IRS Approach Poses New Threat to California Marijuana Dispensaries

It may be the IRS and not the DEA that puts the Marin Alliance for Medical Marijuana out of business. Alliance founder Lynette Shaw was stunned when the IRS audited her 2008 and 2009 tax returns and disallowed the foundation's business deductions, then demanded millions of dollars in back taxes.

The IRS is taking advantage of § 280E of the federal tax code, which states that no business deductions will be allowed for companies "trafficking in controlled substances".

Medical marijuana has been legal in California since the passage of Proposition 214 in 1996, but according to federal law, marijuana is classified as a schedule I controlled substance. Schedule I narcotics are not considered to be legitimate for medical use.

The Marin Independent Journal quotes Shaw as asserting that "every dispensary in the nation, past, present and future is dead if this is upheld." She did not reveal the exact dollar amount requested by the IRS, but said, "It's a staggering sum, millions and millions."

A spokesman for the IRS declined to comment on the matter to the Journal. The spokesman stated that to confirm or deny that an individual or business is facing an audit would be a violation of disclosure and privacy laws.

Similarly, the IRS declined to comment on its audit of the Bay Area's largest marijuana dispensary, Oakland's Harborside Club. Harborside executive director Steve DeAngelo, however, has been more forthcoming, announcing in December that his organization was being audited and that their policy was to be "transparent and compliant" in its interactions with the federal government, "I don't have anything to hide from the IRS," he said.

Harborside's chief financial officer, Luigi Zamarra doubtless speaks for many in the medical marijuana community when he says that § 280E is out of date and has no bearing on today's dispensaries, "This law was enacted a long time ago before there was a medical cannabis industry, and it was written as a back door punishment for thug-like drug dealers. We would like a full exemption."