Federal regulations to undermine legal pot? | AspenTimes.com

Federal regulations to undermine legal pot?

Katie Kuntz
Rocky Mountain PBS

Tuesday's elections meant sweeping victories for the marijuana industry nationally, but in Colorado, the outcome was more of a mixed bag.

Alaska, Oregon and Washington, D.C., legalized recreational marijuana, while only some communities in Colorado chose to expand businesses. Voters in Lakewood, Manitou Springs and Federal Heights passed initiatives allowing retail marijuana shops to operate, while voters in Palmer Lake and Ramah in El Paso County voted against recreational sales. Voters in Palisade in Mesa County also apparently narrowly rejected recreational pot sales.

Nearly 100 new businesses received their licenses from Colorado regulators Oct. 1.

Yet many of these new, voter-approved pot shops may find it difficult to survive a drug war-era tax code that already threatens many established businesses.

Under the code, the federal government stands to make more money from the sale of marijuana than those legally selling it. And that could be enough to shut down many shops.

"It's almost like they want us to fail," said Mitch Woolhiser, while walking through his store called Northern Lights Natural Rx in Edgewater. "Everything I do is aimed at keeping us in business, because if I don't, then (the feds) win. And I'm not going to let them win."

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Woolhiser believes the federal government is actively seeking to undermine his business.

Woolhiser first opened shop in 2010, selling medical marijuana. He started selling recreational pot when it became legal in Colorado at the start of this year. Last year, his business didn't earn a profit. Had he been selling anything but cannabis, he would not have owed federal income tax, as he ended up with a loss.

PUNITIVE TAX LAW

Instead, he ended up paying close to $20,000 to the IRS because of a 1980s tax code called 280E.

"I believe that the feds extend the drug war through 280E," said Jordan Cornelius, a Denver accountant who has worked with Woolhiser and many other marijuana companies in Colorado. "If (the federal government) can't put them out of business legally when voters are mandating these businesses to move forward, it's very easy to put them out of business financially."

Whether the government is actively enforcing the punitive code in an effort to undermine the legal marijuana business remains unclear. The Justice Department, Drug Enforcement Administration and Internal Revenue Service declined comment.

However, an IRS spokesperson provided a 2010 letter written in response to several lawmakers in Colorado, Massachusetts, Arizona and California who had asked the IRS to stop enforcing the tax code in states that legalized the sale of medical marijuana. The IRS letter pointed out that only Congress could make that change.

"The result you seek would require the Congress to amend either the Internal Revenue Code or the Controlled Substance Act," the IRS letter said.

Though multiple members of Congress received the letter, there has been little effort to amend the code.

CAN'T DEDUCT EXPENSES

Instead, the federal government collects taxes on what it considers an illegal drug because the Supreme Court ruled more than 50 years ago that everyone has to pay taxes — even those who make their money illegally.

In 1982, Congress amended the U.S. tax code to include 280E, which says businesses selling a Schedule I or II drug — such as marijuana, heroin, methamphetamine or cocaine — cannot deduct all of their regular business expenses.

The rule means that the "costs of the product," including the soil and fertilizer used to grow plants, are deductible. But the "costs of selling," such as advertising, rent and utilities — even salaries for employees — are not deductible.

"If it made sense, I would feel better about following it," said Rob Corry, Denver attorney and marijuana advocate. "I don't see why production is deductible — they are still producing marijuana."

But that quirk in the tax code has helped many cannabis companies stay in business in Colorado. Medical marijuana stores were required to grow their own product, and therefore had some associated deductions.

As of Oct. 1, cannabis companies are no longer required to grow the products they sell. But without growing, many may soon find that they will have few, if any, business deductions when filing federal taxes next April.

"A lot of people think that the marijuana industry is just a license to print money," said Taylor West, deputy director of the National Cannabis Industry Association. "And it's just not the case."

West works for an association of more than 750 cannabis-related businesses across the United States, and says that 280E results in her clients paying more than 70 percent of their profits in taxes to the federal government.

Sometimes, the rates are far higher than that.

"A lot of times, instead of paying a tax rate that should be 30 to 40 percent, they are paying rates between 80 or 90 percent," Cornelius said. "I even have a client right now that is paying more than 100 percent effective tax rate."

Mac Clouse, a University of Denver finance professor who studies the industry, said the status quo creates an inherent and perhaps fatal conflict.

"The problem is that we have passed laws that allowed these medical marijuana and recreational marijuana companies to do business," Clouse said. "But we have all these other laws, tax laws, federal laws that make it incredibly difficult if not utterly impossible to survive."

The Aspen Times brings you this report in partnership with Rocky Mountain PBS I-News. Learn more at http://www.rmpbs.org/news. Contact Katie Kuntz at katiekuntz@rmpbs.org