For owners of marijuana businesses, April 15 is one big downer.
While most business owners rush to meet the federal tax deadline and cash in on a plethora of deductions, pot store owners and growers complain that they can’t write off a single expense, even if they have state licenses.
They want the law changed, saying it’s discriminatory and outdated as more states move to legalize marijuana.
“We don’t want special favors – we just want to be treated like businesspeople,” said Nick Cihlar of Bellingham, Wash., co-owner of Subdued Excitement Inc., a company in nearby Ferndale that grows marijuana for Washington state retailers.
The ban on deductions by the Internal Revenue Service is in place for one reason: Congress has declared every pot transaction a felony crime.
Getting the law changed will be difficult, with legalization opponents arguing that it would be a mistake to give the pot industry any tax breaks.
“Like any special interest group, they’re after one thing: more money. . . . It’s particularly audacious to demand that the government allow you to deduct expenses when you’re breaking federal law,” said Kevin Sabet, president of the anti-legalization group Smart Approaches to Marijuana.
Derek Franklin, president of the Washington Association for Substance Abuse and Violence Prevention, said giving a tax break to marijuana businesses would only lower the price of the drug, making it easier to acquire. The idea “doesn’t make sense from a public health perspective,” and marijuana businesses should pay more to curb pot use among minors, he said.
Many pot store owners say high tax rates make it hard to enter the industry and to compete with underground drug dealers.
“If someone spends $100 in our store, $77 of it is going to some form of tax – that’s federal, state, sales, whatever,” said Tim Thompson, co-owner of a pot shop called Altitude in Prosser, Wash. “There’s a lot of people staying out of the recreational market because the black market is cheaper, and the reason is because of these taxes and lack of write-offs.”
Thompson said April 15 means “pain, a lot whole of pain.”
Washington state opened its first pot stores in July after voters legalized marijuana in 2012. Three other states – Colorado, Alaska and Oregon, along with the District of Columbia – have approved the drug for recreational use, while 23 states and the District of Columbia allow its use for medical reasons.
Overall, more than two-thirds of all Americans live in states that have approved marijuana use in some form.
That’s a selling point for two Oregon Democrats, Sen. Ron Wyden and Rep. Earl Blumenauer, who want Congress to pass the Small Business Tax Equity Act, a bill that would allow operators of state-approved marijuana businesses to deduct expenses from their federal taxes. They said that marijuana businesses cannot deduct any common expenses, such as the cost of payroll, rent or utilities, and they can’t claim a tax credit for hiring a veteran.
In a statement last week, Wyden, the top-ranked Democrat on the Senate Finance Committee, said the federal tax law “has not caught up to the fact that it’s 2015.”
A similar effort fizzled in the last session of Congress, but backers of the legislation say they’re optimistic.
“It’s going to be tough, but we’ll keep pressing,” said Democratic Rep. Adam Smith of Washington state, who plans to co-sponsor the legislation.
While Smith and Democratic Rep. Jim McDermott were the only members of the Washington state congressional delegation to co-sponsor the bill in the last session of Congress, support is growing. Democratic Rep. Denny Heck, a member of the House Financial Services Committee, said Congress should change the law to give marijuana businesses “the same treatment as any other legitimate law-abiding business.” Washington state Democratic Rep. Derek Kilmer is undecided whether he’ll back the bill, a spokesman said.
Steve DeAngelo, who runs a medical marijuana dispensary in Oakland, Calif., said Congress has experienced a “sea change” on pot policy in the past two years. Most notably, he pointed to a bill passed in December that forbids the Justice Department from using any funds to prosecute medical marijuana operations in states that have opted to legalize them.
DeAngelo, executive director of Oakland’s Harborside Health Center medical marijuana dispensary, is involved in a long-running dispute with the IRS, challenging a $2.5 million tax bill from his first two years of operations. With the issue still tied up in court, Tax Day means more uncertainty for him.
“Most Americans feel a little bit of anxiety going up to April 15th – we feel a great deal of anxiety,” DeAngelo said.
Cihlar, the co-owner of Subdued Excitement, said he’s not expecting much of a tax hit this year, since his business is new and just started making money this year. But he’s already worried about next year’s tax bill.
He said his company employs five people and that business deductions would help him create more jobs.
“These deductions have been put in place for a reason. . . . It doesn’t make a lot of sense to try to inhibit our growth,” Cihlar said. “We’re taxed coming, going, left and right.”
Thompson, the co-owner of Altitude, said Congress could provide an easy fix by lifting the criminal penalties for marijuana use and removing the drug from the list of Schedule I substances, the same category reserved for heroin and cocaine.
For now, he’s just hoping to make ends meet, relying on the $23 he gets to keep for every $100 worth of marijuana he sells.
“We’ve got to pay all our expenses,” Thompson said. “We’ve got to cover our cost of goods. We’ve got to service our debt. And hopefully we’ll get a profit.”