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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

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