Another Scandal? IRS Targets Medical Marijuana Dispensaries, Threaten 40-Year Sentences

Medical marijuana
The federal government has been publicly targeting medical marijuana dispensaries for years now. (CC BY-SA 2.0)

Just this week, Colorado became the first state to implement measures that will legalize, regulate, and tax recreational marijuana. Colorado's Gov. John Hickenlooper was a vocal opponent of legalization from the start and told lawmakers as he signed the bill into law on Tuesday that the federal government will intervene in Colorado's legalization soon.

As The Huffington Post's Ariel Shearer pointed out, Hickenlooper may not have been far off-base with his assertion if the government's handling of medical marijuana is any indication. Medical marijuana dispensaries face excessive audits and high tax bills every year, so much so that many of them are forced out of business.

The Internal Revenue Service (IRS) has targeted medical marijuana establishments for years now under tax code section 280E, which prohibits deductions or credits for trades or businesses that traffic controlled substances, "which is prohibited by federal law or the law of any state in which such trade or business is conducted." The provision was enacted in 1982 to prevent drug dealers from making deductions for purchases that they made from the illegal sale of drugs. But the IRS has employed section 280E in new and inventive ways with medical marijuana dispensaries, which are legal businesses under their states' laws.

"Section 280E was passed by Congress to deprive drug dealers on corners from deducting their expenses," said Henry Wykowski, a defense lawyer who represents some of the dispensaries under audit in California. "The IRS is using this law in a way it was never intended to be used."

Legalizing marijuana is a popular platform right now, as more and more Americans are in favor of legalization - even for recreational purposes. With that in mind, directly attacking and shutting down marijuana businesses in the enforcement of some overarching federal law would not go over well in the court of public opinion. So it seems that U.S. officials have developed a simpler, less public way of shutting down the marijuana industry.

"Attacking state-legal businesses is extremely unpopular, but in doing so through financial means, they're able to undermine state medical marijuana laws without drawing as much ire from the voters," said Aaron Smith, executive director of the National Cannibus Industry Association.

Shearer contacted IRS spokesman Bruce Friedland who, upon inquiry into the application of 280E, directed her to a 2010 memo that says that "neither section of 280E nor the Controlled Substances Act makes exception for medically necessary marijuana." Essentially, until the federal government embraces legalization, marijuana dispensaries will continue to be under the intense watchful eye of the IRS, even if they are completely legal under the laws of their own state.

In January, medical marijuana dispensary operator Aaron Sandusky was sentenced to 10 years in federal prison for operating a business that is legal in his state, but in violation of federal law. In April, landlords in San Jose, Calif. received threatening letters from U.S. Attorney Melinda Haag, warning that they could face 40-year sentences if they don't evict their tenants who legally distribute marijuana for medical purposes.

Many medical marijuana dispensaries are facing huge amounts in back taxes and complain of excessive audits. In 2012, cannabis trade school Oaksterdam University was raided by the IRS and the Drug Enforcement Administration.

This is clearly a battle for supremacy between state and federal government, with each side refusing to back down. The problem, though, is that the fight between state and federal officials is affecting the livelihoods of ordinary citizens and business owners.

"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."

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