A new post on Bankrate.com highlights the need to synchronize statewide legalization efforts with rigorous federal-level civic engagement. Traditionally, when a city or state decriminalizes or otherwise sanctions the consumption, possession and/or distribution of marijuana, the federal government actively intervenes with lawsuits and/or targeted raids. As the aforementioned post clarifies, there are far broader and far more passive ways in which federal intervention can occur, namely through provisions of the tax code.
Section 280E of the IRS code disallows deductions incurred in a trade or business of trafficking in controlled substances that are prohibited by federal law or the law of any state in which the taxpayer conducts the business. In 2001, The United States Supreme Court had concluded that no exception in the Controlled Substances Act exists for marijuana that is medically necessary. (Refer to U.S. v. Oakland Cannabis Buyers’ Co-op, 532 U.S. 483.)
Since marijuana falls within the federal Controlled Substances Act, Section 280E disallows deductions incurred in a trade or business of trafficking in marijuana, even if such trade or business is permitted under state law. The IRS has no discretionary authority to allow tax deductions to the clinic. It would take an act of Congress to change the laws.
Without claiming a deduction for the costs of doing business, the tax burden on the clinic’s gross revenue is too high. The taxes and the expenses exceed income, meaning the place goes to pot. The states sense the millions that are at stake, but they can’t override the feds as they weed out the clinics. [Emphasis added]
Moral of the story: so long as the federal tax code remains unchanged, access to the marijuana market will be artificially narrow, and the powers of the states – and the will of the voters therein – will continue to be subverted.