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IRS to tax California medical marijuana dispensaries of business?

It is common for small Orange County business to experience payroll tax debt issues. Sometimes these businesses are forced to make hard choices to stay open and the resulting tax debt burden may be overwhelming. An experienced California tax law attorney can help California business owners deal with the IRS and determine whether the IRS properly calculated a business' tax debt obligation.

A new IRS ruling has caused a major payroll tax headache for many in California's burgeoning medical marijuana community. The ruling is based on Section 280E of the tax code which bans tax deductions based on trafficking drugs such as marijuana. This means that medical marijuana dispensaries such as California's Harborside Health Center are facing huge payroll tax liabilities arising out of disallowed deductions.

"I see only two outcomes here," said Steve DeAngelo, director and CEO of Oakland's Harborside Health Center. "Either this IRS assessment has to change or we go out of business. There really isn't a middle ground for us."

Harborside is one of the country's largest dispensaries and serves just under 100,000 patients and employs 84 people full time. The dispensary pays over $3.5 million in taxes to the IRS, Oakland and California every year but the new IRS rule means that Harborside will face a new $2 million tax liability for 2007 and 2008.

"We have no complaint about the taxes we pay," DeAngelo said. "We are doing our part. All we ask is that we be treated like any other business enterprise."

Unfortunately Harborside is not just like any other business enterprise. Although California and 15 other states have legalized medical marijuana, the drug is still a controlled substance under the Controlled Substances Act and therefore federally banned. In our next post we will discuss the further implications of the recent IRS ruling on California business owners.

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

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