“Woah, Bro, Did You See This Tax Bill? Bummer.”: Marijuana Dealers Burned By Taxes

One small burden faces the medical marijuana industry: an income tax of 75%. The levy is the result of an obsolete 1982 provision to the tax code so as to limit drug trafficking.

“I’d personally love to give my employees a raise,” said Kayvan Khalatbari, co-owner of Denver Relief, a medical marijuana center in its namesake city. “But because of the industry we’re in, that’s not always possible.” Denver Relief makes over $1 million a year in sales, with his effective tax rate of 50%. An accountant in Colorado specializing in medicinal marijuana tax law, said he has one client that did not turn a profit in 2009, 2010, 2011. In 2012, though, she was handed a $300,000 tax bill from the IRS for the proceeding years. “If you have a license from the state hanging on your wall, that doesn’t fit the definition of trafficking,” Marty said. “Yet the IRS is aggressively auditing this industry.” The general business tax is 15%-30%.

The Internal Revenue Service did not respond to a request for comment. In a letter to a congressman in 2011, the agency said it was merely enforcing the law, and that Congress needs to change the law if it does not want medicinal marijuana dealers caught up in the provision.

Several groups are working on just that, though it’s unclear if the law will be changed anytime soon. The Obama administration has so far not expressed much interest in weighing in on the matter.

Until then, those in the industry will keep looking for crafty ways to minimize their tax bill, and pay the tax man when they can’t.

“An emerging industry that can provide hundreds of thousands of jobs is being held back by these crazy tax rates,” said Betty Aldworth, deputy director of the National Cannabis Industry Association. “We’re like any other small businesses, that just happens to be illegal in some states.”

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