has a nifty slogan: “Out of the Shadows, Into the Light.” It’s actually a pretty good description of what the Internal Revenue Service has done with their tax returns recently.

Ever since California legalized marijuana for medical purposes, pot shops here are thriving . . . but not if the IRS can help it. The IRS recently audited the 2007 and 2008 returns of Oakland’s Harborside Health Center and hit them with a $2.4 million tax bill. It sounds like a lot of money, but Harborside’s is a huge dispensary with 84 full-time employees and gross revenues of $22 million a year. And what really inflated the tax bill is the IRS’s disallowance of their business expenses. Well, the IRS did allow them to deduct the cost of “medicine” purchased (that’s what Harborside calls it on their website), but nothing more. The IRS’s position is based on an old rule forbidding business expense deductions for operations that traffic in illegal drugs.

I have no idea why the IRS would question the legitimacy of this joint knowing they are the official 1st place winner of the coveted 2011 High Times Medical Cannabis Cup.

Harborside is fighting the audit and publicizing their good deeds, like the fact that they are pumping all kinds of money into the local economy. On Friday, September 30th, Harborside made a ceremony out of its $360,000 city tax payment as if it were some kind of voluntary contribution.

** I can’t take credit for the clever title of this blog post. The Discovery Channel will be airing a reality show based on the Harborside drama called “Weed Wars.”