The rapidly growing marijuana industry has a tax problem, the New York Times reports. As more states embrace legal marijuana, shops are being forced to pay crippling federal income taxes because of a decades-old law aimed at preventing drug dealers from claiming smuggling costs and couriers as business expenses on their tax returns. Congress passed the law in 1982 after a cocaine and methamphetamine dealer in Minneapolis who had been jailed on drug charges argued in tax court that the money he spent on travel, phone calls, packaging and even a small scale should be considered tax write-offs. The provision bans tax credits and deductions from “the illegal trafficking in drugs.”
Marijuana business owners say it prevents them from deducting rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-marijuana businesses with the same earnings and costs. They say the taxes, which apply to medical and recreational sellers alike, are stunting their hiring and threatening to drive some out of business. The issue illustrates a growing chasm between the 23 states, plus the District of Columbia, that allow medical or recreational marijuana and the federal bureaucracy, which includes national forests in Colorado where possession is a federal crime, federally regulated banks that turn away marijuana businesses and the Internal Revenue Service. While federal officials have allowed states to pursue legalization, marijuana advocates say the conflict between increasingly permissive state laws and federal prohibitions is creating a morass of complications and uncertainty.