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Medicinal Marijuana in California May Be Cashed

The medicinal marijuana industry in California is taking some big hits this week.

The Associated Press is reporting that federal prosecutors have just sent letters to marijuana dispensaries in California with a warning that the dispensaries must be shut down within 45 days or their operators could face federal criminal charges. Letter recipients were told they cannot justify the legality of operations based upon California’s 15-year-old medical marijuana law.

Essentially, federal prosecutors’ position is that the Supremacy Clause applies. California’s four U.S. attorneys plan to hold a news conference tomorrow.

If that isn’t big enough of a blow, the IRS is also examining medicinal marijuana dispensaries. Earlier this week, the Bay Citizen reported that Harborside Health Center, known as the largest medicinal marijuana dispensary on the West Coast, may be facing a rather large tax bill.

The law at issue, section 280E of the Internal Revenue Code, is easy to understand. Essentially, the law says that taxpayers engaged in the trade or business of trafficking in controlled substances cannot claim typical business expense deductions such as payroll, rent, health insurance, and worker’s compensation. Without these deductions, medicinal marijuana dispensaries would have to pay tax on gross income, rather than net income.

As already noted, medicinal marijuana is legal under California law. Section 208E, however, applies not only to the law of the state in which the business occurs, but also to federal law. The Controlled Substances Act considers marijuana as a controlled substance.

The IRS has disallowed Harborside Health Center’s deductions for the dispensary’s 2007 and 2008 tax years, resulting in an additional tax liability of $2.4 million. Harborside is taking the IRS examination changes to IRS Appeals. Harborside is currently under audit for its 2009 and 2010 tax years.

East Bay Congressman Pete Stark introduced a bill earlier this year so that section 280E would no longer apply to medical marijuana dispensaries. Considering today’s announcement of the possible shutdown of medicinal marijuana dispensaries in California, I highly doubt the bill will make progress anytime soon.

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