IRS auditing Oakland’s Harborside dispensary

(Bay Citizen) Clean and well lighted, Harborside has exploded in popularity with 58,000 members and regular media coverage. The dispensary brings in around $20 million in revenue each year, likely the most in the Bay Area.

The IRS audits large companies on a regular basis, but in looking at Harborside, [it's CEO Steve] DeAngelo believes the agency will be raising questions about a section of tax code known as 280e. The section, which was aimed at nabbing drug kingpins, prohibits companies from deducting any expenses if they are “trafficking in controlled substances.”

“Our contention is that what were doing is legal and not trafficking, and it’s not appropriate to apply it to us,” said DeAngelo. “This is an industry-wide issue.”

Bob McEligot, a partner at the San Francisco tax firm Calegari & Morris, explained that normal companies just pay tax on their profits after deducting expenses such as payroll and rent. But if the IRS found a medical pot dispensary to be trafficking in controlled substances, then “they would be paying on their gross income with no deductions at all,” said McEligot.

The difference could be enormous. A company the size of Harborside could be paying taxes at a rate of about 35 percent without being allowed to deduct expenses.

Harborside believes it is in the clear as they have been transparent and careful about their deductions.  They’re following the guidance of an article, “Medical Cannabis Dispensaries: Minimizing the Cost of IRC Section 280E,” which experts base partly on the case Californians Helping to Alleviate Medical Problems (CHAMP) Inc. v. Commissioner of Internal Revenue.

However, this is the federal IRS auditing a company selling federally illegal marijuana using the federal tax code.  This is the IRS that successfully took down Al Capone’s federally illegal alcohol activities using federal tax code.  I don’t at all find this coincidental to the recent announcement of a federal cannabis industries lobby – before Harborside and others can start spreading those lobbying dollars the feds are going to raid their piggy banks.  You think an eighth is expensive now, just wait until dispensaries are paying back taxes and penalties and required to pay 35% taxes on gross receipts.

I think the IRS is too late, though.  This weekend’s massive KushCon shows how much money there is in the marijuana industry.  An entire generation in the West has grown up with legal medical marijuana.  If the IRS succeeds in killing the most popular, highest profile, most professional dispensary in Oakland, sending people back to the streets and driving up prices, support for full legalization can only grow.