Tax Laws Bleed Legal Marijuana Businesses
A law to prevent drug dealers from getting tax breaks is now taking a huge portion from legal shops in Colorado and Washington. Legal marijuana sales in Colorado and Washington State have grossed billions, but legal owners will see little of that thanks to a federal law meant to punish illegal drug users.
In 2015, Colorado sold nearly $1 billion worth of marijuana and is estimated to produce $135 million in tax revenue. Washington is expected to pull in around $1 billion in revenue from sales taxes between 2015 and 2019.
Despite being Federally illegal on the, these businesses must file taxes to the Internal Revenue Service—and they may pay as much as 70 percent in taxes to the federal government.
280E Tax Code
In 1982 Congress passed Section 280E of the tax code, which states that businesses that are “trafficking in controlled substances” may not utilize many tax deductions and credits available to other businesses, like deducting rent and employee-related expenses. The average small business owner spends 30% on taxes, less than half of a marijuana business owner. Marijuana businesses would be at risk of tax-evasion charges if they didn’t pay proper federal taxes. Marijuana businesses have to register and incorporate in states and that puts them on the IRS radar. Just because the business is illegal according to federal law doesn’t mean the IRS doesn’t expect them to pay federal taxes, since the states are allowing them to operate and getting tax revenue as well.
The effects of the tax code on business is far reaching, a typical business model has to be changed to take into consideration the out of the ordinary cost of business. Things like inventory management, retail sq. footage and overall design.
“Everything from how the stores laid out to merchandising to inventory management, [the tax code] dictates how the business operates,” Eisenberg a Seattle based dispensary owner said. He said he’d love to open a boutique marijuana store with a large floor space and stations for concentrate, edibles, specific growers and more, but the tax burden makes the unreasonable.
Dispensary owners want to see businesses be allowed to deal with banks, since marijuana companies are being forced to deal in cash because federally insured banks won’t open accounts with them (Its against Federal money laundering regulations).