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When I posted a story a week ago suggesting that Fullerton should consider opening itself up to medical marijuana dispensaries in an organized and proper way, I started off the story saying that “cities across California are backing down and rolling over when it comes to Administration pressure against medical marijuana dispensaries, closing them down and refusing to license new ones, denying the citizenry the benefits of this law.”
I just didn’t realize that it would happen this quickly.
The Los Angeles City Council voted 14-0 today to ban medical marijuana dispensaries — leaving patients dependent on the drug for pain relief and appetite stimulation in the lurch. It also left the door open for the self-proclaimed libertarian majority on Fullerton’s City Council to declare the city open to a decent number of well-regulated and lawful dispensaries, in a well-planned and profitable fashion, should it so choose.
The new L.A. law is draconian. As apparently reluctant supporter Councilman Paul Koretz said, “we have shut off almost every way that a normal person can get access to marijuana,” adding “it will be a ban until otherwise noted.”
The LA Times reports:
Under the ban, each of the 762 dispensaries that have registered with the city will be sent a letter ordering them to shut down immediately. Those that don’t comply may face legal action from the city.
Medical marijuana activists who had packed the council chambers jeered when the vote came down. More than a dozen Los Angeles Police Department officers were called in to quell them.
Under the ban, medical patients and their caregivers will be able to grow and share the drug in small groups of three people or less.
But the activists say most patients don’t have the time or skills to cultivate marijuana. One dispensary owner told the council that it would cost patients a minimum of $5,000 to grow marijuana at home.
If Fullerton wanted to put its budget situation in order, it could set up clean and well-lighted districts with plenty of police supervision and carefully vetted and regulated owners. It could snag a great deal of Los Angeles’s legitimate business, making substantial revenue off of both hefty business licenses and sales taxes. The people of Los Angeles will want somewhere to go — and, what do you know, the 5, 91, and 57 all pass through Fullerton. “Dispensary City” could be a monthly destination for patients — and it could be as safe as the city chose to make it. The city could listen to legitimate complaints about past practices and do a better job of it, keeping to the confines of Prop 215.
Of course, my hometown of Brea, or Santa Ana, Anaheim, Irvine, or anywhere else could do this as well. Fullerton, though, now has a council majority that identifies itself as truly libertarian, not as just economically libertarian. It’s the city that can do what must be done to make this happen — very soon, before the LA dispensaries close.
Or, Fullerton could join most of the rest of the Southland in letting people suffer and be turned into law-breakers. It’s really just a matter of philosophy — and transcending fear of the Feds.
Wow…14-0, that is a resounding vote. Was this perhaps a journey for the council to essentially start the process over perhaps? Clean house and then come up with possibly tighter regulations? I presume that they feel it has gotten out of control.
If the Fed’s really wanted to shut most of the dispensaries down, they would go after the dispensaries for income tax evasion…when you can’t get them for one reason, they will often go after for another.
Are you under the impression that no dispensaries pay income taxes?
All the more reason that a city like Fullerton can step in and do it right. It could set up its own “Infrared Light District.”
Hold on and grab a cup of coffee- this could be a long one…I am under the impression that some of them are non-profits while others have not received non-profit status with the State or the Feds. In this situation, their income is taxable. I presume that they know to report their taxable income and calculate their tax. They are likely calculating taxable income as revenue less business expenses. They then pay tax on their net…this is where the Feds can come in and have a field day…
Code Sec 280E indicates that in the case of illegal drug activity, the revenue is taxable but NO deductions are allowed. Since it is illegal on the federal level, this section likely applies to CA dispensaries as well as more traditional drug operations including street dealers. Essentially, they should be paying income tax on their REVENUE and not their NET. This is a huge deal and would likely take a lot of businesses down as they could not afford to pay general operating businesses and tax on their revenue before deductions. No deduction for rent, utilities, cost of their product, salaries, etc…zip, none, nada. I don’t know what their net profit margin is, but I have to imagine that it is less than 35%.
It is my belief, without research or stats to back up, that there are a fair number of dispensaries who are not organized as non-profits and are paying income taxes based upon their net income and not on their revenue…good for them, but likely not abiding by the law. This would mean that for a dispensary to be able to comply with Sec 280E, they would need to have free cash flow of about 35% AND, possibly even more importantly, know to have filed their tax returns on that basis. IF they have not been filing on that basis, then they would not only have to pay the back taxes (i.e. have multiple years of cash in the bank to pay the tax) AND penalties and interest.
Again, this is just my opinion. I have searched the CA Atty Gen site and really can’t find many in the Santa Ana area registered, although names can be deceiving. I don’t know that the feds will go down that road, but if they really wanted to, I think they could. If I were advising a dispensary which I am not, I would highly recommend that they go through non-profit status with the state and the IRS…even then, the IRS can go after the non-profit for other areas too and attack their non-profit status, so I would likely be advising them to reserve in cash approx 50% of their revenue (not net, top line revenue) to pay for possible back tax. This could be a huge a deal.
Disclosures (sorry):
1. The above is not advice, is general in nature and should not relied upon to make any decisions.
2. The above is worth less than you paid for it.
3. IRC Circ 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.
Correction…280E may actually allow a deduction for Cost of Goods Sold, so they would likely be required to pay tax on their gross profit margin not revenue. Complex stuff.
I think you had it right in the first place, gross revenue = net income subject to tax.
You can not stay in business if your costs and taxes are more than you can make.
I believe that COGS is allowed as it is not a deduction but rather an adjustment to revenue, or something like that…it has been affirmed in a number of cases…See Peyton v. Commissioner, T.C. Memo. 2003-146; Franklin v. Commissioner, T.C. Memo. 1993-184; Vasta v. Commissioner, T.C. Memo. 1989-531;
Very interesting. Yes, based on what you say I suppose that the IRS could come after dispensaries for not paying taxes on gross profit margin (as indicated in your follow-up comment.)
That would lead to a huge court case that would perhaps resolve the federalism issue at the heart of the case — whether the federal government’s preposterous categorization of cannabis as a Schedule 1 drug (“no medical use whatsoever”) can truly trump the state’s inherent police powers over public health, no matter how absurd the federal government’s assertion may be. I would not be too unhappy to see that go to court.
Like many things, “I would not be too unhappy to see that go to court” however no one actually would want to be the one who has to go to court to prove it!
The entire issue I believe would have to be whether it is a Sch I or II drug. The medical use argument could potentially move it to a Sch II drug, but Sec 280E also covers Sch II drugs, so it seems that marijuan would need to be moved off not only Sch I but also Sch II in order to allow the otherwise non-deductible expenses…OR, congress just changes the law, which I would not be too terribly optimistic about.
The person sued over such taxes wouldn’t have much of a choice. (Well, they could accept a plea, if offered.)
Very interesting; I’ll need to learn more about § 280E.
Interesting in deed…looks like the IRS has already started down this road with a few dispensaries. I would think that one of these would get the backing of the Med Marijuana industry to try to fight it up the chain if they had some good legal standing, which makes me think that maybe they do not have one as there seems to be quite a bit of money in the industry (arguable, I know). This is a HUGE issue for the industry…one that can take down existing businesses and has to increase prices for those who abide by the rules. A few articles and a Tax Court Decision on current 280E dispensary issues:
Marin Alliance for Medical Marijuana…http://www.forbes.com/sites/janetnovack/2012/07/13/owner-of-nations-first-marijuana-pharmacy-now-broke-and-fighting-irs/
Harborside Health Center (currently in Tax Court I believe): http://www.forbes.com/sites/kellyphillipserb/2011/10/06/irs-just-says-no-to-medical-marijuana-deductions/
Californians Helping to Alleviate Medical Problems (deductions disallowed as discussed above)…http://www.ustaxcourt.gov/InOpHistoric/champ.TC.WPD.pdf
It seems that the strategy is to separate the sale of the drug compared to the providing of counseling services…they likely have to plan ahead to that instead of on the back end. Likely best to provide in separate legal entities with backstops in place.
all mexco laugh at califronia they are so excited ti sell their weeds california are so stuiped i am laugh at u too and now mexico control america life lol
viva the drug lords! Let’s have the people with auto immune diseases ingest insect poop or other bacteria.
Or do we have to wait until after the election to re-address this. Like gay marriages.
Another med dispensary, Vapor Room Herbal Center, loses its fight at Tax Court to deduct ordinary operating expenses (not COGS though- that is still allowed). Olive, (2012) 139 TC No. 2
Looks like it is pretty consistent in the operations losing their tax fight…I hope that they are all getting some good professional advice. Seems that with a little structuring and planning they may be able to diminish/lessen the tax impact going forward, but likely not historically.
Is there an online link to the decision, TJ?
It just came out yesterday…hopefully this link works as I somewhat had to backdoor into it.
http://ustaxcourt.gov/InOpHistoric/OliveDiv.TC.WPD.pdf
Note that the previous CHAMP case (link above) seems to be the determining case. This case, Olive/Vapor Room, has over $1MM of tax due plus penalties and of course interest…huge deal for the owner especially since it was a sole prop. It is only dealing with two years also…they will do the same for subsequent years also, but that is likely outside of the tax court.
Olive did not help his case at all by apparently under-reporting revenue…at least report the correct top line even if you believe your expenses are valid.
I am more concerned about Costa Mesa Pot Shoppery:
http://epaper.ocregister.com/Repository/ml.asp?Ref=T3JhbmdlLzIwMTIvMDgvMDMjQXIwMTgwMA%3D%3D&Mode=Gif&Locale=english-skin-ocr