On Wednesday we posted a blog discussing the recent IRS ruling against medical marijuana dispensaries’ ability to take deductions for payroll, expenses, etc. Now it appears that the DOJ has begun cracking down on these facilities as well. Federal prosecutors have begun warning pot dispensaries in California that they must shut down in 45 days or face criminal charges and confiscation of their property, even if they are operating legally under the state’s medical marijuana laws. According to U.S. Attorney Laura Duffy of San Diego, “under United States law, a dispensary’s operations involving sales and distribution of marijuana are illegal and subject to criminal prosecution and civil enforcement actions. Real and personal property involved in such operations are subject to seizure by and forfeiture to the United States … regardless of the purported purpose of the dispensary.”
It appears that the Obama administration has backtracked from their earlier directive ordering agency lawyers not to prosecute individuals who use or prescribe medical marijuana in states that have legalized the drug for that purpose. The DOJ has begun issuing policy letters explaining that marijuana dispensaries and licensed growers in states with medical marijuana laws could face prosecution for violating federal drug and money-laundering laws.
Of course, just because the government does not want you selling marijuana, this does not mean that they do not want their taxes. Approximately 20 states have illegal drug stamp taxes on their books. These laws require those in possession of marijuana and other illegal drugs to purchase tax stamps and affix them to their products. Failure to do so can lead to additional penalties, usually in the form of a hefty fine. Of course, very few drug dealers even know these laws exist and even fewer (probably none) actually pay the tax. Thus, the real purpose is to pile on the fines when the dealer is caught.
Likewise, the IRS has long held that gross income includes income from the sale of illegal drugs. In Vasta v. Commissioner the IRS assessed a multimillion dollar deficiency against a convicted narcotics dealer for failing to include $6.8 million attributable to the sale of cocaine in his gross income. This was upheld even though all the money and cocaine was seized by the government at the time of his arrest. As detailed in the previous post, under Section 280E of the Internal Revenue Code, no loss deduction is available when dealing in illegal drugs. Thus the dealer lost all his assets and got hit with a hefty tax bill.
All of this just goes to show that the tax laws do not always work in a way that most people would expect. It would be perfectly logical to assume that there is no tax due on illegal drugs, after all they are illegal; and if the money has been seized, hasn’t the government already been paid anyway? Apparently the answer is no. Remember what they got Al Capone for? Tax evasion. It is no secret that the government promotes its idea of public policy through the tax code, and frequently this can be both a blessing and a curse.
Everyone starting a new business should consult with an experienced tax attorney in order to understand how the tax code applies to their situation. Failure to understand your tax obligations can get you in trouble and will probably cost a lot more than a consultation fee. Of course, it is doubtful that many drug dealers will go for this option.