The IRS ruling is based on an obscure portion of the tax code -- section 280E -- passed into law by Congress in 1982, at the height of Reagan administration’s “war on drugs.” The law, originally targeted at drug kingpins and cartels, bans any tax deductions related to "trafficking in controlled substances."
Is any other business taxed on gross revenue? This is quite unfair. The dispensaries say it will drive them out of business. It's also counter-productive as it will drive more patients back to the black market, which is what the Government wants to avoid. Dispensaries pay taxes, and if they go out of business, the feds and state won't get that money. They also provide jobs. This is just bad policy all around.
Update: Ask your congresspersons to support H.R. 1985, Small Business Tax Equity Act of 2011.
C. 2. DEDUCTION ALLOWED FOR EXPENSES IN CONNECTION WITH SALES OF MARIJUANA.
(a) In General- Section 280E of the Internal Revenue Code of 1986 is amended--
(1) by striking ‘No deduction’ and inserting ‘(a) IN GENERAL- No deduction’, and
(2) by adding at the end the following new subsection:
‘(b) Exception- Subsection (a) shall not apply to amounts paid or incurred in connection with the portion of the trade or business consisting of sales of marihuana (as defined by section 102(16) of the Controlled Substances Act) intended for patients for medical purposes pursuant to the law of a State.’.
The bill was introduced in May Mr. STARK, Mr. ROHRABACHER, Mr. POLIS, Mr. PAUL, and Mr. FRANK of Massachusetts) and referred to the Committee on Ways and Means