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How the Tax Code Endangers Medical Marijuana Dispensaries

The largest medical marijuana dispensary on the west coast, Harborside Health Center, may find itself in a precarious situation. Although their business is highly professional and popular within the community, federal tax law may force Harborside to close up shop. Over at The Atlantic, Conor Friedersdorf notes, “[a]t issue is whether Harborside should be able to write off expenses as any other business would, or if selling marijuana changes everything.” The point of contention is a section of the tax code “that prohibits companies from deducting most expenses if they are ‘trafficking in controlled substances’.” It’s also designed to tackle drug trafficking; however, its effect on Harborside is such that they “can’t deduct rent, payroll, health insurance or worker’s compensation insurance — deductions that are standard for many other industries.” According to the IRS, Harborside can only deduct the cost of buying marijuana and the cost of alternative health care services.

The problem is the grey area netherworld in which medicinal use for cannabis exists. Medical marijuana dispensaries operate in compliance with state law, but in violation of federal drug laws. With state and federal law at odds here, what, if anything, can be done to save Harborside? The potential fix comes in the form of a bill initiated by Congressman Pete Stark “that would change the federal tax code to allow medical marijuana dispensaries to make the same deductions as normal businesses.” Although it’s unclear whether President Obama would sign the bill into law, Friedersdorf underscores the importance of allowing dispensaries to write off typical business expenses by pointing out the likely consequences of Harborside shutting down:

Suddenly 83,000 people, or a substantial fraction at the very least, will start obtaining medical marijuana either from a less scrupulous dispensary (Harborside is known even at the IRS for keeping accurate books) or one of the East Bay’s many marijuana dealers. They’ll no longer know the potency of what they’re getting or its origin. The City of Oakland and the United States government will each take in a lot less tax revenue. And the decades-long, obviously unwinnable War on Drugs won’t be any closer to being won. That doesn’t seem like an optimal outcome from a policy perspective, does it? If only the federal government would stop trying to regulate intrastate commerce in this area we’d all be better off.

Additionally, another possible consequence of Harborside’s closing could be an uptick of criminal activity in the area. A recent RAND Corporation study found, “[w]hen medical marijuana dispensaries close, crime rises in the surrounding neighborhood when compared to areas where dispensaries are allowed to remain open….”

This is not to say that the closing of Harborside or other dispensaries will definitively lead to an increase in crime, but its just another potential consequence of failing to remedy a tax code threatening to shut down Harborside and other medical marijuana dispensaries.  Instead of displacing some 80,000 patients, depriving the city of much needed tax revenue, and potentially increasing criminal activity, either Congress or the IRS need to clarify and reform this section of the tax code to provide clear and consistent guidelines allowing dispensaries to deduct standard business expenses.

UPDATE: The RAND Corporation has pulled the study cited above.

Image via flickr user KayVee.INC

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