IRS: Oakland's Largest Pot Dispensary Owes Millions

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)

Grand Jury Indicts 55 for $250 million in tax scams

Grand Jury Indicts 55 for $250 million in tax scams

Mon Oct 3, 2011 11:57am EDT

(Reuters) - A grand jury has indicted 55 people for participating in scams that tried to bilk the government out of more than $250 million in undeserved tax refunds, prosecutors in California said on Monday.

Thirty-two indictments were returned by the grand jury accusing the people of various schemes to obtain the refunds. Millions of dollars were paid out, including a check worth almost $1.2 million, the prosecutors said.

The owners of one California company were accused of making presentations that claimed customers could get tax refunds from a "secret government account" after making payments to the company and agreeing to pay a percentage of any refunds they received, the prosecutors said.

More than 400 false tax returns were filed with the IRS as a result of the scheme allegedly run by a firm called Old Quest Foundation Inc. and another 35 were filed in a scheme allegedly run by another group, De la Fuente and Ramirez and Associates.

IRS Data Show Most Millionaires Pay Taxes at Higher Rate Than Middle Class

IRS Data Show Most Millionaires Pay Taxes at Higher Rate Than Middle Class

Published September 20, 2011

FoxNews.com

President Obama and his advisers are presenting the "Buffett Rule" as the cure for an epidemic of millionaire tax scofflaws, but national statistics show millionaires by and large are paying taxes at a much higher rate than middle-class families.

And their income taxes make up a significant portion of the federal budget pie.

Data compiled by the nonpartisan Tax Policy Center show households pulling in more than $1 million pay about 29.1 percent of their income in federal taxes. By contrast, households making between $50,000 and $75,000 pay about 15 percent.

The so-called Buffett Rule has become the political centerpiece of the president's deficit-reduction program. Named after Warren Buffett, the provision would ensure people making more than $1 million a year pay taxes at a higher rate than the middle class.

The president proposed the rule after Buffett complained he was paying taxes at a lower rate than his secretary. Democrats said he's not the only one -- according to Senate Democratic Leader Harry Reid's office, 22,000 people who make over $1 million a year pay taxes at a rate of less than 15 percent. According to the IRS, nearly 1,500 households reporting more than $1 million in income paid no federal income taxes in 2009.

That's out of about 236,000 returns for income above $1 million, most of which belong to households paying taxes at a higher rate. And, as would be expected, they contribute a disproportionate share of tax toward federal coffers.

IRS statistics for tax year 2009 show the millionaires -- who make up a fraction of a percent of all taxpayers -- contributed more than 20 percent of total federal income tax revenue. That's about $180 billion in taxes from millionaires, according to number-crunching from the National Taxpayers Union.

The National Taxpayers Union also found that in 2008 the top 1 percent of American taxpayers paid 38 percent of collections for personal federal income tax while they represented 20 percent of all income.

For those wealthy Americans paying taxes at a seemingly low rate, it could be because they earn income overseas or because a large part of annual income is from investments. Though corporate profits are taxed at 35 percent, in the form of capital gains and dividends they are taxed at 15 percent. Senate testimony in May from the Tax Foundation also showed that for taxpayers making more than $200,000 a year, their salary income made up just 20 percent of national salary income. Much more came from business income.

In total, the Obama deficit-reduction package would seek to raise taxes, mostly on high-income households, by $1.5 trillion over the next decade.

About half of that is from letting the Bush tax cuts expire for households making more than $250,000. Other changes would strip tax breaks for oil and gas companies and other benefits.

The White House would not say how much might be raised from the Buffett Rule or how it would be implemented.

But the Buffett Rule quickly became the rallying cry for the president's plan. In an email to supporters sent Monday night, the campaign urged voters to get the president's back on the plan.

"This proposal makes sure millionaires and billionaires share the responsibility for reducing the deficit," the email said. "The other side is already saying it's 'class warfare' -- that's their rhetorical smokescreen for providing millionaires and billionaires special treatment."

But Republican Indiana Gov. Mitch Daniels told Fox News the president's proposal appeared to be "purposely divisive."

"As a practical matter, it's a loser," he said, describing the plan as "hair-of-the-dog economics."

"You know people that have had way too much of something they shouldn't and there's always somebody who says have another one, it'll make you feel better -- it just doesn't work any better in this case," Daniels said.

Louisiana Republican Gov. Bobby Jindal said the problem is spending and described the president's proposal as not serious.

"He doesn't get it," Jindal told Fox News.

The president's plan was presented as a proposal to the bipartisan "super committee" trying to find at least $1.2 trillion in deficit savings by Thanksgiving.

The plan includes more than just tax hikes. It covers $580 billion in cuts to entitlement and other federal programs, including to Medicare and Medicaid. The president also claimed $1.1 trillion in savings from winding down the wars in Iraq and Afghanistan -- a claim that has been dismissed as a budgetary gimmick in the past. If the war savings are counted alongside interest savings and the cuts Congress enacted in August, the president's plan is worth than $4 trillion over the next decade.

While Republicans slammed the proposal as divisive and unworkable, some Democrats applauded the president for asking the wealthy to pay more while shielding Medicare seniors and other entitlement program beneficiaries from more severe cutbacks.

"With the wealthiest people in this country becoming wealthier and large corporations enjoying huge profits, it is time that we end tax breaks for the wealthy and large corporations and have them pay their fair share," Sen. Bernie Sanders, I-Vt., said in a statement.

"We call on Congress to immediately pass the president's proposal for job-creating investments, to ask the wealthy to start paying their fair share, to focus on the true causes of our long-term deficits, to reject any cuts to Medicaid or Social Security or Medicare benefits, and to stop scapegoating federal and postal employees and retirees for problems they did not cause," AFL-CIO president Richard Trumka said.

The Associated Press contributed to this report.

California Governor Brown Signs Internet Sales Tax Settlement

California Governor Brown Signs Internet Sales Tax Settlement

By Mark Muntean

On Friday, September 23, 2011, California Governor Jerry Brown signed into law a negotiated settlement Amazon.com Inc., which postpones a new California law requiring Amazon to collect sales tax on online Internet transactions in California.  Amazon, for its part, agreed to drop its initiative effort to repeal the online tax.    The settlement is expected to cost California $200 million. 

Amazon also agreed to begin collection of California sales taxes in September 2012, unless Congress acts to establish a national standard in connection with the applicability of sales taxes to Internet sales.   Amazon’s focus is not on Congress since legal experts believe California’s Internet sales tax law violated the U.S. Constitution.  

In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a 1992 U.S. Supreme Court decision, the Supreme Court held that sales were not subject to incidence of sales tax unless the seller had “nexus” with the tax state.  Previously, Amazon fired its affiliates in California to avoid any nexus with California.  The Commerce Clause of the U.S. Constitution gives the federal government power to regulate interstate commerce and prohibits certain state actions, such as applying sales and use taxes that interfere with trade among the states.  In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US 753 (1967), it was held that a business whose only contacts with the taxing state are by mail or by common carrier lacks the "substantial nexus" required under the Dormant Commerce Clause.  The Commerce Clause is a frequent source of frustration for California as it reaches out to tax someone.

Thus, while the state cannot tax sales by businesses with no nexus with the state, Congress does have the power to regulate interstate sales.  However, it is difficult to see how the parties expect Congress to enact a federal standard for Internet sales taxes in a presidential election year.

Amazon also promised to hire 10,000 workers in California and spend $500 million on California distribution centers.  Several trade associations and retailers supported the bill since the new tax law results in a significant loss in sales to over 10,000 merchants, many of which were small businesses. 

Brentwood Couple Sentenced for State Income Tax Evasion and Concealing Property

Brentwood, California Couple Sentenced for State Income Tax
by Mark Muntean

A Brentwood, California man pleaded no contest to one felony count of California state income tax evasion and one felony count of concealing property with intent to evade the collection of tax.  His wife pleaded no contest to one misdemeanor count of state income tax evasion.

John Meza, 37, was sentenced to serve 120 days in county jail; pay us nearly $163,000 restitution representing the unpaid tax, interest, penalties, and cost of investigation; and serve three years formal probation. Jessica Meza, 40, was sentenced to serve two years probation; 200 community service hours; and is jointly and severally liable for the restitution with John Meza.

The couple immediately provided us a check for $50,000 towards the restitution.

According to court documents, the couple owned and operated seven sandwich shops and a newspaper distribution business in the Bay Area. They failed to file state income tax returns for the 2004 through 2007 tax years and failed to report more than $800,000 in taxable income. The California Franchise Tax Board (“FTB”) initiated the investigation after the couple failed to respond to numerous notices demanding they file their delinquent California personal income tax returns.

In addition, in 2006, the couple opened a bank account using false social security numbers and deposited checks into this account in order to evade or defeat collection of their personal income tax due.  This was a very big mistake.  Taxpayers that have not filed tax returns can come forward and working through an attorney can often resolve their issues with the FTB.  However, here the taxpayer took an extra step to hide money from the FTB.  Taxpayers should never ever under any circumstances take that extra step to hide money.  These are treated as badges of dishonesty and always end up badly. 

Contra Costa County Superior Court Judge William Kolin handed down the sentence in Department 18 of the Walnut Creek Superior Court. The case was prosecuted by Contra Costa County Deputy District Attorney Stacey Grassini.

The FTB criminal investigation program identifies and investigates cases of tax evasion and tax fraud to encourage compliance with California income tax laws and maintain the public trust.