Medical marijuana dispensaries can't deduct business expenses on state tax returns

Shawn Coleman.

Woolhiser's equally unhappy with various medical marijuana industry groups, who he faults for not addressing the situation. But Shawn Coleman, executive director of the Cannabis Business Alliance, stresses that the issue is indeed on the CBA's radar.

"We've known about this for a while, and we've been working on it for a while," Coleman says. "I think the reason it hasn't been a big story yet is because most of the businesses aren't profitable yet. This tax issue only becomes an issue once they're profitable. And since we're starting to see people getting profitable, the problem is going to get worse instead of better."

In Coleman's view, "the problem is the federal tax code, which says if you are engaged in a business that's against federal law, you can't claim business expenses. It's a law designed for interrupting international drug cartels, the crack house on the corner and things like that, which don't apply to this industry. So in a lot of people's opinions, this is a misapplication of the tax code."

Nonetheless, the Colorado Department of Revenue "follows federal tax law," Coleman goes on. "The idea is that you probably told the feds the truth, so we're going to charge you taxes based on what you told the feds. So people who say, 'We can't make these deductions on the federal level, but we can do it in Colorado, because it's legal here' are getting the rejection letter. And the Department of Revenue says that's because they haven't been specifically told in legislation to allow the deductions."

Does that mean a bill could be passed in Colorado instructing the Department of Revenue to allow business deductions for medical marijuana businesses? When asked, DOR's Couch refers the question to the state's Office of Legislative Legal Services. There, a source tells us the office hasn't studied the matter in detail yet, because no legislation has been submitted about it. However, he believes a state fix would be possible, albeit with potential federal repercussions.

Pete Stark.

One way around this dilemma would be for the U.S. Congress to pass a law to allow states more leeway when it comes to medical marijuana, and Coleman says there is already legislation on the subject: the Small Business Tax Equity Act, sponsored by Representative Pete Stark, a California Democrat. In Coleman's words, "It would clarify the federal tax code so that the language would not apply to state-legal businesses."

Trouble is, the Small Business Tax Equity Act has been languishing since being introduced in May 2011, and the likelihood that it will suddenly start rocketing through the process is slight, especially during an election year. And while pushing such a measure in Colorado might be simpler, no legislator has stepped forward to sponsor such a bill -- and even if someone does, the next legislative session doesn't start until January 2013. With that in mind, the CBA's Coleman wants to wait to start talking to legislators about taking up this cause until after the November elections.

In the meantime, Woolhiser is frustrated. He calls the stereotype of medical marijuana making entrepreneurs rich a "huge misnomer" and concedes that if he'd known all of the hoops through which he'd be made to jump simply to break even, he might never have gotten into the industry in the first place.

Regarding the current Colorado tax laws about medical marijuana, he believes "something's got to be done. It's just basic fairness: You shouldn't be penalized for following state law. I understand it on the federal level. But this is ludicrous."

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