More Trouble for Marijuana Dispensaries from the IRS

Back in 2007, the Tax Court ruled that a non-profit that supplied medical marijuana to terminally ill patients could not deduct business expenses related to that activity but could deduct the expenses related to their counseling and caregiving activities. It appears that the IRS has now started to audit medical marijuana dispensaries throughout California.

The Marin Independent Journal is reporting that a Fairfax, California medical marijuana dispensary has been audited and told that they will not be able to deduct any business expenses. The case is in the audit stage, so this case will percolate for some time. (Hat Tip: TaxProfBlog)

Medical marijuana is legal under California law. However, it is illegal under federal law. While the Obama Administration pledged to not go after medical marijuana dispensaries, it appears the IRS hasn’t heard the news. And this is likely to pose a real problem for the dispensaries.

In the case the Tax Court previously decided, the non-profit was providing end-of-life counseling:

By conducting its recurring discussion groups, regularly distributing food and hygiene supplies, advertising and making available the services of personal counselors, coordinating social events and field trips, hosting educational classes, and providing other social services, petitioner’s caregiving business stood on its own, separate and apart from petitioner’s provision of medical marijuana.

But a medical marijuana dispensary likely has one purpose: distributing marijuana to those who medically need the drug. While a San Francisco lawyer in the newspaper article I referenced suggests that counseling users on which type of marijuana to use is another type of business, I think this will be a much tougher sell to the Tax Court. The problem is this is all related to the act of selling and distributing (a.k.a. trafficking) marijuana.

It may take some time for this issue to reach the Tax Court; the case is apparently just in the audit stage. There will likely be an appeal before it heads to court. That said, I do expect this case to head to Tax Court in about a year, with a ruling in a couple of years.


One Response to “More Trouble for Marijuana Dispensaries from the IRS”

  1. […] audit of a medical marijuana dispensary called Harborside in San Francisco. I’ve reported on the case before (most recently in March). It appears that Harborside received the results of its audit of 2007 and 2008 at the hands of the […]