Many pro-legalization advocates and legislators claimed legalizing marijuana would result in massive tax revenues. And while this has proven true, state officials want more.
From June 2014 to June 2015, cannabis sales soared to over $260 million in the state of Washington. State officials claim to have collected over $65 million in first-year taxes from recreational marijuana sales. In Colorado, state officials estimated that it will collect close to $100 million in taxes from the first year of recreational marijuana legalization. However, the state came short, only collecting $44 million in taxes from recreational marijuana sales, largely due to a quirk in the state’s constitution. In addition, despite legalization, some observers are suggesting not all sales are going through legal channels.
Now, the Ninth Circuit Court of Appeals has sided with the IRS in Olive v. Commissioner, by affirming the Tax Court ruling. The decision holds that marijuana dispensaries cannot deduct business expenses, and thus must pay taxes on a hundred percent of their gross income.
The Tax Court held that section 280E of the Tax Code prevents legal medical marijuana dispensaries from deducting ordinary and necessary business expenses from their taxable income. Under section 280E, such dispensaries are considered a trade or business trafficking controlled substances prohibited by law: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business consists of trafficking in controlled substances which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” Thus, the tax code denies even legal marijuana dispensaries a business expense tax deduction since marijuana remains a controlled substance under federal law. It appears the IRS is simply enforcing the tax code, and the Ninth Circuit similarly gave deference.