Of course this is profoundly
wrong and the inevitable road to the outright evil of using governmental coercive
powers without meaningful oversight and or authority. It is just too easy and just too easily for
the weak minded to rationalize.
The fact remains that the IRS has
been given broad coercive power mostly on the premise that one has to scare tax
evaders to gain their cooperation. If
that were such a good idea, one must ask why we receive scant taxes from drug
dealers. As happens with any petty
bureaucracy, they target the weak and the unlucky. This is wrong. Particularly since individuals have made off
with as much funds as can be collected from the audiences targeted put
together.
Far too much of our civilization
is suffering from the tyranny of gigantism.
Countering this has not even begun while we are now experiencing the difficulties.
Without question it is becoming the
worst problem we are facing. Class two
talent given giant power can only drive awful results.
The Other IRS Scandal: Outright War Against Marijuana Dispensaries
May 18, 2013 |
Clarence Walker
“Should the IRS campaign be successful, it will … eliminate tens of
thousands of well paying jobs, [and] destroy hundreds of millions of dollars of
tax revenue.”
Dispensaries providing marijuana to doctor-approved patients operate in
a number of states, but they are under assault by the federal government.
SWAT-style raids by the DEA and finger-wagging press conferences by grim-faced
federal prosecutors may garner greater attention, but the assault on medical
marijuana providers extends to other branches of the government as well, and
moves by the Internal Revenue Service (IRS) to eliminate dispensaries’ ability
to take standard business deductions are another very painful arrow in the
federal quiver.
The IRS employs Section 280E, a 1982 addition to the tax code that was a response to a drug dealer’s successful effort to claim his yacht, weapons purchases, and even illicit bribes as business expenses. Under 280E, individuals involved in the illicit sale of controlled substances — including marijuana, even medical marijuana in states where it is legal — cannot claim standard business expenses on their federal taxes.
“The 280E provision which requires certain businesses to pay taxes on
their gross income, as opposed to their net income, is aimed at shutting down
illicit drug operations, not state-legal medical marijuana dispensaries,” said
Kris Hermes, spokesman for the medical marijuana defense group Americans
for Safe Access.” Nonetheless, the Obama Administration is using Section
280E to push these local and state licensed facilities out of business.”
The provision can be used to great effect. Oakland ’s Harborside Health Center was hit with a $2 million IRS
assessment in 2011 after the tax agency employed Section 280E against. Harborside is fighting that assessment, even as it continues to try to fend off federal prosecutors’ attempts to shut it down by seizing the properties it leases. Similarly, when the feds raided Richard Lee’s Oaksterdam University
that same year, it wasn’t just DEA, but also IRS agents who stormed the premises. Lee said it was because of a 280E-related audit.
The attacks on Harborside and Oaksterdam were part of an IRS campaign of aggressive audits using 280E to deny legitimate business expenses, such as rent, payroll, and all other necessary business expenses. These denials result in astronomical back tax bills for the affected dispensaries, threatening their viability — and patients’ access to their medicine.
“Should the IRS campaign be successful; it will throw millions of patients back in to the hands of street dealers; eliminate tens of thousands of well paying jobs, destroy hundreds of millions of dollars of tax revenue; enrich the criminal underground; and endanger the safety of communities in the 17 medical cannabis states,” said Harborside’s Steve DeAngelo as he announced the 280E Reform Project to
begin to fight back.
It’s going to be an uphill battle. In the last Congress, Rep. Pete
Stark (D-CA) introduced House
Bill 1985, the Small Business Tax Equity Act, designed to end the 280E
problem for medical marijuana businesses, but it went to the Republican-controlled House Ways and
Means Committee, where it was never heard from again.
Still, something needs to happen, said Betty Aldworth, deputy director
of the National
Cannabis Industry Association, which this year is working with members of
Congress to try to find a fix for the 280E problem.
“When Section 280E was created in the 1980s, no one imagined
state-legal marijuana providers,” Aldworth told the Chronicle. “Whether or not
it is part of a larger effort to curtail the development of regulated models
for providing marijuana, which is a model that is clearly preferable to leaving
this popular and relatively safe medicine (or adult product) in the underground
market, these onerous tax rates have severely hampered the development of the
regulated market.”
It’s a brake on the overall economy, Aldworth said.
“Not only has it resulted in stymieing job development, but it also curtails other economic activity such as reinvestment in business and the rippling positive effects of that spending,” she argued. “And in many cases, it has created a tax burden that is simply unbearable: many providers have had to close their doors and lay off their staffs because the tax burden was simply too great.”
Because of this unintended application of 280E, medical marijuana
providers are paying overall taxes at a rate two to three times those of other
small businesses, Aldworth said.
“It’s important to note that just as they want to apply for licenses,
follow regulations, and otherwise participate in the legal business community,
state-legal marijuana providers also want to pay their fair share of taxes,”
she pointed out. “Most small businesses pay an effective tax rate of between
13% and 27% on net income, according to the Small Business Administration.
State-legal marijuana providers pay an average effective tax rate of 65-80%. An
industry that can provide thousands of jobs is being held back by these crazy
tax rates.”
While the lobbyists look to Congress for a fix, one academic tax law
expert thinks he has hit upon a novel solution, but not everyone agrees.
Benjamin Leff, a professor at American University’s Washington College
of Law, raised eyebrows at a Harvard University seminar this spring when he
presented his report,Tax Planning For Marijuana Dealers, where he suggested that
dispensaries get around 280E by registering with the IRS as tax-exempt social
welfare organizations, known as 501(c)(3)s or 501(c)(4)s.
The IRS has already ruled that medical marijuana providers can be exempt
under 501(c)(3) because its “public policy doctrine” does not allow charitable
organizations to have purposes contrary to law, but in the paper, Leff argued
that “a state-sanctioned marijuana seller could qualify as tax-exempt under
501(c)(4), since the public policy doctrine only applies to charities, and
501(c)(4) organizations are not charities.”
The organization would have to be operated to improve the social and
economic conditions of a neighborhood blighted by crime or poverty, by
providing job training, employment opportunities, and improved business
conditions for commercial development in the neighborhood, just like many
existing community economic development corporations that run businesses.
“When taxes get too high, you can drive compliant dispensaries out of
business,” Leff told the Chronicle.
Americans for Safe Access’ Hermes would agree with that, but he’s not
so sure about Leff’s idea.
“The concept of medical marijuana dispensaries registering with the
federal government as a 501(c)(4) in order to sidestep section 280E is novel
and may be hypothetically valid,” he said. “However, the IRS will refuse to
grant tax-exempt status to a business that the agency believes is violating
federal law. Perhaps, it would be possible for a dispensary to obtain 501(c)(4)
status under false pretenses, but such status would not very likely withstand
an IRS audit.”
There are better ways, he said.
“A much more realistic and sensible approach — pending a change to the
federal classification of marijuana for medical use — is to amend the tax code
to exclude state-lawful medical marijuana businesses from Section 280E,” Hermes
recommended. “This is the kind of legislation that Congress should pass in
order to allow states to implement their own medical marijuana laws, without
undue interference by the federal government.”
“I agree with everything he said,” Leff replied. “But it’s not just the
Obama administration that is using 280E this way. The Supreme Court has held
that there is no exception to the Controlled Substances Act for state-level
legal marijuana sales, and since 280E makes references to Schedule I controlled
substances, it applies to legal marijuana unless Congress changes the law. I
totally agree that Congress should amend 280E to exempt marijuana selling that
is legal under state law. Congress could also amend the Controlled
Substances Act to remove marijuana from it, which would probably also make
sense,” he added.
Whether it is by act of Congress, internal policy shifts, or creative
thinking by law school professors, some way has to be found to exempt
state-permitted medical marijuana providers from the clutches of 280E and its
punitive tax burden aimed at dope dealers, or there may not be any medical
marijuana providers.
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