Though it is commonly said that nothing is certain but death and taxes, this doesn’t stop people from trying to cheat both. In the cannabis industry, the uncertainty of the current status of federal and state laws only magnifies the issue and many marijuana business owners fail to file returns and pay taxes due for years at a time. But as the industry is slowly finding out, failing to pay your tax liabilities usually doesn’t payoff in the long run.
On the federal side, the Internal Revenue Service assesses huge tax liabilities through Section 280E even though cannabis remains illegal under federal law. The proper way to determine those taxes is still being battled out in well-publicized Tax Court cases. However, there is movement on the state side as well, with lawsuits being filed in several states with regulated (and taxed) marijuana systems in attempts to avoid paying state and local taxes altogether.
Recently, a medical marijuana dispensary owner in California tried to argue that since the dispensary is organized as a collective under state law, it is not technically selling marijuana, but instead accepting “equitable contributions” from patients who cultivate the marijuana collectively. Consequently, since no sales have occurred, no sales tax can be collected. The California district court didn’t buy this argument and instead ruled that the dispensary owed the city of San Jose $767,058 in taxes and fees due to its failure to pay the city’s Marijuana Business Tax since 2012.
In Washington State, another dispensary owner took a different approach and sued the state in federal court claiming that because he was under federal prosecution, he could not be forced to pay state and local marijuana taxes without waiving his Fifth Amendment right against self-incrimination. The lawsuit challenged the state’s authority to tax marijuana businesses in conflict of federal law where sales of marijuana are illegal. That case is currently on appeal and set for court this September.
In Colorado, an attorney filed a similar lawsuit against the state’s governor and the mayor of Denver, also claiming that paying special marijuana taxes levied by the state violate an individual’s right against self-incrimination for dealing in an illegal controlled substance under federal law. The plaintiffs in this lawsuit went one step further and argued that the state of Colorado is knowingly participating in illegal money laundering by collecting taxes from the marijuana businesses.
The potential tax revenue from marijuana businesses is a big incentive for states to legalize medical and recreational marijuana. Reports estimate that total marijuana tax revenue in 2016 will grow to over $180 million for Colorado and over $130 million for Washington, and project that California could gross over $640 million per year at a 15% excise tax rate. There is a lot at stake for both states and marijuana businesses and thus the fight over taxes is unlikely to die down anytime soon.
For current marijuana business owners, the fight is oftentimes more personal. If you don’t file tax returns, an audit will be painful and may even result in your business going under if you can’t afford to pay back taxes. Bankruptcy courts do not allow marijuana businesses to file for bankruptcy to avoid tax liabilities by reorganizing their businesses or liquidating their assets. This means those taxes will stay with the business and may even follow you personally if you ultimately decide to shut it down. Some taxes, like state sales and payroll taxes, are always the responsibility of the business owners, which means that if liabilities are assessed, the state can come after your personal accounts and assets to collect. Tax audits in the cannabis industry often result in hundreds of thousands of dollars in tax liabilities even when tax returns are filed with the best intentions. Shoddy record keeping and reliance on poor tax advice are not excuses for failure to pay taxes due.
Finally, don’t think that just because you haven’t been audited for last year’s return you are in the clear. Government agencies tend to be years behind on reviewing returns and they generally will look several years back once an audit has begun. With interest and penalties accruing all the while, the longer you wait, the bigger your tax problem grows. If you are striving to operate a legally compliant marijuana businesses, it is crucial you properly record, compute, and timely pay your taxes on the local, state, and federal level. This is not an area to cut corners as the costs you save now will be pennies compared to what you’ll end up paying later. If you need tax help, get it now, as tax problems definitely do not improve with age.