Tax Minute


A recent tax court case cost an Oakland California cannabis dispensary tens of millions of dollars. Although cannabis sales are legal in California, and many other states, it is still considered drug trafficking under Federal law. A portion of the Internal Revenue Code states that the only deduction allowed for drug traffickers is the cost of goods sold. In this case, relying on another code section, the business capitalized 60% of its labor costs as cost of goods sold and also deducted all of the other normal operating costs associated with the business on their tax returns. The Tax Court disallowed the ordinary operating costs as these were clearly prohibited under law. In addition, the capitalized inventory costs were also thrown out as there is a provision in that code section that states that costs that would otherwise not be deductible are excluded from the capitalization rules. This is a new area of a tax litigation and I expect many more cases to be tried in the coming years. However, barring any action from Congress, I think the cases are all going to be decided the same way and that businesses engaged in the cannabis industry are going to pay substantially more taxes than any other business in this country.

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