The federal prohibition of cannabis creates many problems for those who work in state-legal cannabis industries around the country, whether they are part of a medical or adult use market. One of the biggest problems affecting all cannabis businesses is a lack of banking services – less than 30% of all businesses working in the legal marijuana industry are actually able to obtain a bank account of any kind – which leaves the majority of the industry dealing in cash only.
Since the IRS is required to take any form of legal tender, this generally means that come tax time, they are sifting their way through extremely large sums of cash from these businesses. In the past, not as many medical cannabis businesses would file taxes due to the conflict with state and federal laws, but as the years have gone by more and more have been complying with all state laws and filing their taxes – a way to prove the legitimacy of the growing industry.
Unfortunately, these businesses can be taxed at up to 70% because they can’t take normal tax cuts – like writing off expenses – that normal businesses would. This has led to more cash than ever coming into the IRS, especially in states with legally operating recreational dispensaries like Colorado, Washington, Oregon and Alaska. In Oregon alone, there has already been $43 million paid in cash to the IRS, who doesn’t have the manpower needed to quickly and efficiently count all the money.
In response to this they have set up two locations – one in Denver, Colorado and one in Seattle, Washington – where they will be specifically counting cash tax payments made by cannabis businesses in these states. These locations opened up on April 10th and will remain open through the 18th, the last day the IRS is receiving on-time payments for this year’s taxes. Unfortunately, this will not be enough to cover all the businesses, and only makes a significant difference in the states where these locations have been set up.
“I’m happy about anything that smoothes relations with the IRS, but practically speaking, this doesn’t really do anything,”
said Todd Arkley, a Seattle-based accountant and board member of The Cannabis Alliance.
“It’s nice that the IRS is opening this window, but it’s more of a gesture to me than anything.”
Along with setting up these money counting locations, the IRS has also partnered with OfficialPayments.com and a company called PayNearMe to allow both businesses and individuals to make cash payments to the IRS at some 7-Eleven locations in 34 states. Sadly these payments can only be made in increments of up to $1,000 per day – and in the amounts that some cannabis businesses owe the IRS it could take years to make the full payment for a single tax year. So while they are working to try and find a solution, this particular solution is only really helpful to smaller businesses and individuals.
Hopefully, the IRS sees a new found importance for banking services in the cannabis industry. These businesses are already going above and beyond to comply with their state’s regulations, and even pay extremely high federal income taxes – so the least the government could do is allow these businesses access to banks, which would not only make the industry safer all around, but would benefit them as well.
Originally published: The Marijuana Times
An Internal Revenue Service agent based out of Seattle has been charged with soliciting bribes and accepting payment from a local cannabis business owner in the greater Seattle metro area.
Paul Hurley, 42, was charged in U.S. District Court Monday following his alleged actions of asking for $20,000 in cash from a store owner in exchange for giving lenience in an upcoming tax audit.
It’s been reported that the business owner in question did not even ask for leniency being sent his way.
Prosecutors assigned to the case say that Hurley presented the business owner a tax bill for 2013 and 2014 that was just north of $290,000 but reported that Hurley had ‘saved’ the businessman more than $1 million. In exchange for lowering the tax bill, the agent prompted the $20,000 from the presently unknown cannabis business owner.
Cannabis business operate in a very difficult business environment when it comes to taxes. Standard business expenses are not allowed as deductions on federal tax returns – while their gross revenues are taxed.
Authorities were contacted on Monday, after the second successful exchange of cash between the two parties was recorded. Hurley has been an IRS agent since 2009 and will be charged with a total of 3 counts of bribery related crimes. If convicted, he faces up to a $250,000 fine and 15 years in prison.
Hurley was present in court Monday and released on his own warrant pending future hearings. The FBI and the Treasury Inspector General for Tax Administration are still investigating, we will post updates as they arrive.
Retail marijuana was recently legalized by voters in Oregon and Alaska. This means that in the near future, a new group of potrepreneurs will be frantically preparing to apply for a license to operate a retailer or producer business in the newly budding cannabis industry. Unfortunately once up and running, some of those businesses may be in for a rude awakening in the form of unexpected taxes.
In 1982, a federal tax code amendment, 280E, was enacted to prevent drug lords from being able to write off certain expenses for business involved with any Schedule I or II drugs. Currently, against much opposition, marijuana is listed in the company of heroin and methamphetamine as a Schedule I drug. Now, the same tax code is being used against marijuana dispensaries that are operating legally under state law.
Under Section 280E, marijuana businesses are permitted to write off business expenses relating to the “costs of the product.” Examples of these items would be anything involved in cultivating the marijuana plants, like soil and fertilizer. These items may be written off as deductibles. Items classified as tools used for “costs of selling” are not tax deductible. Examples of these items would be advertising, rent, utilities, and in some cases employee salaries.
According to USA Today, some dispensary businesses end up paying upwards of seventy percent in income tax, even when the business is operating at a loss because many business expenses are not deductible. Other small businesses are exempt from paying federal income tax if the business does not turn a profit.
One business owner in Colorado learned about this tax code the hard way. In an interview, Mitch Woolhiser, owner of Northern Lights Cannabis Co., a retail marijuana dispensary near Denver told USA Today,
“It’s almost like they want us to fail. Everything I do is aimed at keeping us in business because if I don’t, then (the feds) win. And I’m not going to let them win.”
In 2010, Woolhiser opened Northern Lights Cannabis Co. selling medical marijuana. Then in 2014, Colorado became the first state to legalize recreational marijuana, and Northern Lights Cannabis Co. was awarded a license to sell both medical and recreational marijuana. His business operated at a loss last year, and instead of being exempt from paying federal income tax, as a business selling any other goods would have been, he ended up paying nearly $20,000 to the IRS. He fears going out of business if things do not change.
This law will have to be amended in order to support growth in the cannabis industry. No movement has been made in the direction of change, at this time, but it is likely that in the next five to ten years, as more states legalize recreational marijuana, many federal laws will be amended.
photo credit: Washington Post