IRS:
Oakland's Largest Pot Dispensary Owes Millions
Harborside
Health Center loses high-stakes tax battle; advocates say ruling could cripple
the industry.-- By Zusha Elinson on October 3, 2011 - 4:36 p.m. PDT The Bay Citizen (http://s.tt/13qbg)
Oakland’s Harborside Health Center — the largest
medical marijuana dispensary on the West Coast — lost the first round in a
high-stakes battle with the Internal Revenue Service that could spell trouble
for the booming pot industry.
In a letter to Harborside late last week, the IRS
ruled that the dispensary cannot deduct standard business expenses such as
payroll and rent, because it is involved in what the agency terms "the
trafficking of controlled substances," said Luigi Zamarra, Harborside’s chief
financial officer.
“We can't live with the conclusions that the IRS has
come to and neither can the industry,” Zamarra said in an interview Monday. If
the IRS ultimately prevails, “we would close our doors and go away because the
business model wouldn’t work,” he said.
Zamarra said Harborside would appeal the ruling. An
IRS spokesman declined to comment.
The ruling highlights the conflict between federal
and state authorities over medical marijuana, which is legal under state law
but illegal under federal law. As Oakland and other cities have looked to
dispensaries as sources for much-needed tax revenue, the federal government has
toughened its stance toward the state’s marijuana industry.
Harborside — which has more 83,000 members and raked
in $22 million at its Oakland dispensary last year — received a letter from the
IRS late last week saying that the dispensary owed $2.5 million in taxes from
2007 and 2008. That’s $2 million more than Harborside paid for those tax years,
Zamarra said.
The difference: The IRS insists that medical
marijuana dispensaries must obey a section of tax code that prohibits companies
from deducting most expenses if they are “trafficking in controlled
substances.” [Section 280(e) of the Internal Revenue Code (“IRC”)] was designed
as a tool for fighting drug trafficking.
Zamarra said that the IRS letter states that
Harborside can’t deduct rent, payroll, health insurance or worker’s
compensation insurance — deductions that are standard for many other
industries. The only two things the IRS says the dispensary can deduct are the
cost of buying marijuana and the cost of alternative health care services such
as yoga, he said.
For instance, if Harborside bought marijuana for
$60, sold it for $100 and used the entire $40 in income to pay salaries, rent
and other expenses, the IRS would still demand that Harborside pay 35 percent
tax on the $40, Zamarra said.
Richard Lee, who runs a downtown Oakland dispensary
and is president of Oaksterdam University, which provides training to budding
potrepreneurs, said the ruling would be a serious blow to the industry when
added to increased local taxes and regular state and federal taxes.
The IRS began auditing Harboriside two years ago, as
The Bay Citizen first reported. Last week's decision came after months of
apprehensive waiting, Zamarra said.
Although the IRS ruled against Harborside on the [IRC
Section 280(e)] issue, Zamarra said that that the auditors aren’t questioning
whether the dispensary’s books are clean. Other dispensaries, like New Age
Healing Collective in San Jose, have landed in hot water for allegedly cooking
their books to hide the rivers of cash flowing in.
“Harborside Health Center is very proud that they
are not questioning our gross income or the details of our expenses,” said
Zamarra. “The IRS has accepted our accounting.”
On the same day that it announced its loss to the
IRS, Harborside also announced that it had handed over the last installment of
its $1,081,450 tax bill to the city of Oakland, which now collects a 5 percent
tax on marijuana dispensaries.
East Bay Congressman Pete Stark introduced a bill
this spring that would change the federal tax code to allow medical marijuana
dispensaries to make the same deductions as normal businesses.
"Our tax code undercuts legal medical marijuana
dispensaries by preventing them from taking all the deductions allowed for
other small businesses,” Stark said at the time.
But with the federal opposition to marijuana
dispensaries, it’s unclear whether the president would sign the bill.
“The Obama administration is really on the
counterattack right now, so I’m not sure what will happen,” Oaksterdam's Lee
said.
Lee declined to comment on whether the IRS had
raised the same issues with his dispensary. But Lee said Harborside’s battle
with the IRS shows that the medical marijuana industry is making progress.
“At least it's better to be bankrupted than
incarcerated,” he said.
Source: The Bay Citizen (http://s.tt/13qbg)
