Oregon Marijuana Dispensary Owner First to be Sentenced on Federal Tax Charges

By:
Chris Gaetano
Published Date:
Oct 10, 2018
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While the federal government still considers marijuana an illegal substance, an Oregon dispensary owner found out that when people make a business from it, the IRS will still demand its due and punish those who try to get around it, according to Accounting Today. The agency's pursuit of tax scofflaws has resulted in Matthew Price, the owner of the dispensary, being the first legal marijuana distributor to be sentenced for federal tax crimes. Price pleaded guilty to willfully failing to file income tax returns in connection with his business, and for not filing individual tax returns from 2011 to 2014 for income he received from it. This was despite numerous pleas from CPAs who'd been advising him to, you know, file a tax return. Consequently, he was sentenced to seven months in federal prison. 

The conflict between federal and state laws has made tax planning difficult for the legal marijuana industry. As reported in the January/February 2017 issue of The Trusted Professional (p. 6), Todd Arkley, a CPA who specializes in the marijuana industry, said at the NYSSCPA's 2016 Marijuana Symposium that a particularly troublesome aspect is 26 U.S. Code 280E, which forbids making any deductions in connection with the sale of illegal substances. This means that a lot of procedures that would be taken for granted with any other business clients become more complicated with marijuana industry clients. 

This provision can be a problem even if a deduction is for a non-marijuana-related business expense: recently, a tax court ruled against two medical marijuana retailers who tried to claim deductions for administrative expenses. Laurel Alterman and William Gibson, a married couple, ran a marijuana dispensary called Altermeds, LLC in Lousiville, Colo., near Boulder. In their joint returns for the years 2010 and 2011, they claimed business-expense deductions based on the sale of non-marijuana products.  But the Tax Court held that “selling non-marijuana merchandise was not separated from the business of selling marijuana merchandise. First, Altermeds derived almost of its revenue from marijuana merchandise. Second, the types of non-marijuana products that it sold (pipes and other marijuana paraphernalia) complemented its efforts to sell marijuana."

The Tax Court also addressed the couple’s claims for costs of good sold, noting that “costs of goods sold is a reduction made in the course of computing gross income. … It is not a deduction, and therefore it is not disallowed by Section 280E.” But the Tax Court found that there was no information on the record to calculate inventory during the relevant years, nor for the cost of goods sold, so it disallowed the couple’s reductions claims that were in excess of the amounts that the IRS conceded in its brief.

The industry also faces numerous banking challenges, which can exacerbate the tax challenges. Many banks won't deal with marijuana industry customers, as doing so requires extensive paperwork that most institutions believe isn't worth it. On top of this, the Federal Reserve does not let marijuana businesses access its system, and the Federal Deposit Insurance Corp. refuses to insure their accounts. This, in turn, forces the industry to rely more on cash, which necessitates other expenses such as armed guards and armored cars. Accounting Today noted that the heavy use of cash, in and of itself, increases the likelihood of a tax audit. 

These sorts of business issues, and many more, will be the subject of discussion at the NYSSCPA's upcoming Cannabis Industry Conference, which is scheduled for Dec. 11 in New York City. You can register for the conference at this page

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