The Tax on Grass
A recent tax development during the middle of July 2015, is that the current Chairman of the California Board of Equalization (which is the California sales tax enforcement agency) has announced further enforce the California sales tax on medical marijuana sellers. According to the California Board of Equalization, of the 935 active medical sellers, approximately 28% of them do not have even a seller’s permit. After all marijuana, even though sold for medical purposes (which the California electorate approved back in 1996, and also legal in 23 other states, including DC and the 4 states – Alaska, Colorado, Oregon, Washington State, that fully legalized marijuana) is still “tangible personal property” and thusly still subject to California sales taxes. However that is not the bad news about marijuana, the worse are the tax consequences under federal tax law.
The problem with marijuana sellers (be it for medical or legal recreational use) is that under federal law it is still an illegal drug and there a provision under federal tax code that prohibits any deduction in the trade or business of the “ trafficking in controlled substances”, which includes marijuana. However, the way this provision (for those tax geeks out there it is Section 280E of the federal tax code) has been interpreted and applied to other provisions and/or sections of the federal tax code, is that any inventory costs related to the purchase of marijuana inventory (in those states that is allows for medical and/or recreational use) is still deductible against the gross receipts of the marijuana seller. The problem is that the provision of the federal tax code that bars deductions in the trade or business of the “trafficking in controlled substances” is really the operating expenses (e.g. rent, salaries/wages, legal fees, office supplies, etc) for the marijuana seller.
Therefore, there could be not only huge penalties and/or taxes for the medical (or if appropriate the recreational) marijuana for not registering with the California Board of Equalization a seller’s permit (or any other state for such equivalent therein), but also the marijuana seller must be concise of the fact that he/she cannot claim any operating expenses for his/her marijuana operations, until Congress decides not to list marijuana as a “controlled substance”.
So if you are planning to be (or currently are) a marijuana seller in a state that allows for medical and/or recreational use, please let us know at firstname.lastname@example.org, and we would be more than happy to tell further of the tax consequences as a marijuana seller.