Medical marijuana is a complex subject. California voters passed an initiative legalizing it; the federal government says its still illegal under federal law. I’ll let the attorneys battle that one out.
However, whether medical marijuana is legal or illegal doesn’t impact the tax situation for a grower. Illegal income is just as taxable in the United States and California as legal income. And that’s where our story begins.
Edwin Hoey pleaded no contest last year to possessing and selling “hundreds of pounds of pot.” He has now been arrested on five charges of filing a false state income tax return.
Mr. Hoey’s attorney, Ben Rice, is quoted by the Central Coast Sentinel, as stating, “This gray area is very gray, very dark and it’s hard for people who want to do this exactly the way they’re supposed to…It’s hard for people to know how to do it… Hoey has paid his taxes and he’s prepared to rectify his tax statements but it’s really difficult to know how to do that.”
I hate to tell Mr. Rice, but I think he’s very wrong here. Mr. Hoey was conducting a business. It’s pretty simple: add up all your income, subtract your expenses, and you’ve got your net income. Perhaps it was hard for Mr. Hoey to include his illegal income on his tax return but it’s the law.
Mr. Rice also complained that the government is getting a second bite at the apple. But tax charges are different from drug charges—it’s not double jeopardy.
And I have even more bad news for Mr. Rice and Mr. Hoey. It’s quite possible that the IRS will take a look at this case, too. The IRS and the Franchise Tax Board (California’s state income tax agency) share information.
So if you decide to get in a business that’s in a gray area (or even one that’s over the line) do make sure to file and pay your taxes.