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California medical marijuana tax woes grow after IRS ruling

Yesterday we discussed the huge payroll tax debt issues that many marijuana medical dispensaries potentially face after the IRS decided to disallow all deductions for these businesses. The IRS' decision is based on a provision in the tax code that bans deductions based on the trafficking of controlled substances such as marijuana.

Steve DeAngelo runs one of California's largest medical marijuana dispensaries and says that the IRS ruling could put his company out of business.

"To treat us like criminals is simply wrong" DeAngelo said. "Drug kingpins and cartels don't file taxes. We do. But no business, including ours, can survive if it is taxed on its gross revenue. The IRS is trying to tax us out of existence."

Normally, businesses are allowed deductions for payroll taxes and other business expenses. The IRS decision highlights the importance of payroll tax deductions for businesses and the growing tension between state laws which allow medical marijuana dispensaries and federal laws which still consider marijuana among the most serious controlled substances.

The IRS' ruling may drive the $1.7 billion marijuana market back underground according to Keith Stroup, the founder of the marijuana advocacy group NORML.

"You know, Al Capone was taken down by the IRS, not by the FBI or the police. And I can assure you that Steve DeAngelo is no Al Capone," Stroup said.

Many California dispensaries have become alarmed by the IRS' ruling and Stroup believes that the IRS targeted Harborside first because of its size. Stroup also believes that cases will be resolved in the same manner against other California dispensaries unless there is congressional action.

In our next post we will discuss the congressional efforts that might save California business owners such as DeAngelo.

Source: MSNBC, "IRS ruling strikes fear in medical marijuana industry," Al Olson, Oct. 5, 2011

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