We always knew that this battle would go back and forth, and last week’s decision by the US Tax Court regarding whether or not collectives are allowed to deduct the costs of their marijuana medicine as an expense of doing business.
In a confusing little twist of logic came as Judge Diane L Krupa sided with the Internal Revenue Service’s decision to disallow any and all business expenses that had once been claimed by San Francisco’s marijuana collective…the Vaper room. As the vapor room closed its doors for the final time last week after a protracted eight year run, in the grateful San Francisco neighborhood that hosted their presence. This forced closure was based on the action and threats from US attorney Melinda Haag, who in her confused sense of right and wrong has devised her own set of guidelines under which collectives can and cannot operate.
The current tax issues that the vapor room collective are facing stems from the filed tax returns for 2004 and 2005; these returns included what is known as a schedule C-section. It is within this schedule C-section, but the vapor room allowed itself expenses totaling $297,000. Judge Krupa indicated that all of the itemized expenses, including such payouts for wages, marijuana supplies and advertising all were unacceptable as deductions under “section 280e” of the IRS tax code, which states “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 a controlled substance… Which is prohibited by federal law.” To which US attorney Haag stated that she did not care how the California voters felt about their pet project of medical marijuana.
A tax expert told A.P. that Kroupa’s decision is “very important” and will have “a major impact” on medical marijuana suppliers. How major? Last year Lynnette Shaw, founder of the Marin Alliance for Medical Marijuana, said “every dispensary in the nation, past, present and future, is dead if this [disallowance of business expenses] is upheld.” (source)
The owner of the vapor room went on to argue noting that a 2007 Tax Court decision called “champ” or Californians helping to alleviate medical problems allowed for the deduction of any expenses that were found to be related “to the counseling and/or caregiving services” regardless of whether or not the establishment also acted as a marijuana collective, the vapor room’s attorney argued that the majority of his clients expenses were likewise not related to any “trafficking in controlled substances.” The judge out right rejected this argument, stating that the vapor room was ostensibly a street corner pot dealer, regardless of whether or not those weed sales were accompanied by a 10 min. massage or some random advice and I go to class.
Just as a means of keeping everyone involved in this case on their toes… And scratching their head. Judge Krupa after stating all the reasons that the vapor room could not deduct the cost of goods sold went on to explain how the vapor room should still be allowed to subtract his “costs of goods sold.” Of course his normal “COGS” was primarily the bulk of his marijuana purchases for the resale in his collective. As with any normal business your “cost of goods sold” is generally allowed to be subtracted from your gross receipts, in order to determine the taxpayers IRS responsibility. As the vapor room room reported its costs of goods sold totaled a little under $1 million for the tax year of 2004… And approximately 2.7 million for the 2005 tax year. When looking at his total income that $3.8 million encompassed approximately 90% of his businesses gross revenue. Declaring that the vapor rooms tax records had been unverified and as such were not to be trusted, Judge Krupa decided that the vapor rooms ”COGS” was more likely in the neighborhood of 75% of their total operating expense for both years.
As many tax experts huddle to discuss exactly what Judge Krupa’s decision actually means to the marijuana collectives that are legal and operate openly in 17 states around the country, several tax experts claimed that this was a major victory against the oppressive Internal Revenue Service, and their overbearing reach to shut down industries they find offensive.