Tax Problems Facing Marijuana Dispensaries, This Time From the City of Los Angeles

The LA times published an interesting article about marijuana dispensaries operating in Los Angeles.  The article focuses on the interesting fact that as Los Angeles tries to clamp down on the number of marijuana dispensaries operating in Los Angeles by making them follow Proposition D requirements, more than 450 medical marijuana shops filed business tax renewals with the Office of Finance.  This number is more than three times as many stores than what is estimated to be allowed to stay open.  So while local lawmakers are troubled by the number of medical marijuana shops that still exist in Los Angeles, the Office of Finance has no problem cashing in on all the taxes being collected from them.  The article states that Los Angeles collected roughly $2.1 million from medical marijuana tax renewals this year, an Office of Finance staffer told a City Council committee Monday.

The interesting thing about this article is that City Council is upset that these people are paying business taxes because now the City cannot use tax evasion statutes as a method to shut them down.   It seems to me that these people are trying to comply with the tax code so whether or not they comply with Proposition D is not the tax-collecting agencies' business.   The City is so upset at all the business tax renewals, but has no problem collecting the roughly $2.1 million in revenues from medical marijuana shops.  Nor should they have any problem with it - Council members would be forfeiting their jobs if they took the position that the illegal businesses should be issued refunds.

In reality, the juxtaposition between collecting taxes from someone while turning a blind eye to the source of the money is hardly a new story.  This happens every time the IRS comes in to count the drug money after the DEA makes a big bust.  Even illegal businesses have to pay taxes.  Nonetheless, you don't usually see the opposite scenario - e.g., the DEA swooping in after the IRS audits a tax return - as the City Council members seem to support here.   The sharing of tax information between taxing and law enforcement agencies is usually a one-way street.  In non-tax cases, the Federal tax privacy law, IRC Section 6103(i)(1), provides that the IRS can share return information with another federal investigative agency only with a court order.

The government relies on taxes to operate and it would inhibit people from filing true tax returns if they thought that the information would be made public or would be shared with other government agencies.  The privacy of tax return information was also a qualified privilege under Federal common law before Congress enacted Section 6103.  In this situation, it would behoove whoever is advocating and lobbying on behalf of the dispensaries to not only be familiar with the medical marijuana laws and business laws, but also tax law and policy.

As an attorney who understands criminal law and tax law, I can tell you that medical marijuana dispensaries get no breaks that other businesses get under the state tax code.  They are treated as illegal drug trafficking activities under the California Revenue and Taxation Code. So what does this mean? 

It means both the Feds and California will disallow all the business expenses of a marijuana dispensary that a normal business is entitled to deduct.  As a result, marijuana dispensaries will be taxed on their gross receipts for income tax purposes. California's tax code is basically "monkey see, monkey do," adopting the Federal tax code almost rule for rule.  Under Federal law, if a business violated public policy or is illegal, then it cannot take advantage of deductions or credits under the tax code.  Because federal tax law deems these activities as illegal drug trafficking activities, so does California.  These rules are completely screwed up because they encourage these types of businesses to operate under the radar for tax purposes.   Fortunately, it is not an entirely slam dunk case for the tax authorities because there are some legitimate tax "loopholes."  There are ways to operate so as to legitimately minimize these tax burdens.

Much of this is covered in a recent article I wrote on the Taxation Of Medical Marijuana Dispensaries.  I suggest any marijuana dispensary contact an experienced tax attorney who knows the marijuana dispensary tax rules inside and out.  There are ways to follow the tax rules and not have to pay taxes on the gross receipts of the dispensary.  Feel free to contact the Wilson Tax Law Group, if you have any questions. Our firm has significant experience addressing tax problems facing marijuana dispensaries.