Shaw wouldn’t disclose the exact amount she is being ordered to pay. “It’s a staggering sum, millions and millions,” she said. She is also negotiating with the California Board of Equalization regarding sales tax that was not paid in 2005 and 2006.
As for that state sales tax, “The State of California issued the Marin Alliance for Medical Marijuana a permanent exemption from collecting sales taxes in 1997 that was reaffirmed and reissued in 2002,” Shaw said. “We were told NOT to collect sales taxes, as they did not wish to create a new category for taxing marijuana. We were never notified that our exemption had been changed. In 2008 we were contacted for the first time regarding our exemption. The state then claimed we owed them money they had told us to not charge nor collect. We are going to a trial in Sacramento on March 29 because of this unfair situation.”
The IRS disallowed the Alliance’s deductions — for buying marijuana, hiring employees, securing office space and more — based on Section 280E of the federal tax code, which says no deductions are allowed for any business “trafficking in controlled substances.”
Marijuana is considered a Schedule I controlled substance under federal law. This category of drugs is considered to have no legitimate medical uses and a high potential for abuse.
However, California voters in 1996 approved Proposition 215, which legalized the medicinal use of cannabis in the state.
“We can neither confirm nor deny there is an examination of audit of any taxpayer, because of the disclosure and privacy laws,” said Jesse Weller, an IRS spokesman who declined all further comment.
Henry Wykowski, a San Francisco attorney who represents dispensaries, said he is personally involved in more than a dozen tax audit cases, and has been consulted on several others. Wykowski said all the audits are in California.
The IRS began going over the books of Harborside Health Center in Oakland, one of the largest dispensaries in the United States, a year ago, according to director Steve DeAngelo.
Section 280E “is the major issue in the Harborside audit,” DeAngelo said.
“If the IRS were to aggressively interpret 280E, it has the potential to close down every medical cannabis dispensary in the United States,” DeAngelo said. “If you can’t deduct your rent, your payroll, licensing fees, et cetera … you’re going to be taxed out of existence.”
But Shaw said previous battles with the federal government have prepared her for this challenge. She said she plans to mount a legal defense based on the reasoning that there is “no rational basis” for classifying marijuana as a Schedule I drug.
A U.S. Tax Court judge ruled in 2007 that dispensaries can legally deduct expenses for all activities except dispensing marijuana, according to Wykowski, who worked on the case, called “Californians Helping to Alleviate Medical Problems Inc v. Commissioner of Internal Revenue.”
For example, Wykowski said dispensary employees often advise patients on which type of cannabis will best treat their symptoms. He said this constitutes counseling, not trafficking, so deducting at least part of that employee’s salary should be allowed.
“280E should not apply to us,” DeAngelo said. “It was designed for cocaine kingpins, not nonprofit community service organizations. But if it is applied to us, the IRS needs to take into account that the vast bulk of what we do is education, counseling and advocacy, not the actual handling of cannabis.”