Over the last few years, states have considered additional legalization of recreational and medical marijuana and now it’s Missouri’s turn. Missouri medical marijuana advocates are currently petitioning state courts to allow their initiative on the November ballot. The Missouri legislature recently defeated legislation to legalize medical marijuana. Currently, the Missouri Secretary of State has approved petition language for the November 2016 election. Twenty-five states have already legalized medical marijuana, and four states, plus the District of Columbia, have fully legalized recreational marijuana use. This trend towards legalization of marijuana will continue. In a recent Gallup poll conducted in October of 2015, 51 percent of Americans support legal recreational marijuana usage.
If this measure passes, is it worth opening a Medical Marijuana Dispensary in 2017? The answer is maybe. The biggest problem that medical marijuana faces is that the federal government categorizes marijuana as a Schedule I controlled substance. Illegal drugs are defined as controlled substances within the meaning of Schedules I and II of the Controlled Substances Act, the trafficking in which is prohibited by either federal law or the state law for the state in which the trade or business is conducted. Marijuana is a Schedule I controlled substance for this purpose, even if it’s recommended by a physician as appropriate to benefit the user’s health. Earlier this month, the Drug Enforcement Administration (DEA) announced that marijuana will remain a Schedule I drug and continue to be “illegal” for any purpose under the Controlled Substance Act.
There are significant tax consequences of opening a medical marijuana dispensary. The IRS Section 280E denies legal dispensaries tax deductions because marijuana remains a federally controlled substance. The Internal Revenue Code bars those selling illegal substances from deducting related expenses on their federal income taxes. What does this mean? Effectively the federal income tax rate can be 50 percent since the dispensary is not allowed to take any business deductions associated with the trade or business of trafficking illegal drugs. Essentially, these marijuana dispensaries are paying tax on 100 percent of their gross revenue (not net revenue). However, on January 23, 2015, the IRS released an Internal Revenue Service memorandum regarding how a taxpayer trafficking a Schedule I or Schedule II controlled substance determines costs of goods sold for the purposes of IRC 280E.
There is currently a proposed Marijuana Tax Equity Act which would de-federalize marijuana policy and create a framework for the federal taxation of cannabis. Ending the Federal Marijuana Prohibition Act would remove the DEA’s authority over marijuana and allow states to choose whether or not to allow marijuana for medicinal or recreational use. The Marijuana Tax Equity Act would create a federal excise tax on marijuana. Together, these bills would provide a system of regulation and taxation for marijuana in states where it is legal.
The Ending Federal Marijuana Prohibition Act follows Colorado’s model of regulating marijuana like alcohol by:
- Removing marijuana from the Controlled Substances Act;
- Transferring the Drug Enforcement Administration’s authority to regulate marijuana to a newly renamed Bureau of Alcohol, Tobacco, Marijuana and Firearms, which will be tasked with regulating marijuana as it currently does alcohol;
- Requiring marijuana producers to purchase a permit, as commercial alcohol producers do, of which the proceeds would offset the cost of federal oversight;
- Ensuring federal law distinguishes between individuals who grow marijuana for personal use and those involved in commercial sale and distribution; and
- States could choose to continue to prohibit marijuana production or use in their states and it would remain illegal to transport marijuana to a state where it is prohibited.
- The Marijuana Tax Equity Act would create the following framework:
- This bill imposes a 50 percent excise tax on the first sale of marijuana, from the producer to the next stage of production, usually the processor;
- Similar to the rules within the alcohol and tobacco tax provisions, an occupational tax will be imposed on those operating in marijuana, with producers, importers and manufacturers facing an occupational tax of $1,000/a year and any other person engaged in the business facing an annual tax of $500/a year;
- Civil penalties will be imposed for failure to comply with taxing duties. Criminal penalties will be assessed for intentional efforts to defraud the taxing authorities; and
- The bill also requires the IRS to produce a study of the industry after two years, and every five years after that, and to issue recommendations to Congress to continue improving the administration of the tax.
This is just the federal tax, not the state tax that will be imposed on the sale of marijuana.
Additionally, in the past, banks have refused to open bank accounts for marijuana dispensaries. Since 2011, the IRS has required employers to deposit withheld income taxes through the Electronic Federal Tax Payment System (EFTPS). However, you cannot pay withholding tax through the EFTPS unless you have a bank account established. Taxpayers can pay employee withholding taxes in cash; however, there is a 10 percent penalty and only certain IRS offices accept cash payments. Under the law, the penalty may be waived by the IRS if a taxpayer can show that the failure to pay electronically was due to reasonable cause and not willful neglect.
In 2015, AllGreen, LLC, a marijuana dispensary in Colorado, filed a claim against the IRS in Tax Court when the IRS imposed a 10 percent penalty against the company for paying its employment taxes in cash. AllGreen requested the penalty be waived for reasonable cause and the IRS denied the request. Before the Tax Court ruled on the matter and shortly after AllGreen filed its case in the Tax Court, the IRS conceded that AllGreen was not responsible for the penalty. Some banks are starting to work with marijuana dispensaries, albeit slowly.
The IRS has now issued some guidance for its employees on how to evaluate future claims of reasonable cause for what’s called “unbanked taxpayers”. Though, you will have to request the penalty be waived every time. To qualify for this relief, the business must submit the following: (i) A signed statement explaining the attempts to open a bank account. The statement does not need to be in any particular form, but it should clearly identify the taxpayer’s name, address and taxpayer identification number; and (ii) Collaborating documentation that would demonstrate the business’ inability to open a bank account, including bank correspondence, denied account applications, etc. The documentation should show at least one attempt to obtain a bank account. The IRS says that the taxpayer can rely on the same documentation for a period for 24 months from the time it became unable to obtain banking services.
Winning the ballot box in the November election will not end the debate on the status of marijuana and how to handle marijuana dispensaries. Please call our office if you are interested in learning more about starting a medical marijuana business in Missouri.
