Conservatives are not the only ones that have been flagged by the Internal Revenue Service for further review after asking for tax-exempt status — just ask those in the marijuana industry.
While many Americans first learned of the IRS’s scrutiny of political organizations with the discovery that several groups that had “tea party” or “patriot” in their names were flagged, the tax agency has conducted the same review process for years on groups across the political spectrum, including many marijuana-affiliated businesses.
Even in the most recent incident, only one-third of the groups flagged for further review by the IRS were conservative. Of the roughly 300 conservative organizations under review, only 70 were tea party organizations.
The process is familiar to Rob Kampia, executive director of the Marijuana Policy Project, a marijuana advocacy organization. In an article for the Huffington Post, Kampia wrote that before groups with “Tea Party” or “patriot” were targeted, “nonprofit organizations that contest the federal government’s anti-marijuana policies and propaganda” were targeted and continue to be.
He said that in 2000 and 2006, “MPP was subjected to grueling audits, despite no evidence of faulty accounting or violations of the IRS’ rules governing nonprofits.”
“An organization that had recently survived a rigorous IRS application process — and that had only about $150,000 in revenues during the year in question — was forced to bear the brunt of a federal audit,” Kampia wrote. “On the bright side, the IRS’ determination that MPP was in compliance with the federal tax code and accounting procedures allowed us to use that information in a compelling fundraising appeal to existing and potential MPP donors.”
Pot businesses, too
Marijuana-related nonprofits aren’t the only organizations drawing the ire of the IRS. Though marijuana has been legalized for recreational use in two states and for medical purposes in 18 states and Washington, D.C., the drug’s illegal federal status prompts the IRS to treat all marijuana-related businesses as “drug trafficking organizations.”
A provision in the current tax code — enacted in 1982 after a drug dealer claimed his yacht and weapons were a business expense — stipulates that “deductions incurred in the trade or business of trafficking in controlled substances” are not allowed. This means anyone involved in the sale of marijuana cannot deduct typical business expenses from their federal taxes, such as rent, payroll, product or advertising.
When California first legalized marijuana in 1996 for medicinal purposes, the IRS continued to apply the current law to the industry. This meant marijuana-related businesses and dispensaries, although legal under state law, are subject to “audits and heavy tax bills that could force them out of business.”
Henry Wykowski is a California defense lawyer who has represented many dispensaries that have been audited by the IRS. He said the tax provisions used to target marijuana businesses were passed to “deprive drug dealers on corners from deducting their expenses,” adding that the “IRS is using this law in a way that it was never intended to be used.”
Wykowski said that many of the dispensaries that end up being audited are the ones that file federal tax returns, because they are trying to follow the law.
“The result is, unfortunately, you’re better off not filing,” he said.
“Whether or not this is a coordinated tactic to try and shut down the industry, or send a chill through the industry, or if it’s just the IRS trying to collect as much revenue as they can from easy targets, it’s clearly outside the spirit and intent of the law,” Kris Krane, principal of 4Front Advisors, a medical marijuana dispensary consulting firm, said.
Despite the fact that IRS audits of the marijuana industry are routine, Aaron Smith, executive director of the National Cannabis Industry Association, said they are often not as publicized since it’s “not as shocking as a SWAT team raiding the [medical cannabis] facilities.”
Smith called the IRS audits a “silent killer” for the industry and said attacking the financial means of a state-legal business allows the federal government to undermine state marijuana laws without “drawing as much ire from the voters.”
Bruce Friedland is a spokesman for the IRS. When asked by the Huffington Post about the agency’s high level of auditing of medical marijuana dispensaries, he referred to a memo the IRS sent to Congress in 2010, which said that neither the tax code nor the federal Controlled Substances Act make an exception for medically necessary marijuana.
Change is coming?
But not everyone in Washington is happy with the IRS’s crackdown on the growing ganja industry. Rep. Earl Blumenauer (D-Ore.) is scheduled to introduce legislation on June 5 that would allow state-regulated cannabis businesses to take advantage of the tax benefits every other U.S. business enjoys.
The Small Business Tax Equity Act of 2013 would give cannabis businesses a tax system similar to what’s currently in place for the alcohol and tobacco industries.
Mason Tvert, communications director for the Marijuana Policy Project, told Mint Press News that while the legislation would protect businesses, it doesn’t protect advocacy groups.
When the Small Business Tax Equity Act is introduced next week, it won’t be the first time that medical marijuana advocates pushed for a change in tax code laws. Similar legislation was introduced in 2011, but it never made it out of the committee.
Since the American public’s acceptance of marijuana has increased in recent years, supporters are trying again. A 280E Reform Campaign, referring to the section of the tax code that is used to target marijuana businesses, has been created in an attempt to prevent IRS targeting and offer assistance to dispensaries on how to properly file federal income tax returns.
Wykowski told the Huffington Post that the IRS has the ability to change industry guidelines, which would make legislation like the Small Business Tax Equity Act unnecessary. But he says the IRS would rather have Congress remedy the situation.
“The auditing of dispensaries by the IRS is unfair and unreasonable and should be of concern to everybody,” Wykowski said. “If they can do it to one group, they can do it to any group… A dispensary wins if they get treated like any other taxpayer.”