Harborside Strikes Back, Wins Big In Tax Court

U.S. Tax Court Declines to Issue Penalties in Harborside 280E Case, Saving Industry Tens of Millions

CALIFORNIA: In a historic landmark decision that will save Harborside and the legal cannabis industry millions of dollars, the U.S. Tax Court has ruled that the California dispensary is not liable for accuracy-related 280E penalties. 280E is a tax code provision that denies all standard business deductions to businesses whose operations “consist” of activities that violate the Controlled Substances Act.

According to the Opinion issued by the Court, Harborside acted “reasonably and in good faith” when taking its tax positions for the years at issue. The Court cited Harborside’s timely filing of its tax returns and its maintenance of accurate financial records as a key strength, along with a persuasive argument from Harborside co-founder and Chairman Emeritus, Steve DeAngelo, that he made good-faith efforts to comply with the law, despite a lack of clear legal authority to guide medical marijuana dispensary taxpayers.

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The ruling comes just a few weeks after the same Court ruled that 280E itself does apply to Harborside — a ruling Harborside intends to appeal to the U.S. 9th Circuit Court of Appeals.

“We’re still working on knocking out 280E entirely, but at least for now we have established that cannabis businesses who operate in reasonable, good faith compliance with existing law will not suffer from additional unjust penalties,” said DeAngelo. “This ruling could save the legal cannabis industry tens of millions of dollars— dollars that ultimately come out of the pockets of cannabis consumers. What we are asking for is simple and fair: for the IRS to treat us like every other legal, tax paying business in the United States. Since the IRS has made it clear they are unwilling to do that on their own, Congress should step in and pass clear 280E reform legislation.”

The decision highlights Harborside’s historic role as an advocate and defender of the legal cannabis industry, and is just one of several victories it has scored since its founding in 2006. “Harborside never has, and never will, give up in its pursuit of justice for cannabis consumers and the legal industry that serves them,” said DeAngelo.

In 2016, the U.S. Department of Justice gave up on a years-long attempt to seize the properties where Harborside does business, dismissing a pending civil forfeiture action initiated 2012, when California’s four U.S. Attorneys mounted a statewide campaign to shutter California’s medical cannabis industry. The campaign had succeeded in closing 600 dispensaries— one third of the dispensaries in the state—but ended after Harborside won multiple legal victories in both state and federal courts.

“The penalties ruling strengthens Harborside’s financial position and helps clears the path for future industry growth,” said Andrew Berman, CEO of Harborside. “It’s a huge win for Harborside and the entire cannabis industry. We applaud the Court’s well-reasoned opinion, and appreciate the Court recognizing our commitment to compliance and operating in good faith.”

Financial Valuations Of Businesses That Sell Marijuana And Financial Fraud Investigations Highlight AICPA’s 2017 Forensic and Valuation Services Conference

NEVADA: Discover insights on everything from how forensic accountants ferret-out financial fraud to how valuation professionals decipher the value of high-profile celebrity estates at the American Institute of Certified Public Accountants (AICPA) Forensic and Valuation Services Conference.

When and Where: Nov. 13-15, 2017, at Caesars Palace, Las Vegas (Online access available)

Experts pull back the curtain to provide insights on topics such as:

  • White collar crime – Predicting the challenges and defenses to forensic evidence and testimony
  • Governmental corruption – Examining irregularities involving city contractors and forensic audits
  • Cannabis businesses – Looking at the highs and lows of business valuations for companies that sell marijuana
  • More than 85 additional sessions – For complete details, consult the AICPA FVS Conference agenda and brochure.

What Every Cannabis Business Needs To Know About IRS Form 8300

By Dean Guske, CPA

I have received a number of emails and phone calls over the past couple of days regarding the article posted in MJ Biz Daily on Tuesday.  I was actually contacted last week by the author who wanted to know if I was seeing any audit activity in Washington and Oregon in this regard and I indicated that I had not.  He was curious as to why there was so much activity in Colorado around this issue as well.  It’s my understanding that there are quite a few IRS audits in progress in Colorado and that activity has been going on for a while.  I think this is due in part to several cannabis businesses there not following 280E when filing their federal income tax returns.  280E is unfair but unfortunately it’s the law we have to deal with for now.  At some point this will be behind us.

The 8300 audits were news to me and so far seem to be concentrated in Colorado.  My thought is that because of all the other audit activity in Colorado that this is just a follow on audit to make sure these businesses are compliant with ALL reporting requirements.

I have include a copy of Form 8300 with instructions here for your reference. I have also attached an overview of the penalties associated with not filing the form as well.

The bottom line is this.  If you any person in a trade or business receives a payment of $10,000 or more in any single transaction or series of transactions they are required to file a form 8300 within 15 days of receiving the cash.  Please note that a “person” includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate.  You should also be aware that “cash”  includes cashier’s checks, money orders, bank drafts and traveler’s checks.

In addition to filing Form 8300 with the IRS, companies need to furnish a written statement to each person whose name is required to be included in the Form 8300 by January 31 of the year following the transaction. This statement must include the name, address, contact person, and telephone number of the business filing Form 8300, the aggregate amount of reportable cash the business was required to report to the IRS from the person receiving the statement, and that the business provided this information to the IRS.

Filing form 8300 isn’t something anyone should be afraid of. Not filing the form is much worse.  If you have any questions or need any additional information, please feel free to call..

 

Have a great weekend.

Oregon House Bill 4014 Signed Into Law by Governor Kate Brown

by Larry J. Brant 

As reported in my November 2015 blog post, in accordance with Internal Revenue Code (“Code”) Section 280E, taxpayers (for purposes of computing federal taxable income) are prohibited from deducting expenses related to the production, processing or sale of illegal drugs, including marijuana.

A Bit of Welcome Relief?

Measure 91, officially called the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act, passed by Oregon voters, appears to have alleviated some of the impact of Code Section 280E as it relates to Oregon taxable income. Specifically:

  • Section 71 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our corporate income tax regime. This provision sets forth no specific effective date. So, in accordance with Sections 81 and 82 of Measure 91, it became effective on July 1, 2015.
  • Section 74 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our individual income tax regime. This provision of Measure 91 specifically provides that the change became effective for tax years beginning on or after January 1, 2015.

So, following the passage of Measure 91, were there any Oregon tax problems plaguing the cannibals industry? The short answer is: Maybe.

Measure 91 generally only applies to the recreational marijuana industry. Even though nothing in Measure 91 says Sections 71 and 74 are limited to recreational marijuana, maybe an argument could be made that these provisions did nothing to alleviate the Code Section 280E issue for medical marijuana business activities.

Don’t despair; Oregon lawmakers came to the rescue. The law is now clear (at least as clear as a law can be) that, with respect to the Oregon individual income tax regime, folks in both medical and recreational marijuana businesses may deduct (for Oregon purposes only) expenses that would be otherwise be nondeductible under Code Section 280E.

House Bill 4014 Is Signed Into Law

On March 3, 2016, Oregon Governor Kate Brown signed House Bill 4014 into law. The bill, which spans numerous pages, deals with several issues related to the Oregon cannabis industry, including the application of Code Section 280E to both the recreational and the medical marijuana industries.

The provisions of House Bill 4014 relating to Oregon income taxation are contained in: Sections 28, 28a and 29.

SECTION 28 of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 but for section 280E of the Internal Revenue Code.”

SECTION 28a of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 or 475B.395 or 475B.400 to 475B.525 but for section 280E of the Internal Revenue Code.”

SECTION 29 of House Bill 4014 provides that the amendments to ORS 316.680 by Section 28 apply to conduct occurring on or after July 1, 2015 but before January 1, 2016, and to tax years ending before January 1, 2016. The amendments to ORS 316.680 by section 28a apply to conduct occurring on or after January 1, 2016, and to tax years beginning on or after January 1, 2016.

Implications for the Oregon Cannabis Industry

What this means for the cannabis industry in Oregon is twofold:

  • For Oregon personal income tax purposes only (for tax years beginning on or after July 1, 2015 but before January 1, 2016), the prohibition contained in Code Section 280E does not apply to the non-medical production, processing or sale of marijuana. In other words, a subtraction from Oregon personal income tax is permitted by folks in a recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.
  • For Oregon personal income tax purposes only (for tax years beginning on or after January 1, 2016), the prohibition contained in Code Section 280E does not apply to the production, processing or sale of marijuana (medical and non-medical marijuana).  In other words, on or after January 1 of this year a subtraction from Oregon personal income tax is permitted by folks in bothmedical and recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.

Interestingly, House Bill 4014 does not appear to address the Oregon corporate excise or income tax regimes. Remember, Section 71 of Measure 91 clearly tells us that, after July 1, 2015, Code Section 280E does not apply to the computation of Oregon corporate taxable income.

Why did Oregon lawmakers feel the need to make it clear that Code Section 280E does not apply to the computation of Oregon individual taxable income in the case of both medical and recreational marijuana business activities (as of January 1, 2016), but did not do the same for the computation of Oregon corporate taxable income?

Oregon law clearly contemplates corporations and other entities will be used to operate marijuana related businesses. In fact, both Measure 91 and the Oregon regulations governing the local marijuana industry allow businesses to be organized as corporations (and other entities). The definition of “person” in Measure 91 includes corporations (Section 5(24)), and various parts of the regulations contemplate that marijuana licenses will be issued to corporations and other entities (e.g., OAR 845-025-1045(3).

Was this apparent omission intentional or simply as oversight by Oregon lawmakers? It certainly seems Measure 91 covers (for purposes of Code Section 280E) recreational and medical marijuana activities at both the Oregon corporate and individual income tax levels. Was House Bill 4014 necessary to clarify the elimination of the application of Code Section 280E for Oregon income tax purposes?

It will be interesting to see how the Oregon Department of Revenue interprets House Bill 4014 and Measure 91 in this regard. Time will tell.

An Observation

One interesting observation about Measure 91 is that the clear language eliminating the application of Code Section 280E for Oregon individual and corporate taxation is not expressly limited to marijuana activities. Arguably, it eliminated the application of Code Section 280E for Oregon income tax purposes in all instances (including the sale or distribution of illegal drugs). It appears House Bill 4014 removes that interpretation of the law in the instance of the Oregon individual tax regime as it expressly limits the application to marijuana, but its silence as to the Oregon corporate tax regime leaves that interpretation alive. I hope this was not the legislature’s intent.

San Diego Medical Marijuana Dispensary Hit With $1.8-Million Fine

CALIFORNIA:  A Pacific Beach medical marijuana dispensary has been hit with a $1.8-million penalty for operating outside of San Diego‘s zoning regulations, the largest fine against a dispensary in city history.

That more than doubles the total amount of dispensary-related judgments the city has collected to date.

On Nov. 20, San Diego County Superior Court Judge Timothy Taylor ruled against SoCal Holistic Health Inc. and the company’s president, Ryan Murphy. Besides the penalty for operating illegally, Taylor also issued a permanent injunction against the dispensary and its president, prohibiting them from having a dispensary anywhere within city limits.

“The judges are sending a message, and so are we: Marijuana dispensaries can either follow the law or they will pay a high price for their actions,” City Atty. Jan Goldsmith said in a statement Wednesday.

 

IRS Position On 502 Excise Taxes – “Don’t Count Excise Tax Amount As Income”

WASHINGTON: Dean Guske, CPA to many marijuana businesses in Washington State (and around the country),  and his firm, Guske & Company, have been taking the position with their clients since the beginning of the year that the 502 excise taxes DO NOT have to be counted as income when 502 Cannabis businesses file their federal income taxes.  Instead, the excise tax is a reduction from the net income.

This is in direct contradiction to what most people in the industry have thought was the position of the IRS – that the full amount taken in from sales would be counted as income before the excise taxes were paid to the Washington State Department of Revenue, and therefore would double tax the businesses by having to pay tax on income they didn’t get to keep.

But a new memo issued by the IRS today confirms Guske’s position, concluding that: “A taxpayer who paid the State of Washington marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property.”

You can read the full memo here.

‘Pot’ Church Wins Tax-Exempt Status

INDIANA:Peace, love, pot and a tax deduction.

It’s not exactly the Holy Trinity but it’s what the First Church of Cannabis hopes to offer supporters now that it’s incorporated as a tax-exempt religious organization.

Bill Levin, who founded the church to test Indiana’s new religious freedom law, was notified earlier this week that the Internal Revenue Service has granted his request for a status that allows donors to deduct contributions on their taxes. IRS documents provided by Levin confirm the agency’s approval.

“It means people in higher tax brackets will be more generous with the church,” said Levin, a longtime marijuana legalization advocate in Indianapolis. “There have been people who want us to succeed but they’ve been waiting us to get our 501(c)3 exemption.”

Levin’s new church may need the money: It’s still looking for a place to lease so it can hold its first church service on July 1, when Levin promises that worshippers “will light up” and fill the sanctuary with marijuana smoke.

 

IRS Deal Will Refund Fines To Denver Pot Shop That Pays Taxes In Cash

COLORADO:

The Internal Revenue Service has backed away from a policy that penalized an unbanked marijuana business in Denver for paying taxes in cash, but the federal agency will not say if the approach applies industry-wide.

In a settlement with Denver-based Allgreens, a medical-marijuana dispensary that challenged the agency over its policy, the IRS said it would abate future penalties and will refund about $25,000 of fines the business was forced to pay despite having paid its federal employment withholding on time.

IRS rules require businesses to pay employee withholding electronically or face a 10 percent penalty for cash payments. Although the IRS allows for an abeyance in certain circumstances, it disagreed with Allgreens’ position that an inability to get banking services forced it to pay in cash.

Tax Time Hits Hard For Marijuana Businesses

COLORADO:  It’s tax time and small business owners all over America are digging out their receipts for deductions, except marijuana business owners because most deductions aren’t for them.

Some of the top tax deductions for small businesses include advertising, office supplies, utilities, business entertaining and legal fees. But cannabis businesses face an different issue that marijuana tax expert refer to as the 280 (e) problem. This U.S. tax code addresses expenditures in connection with the illegal sale of drugs. Marijuana is still classified as a Schedule 1 controlled substance and so the Internal Revenue Service must treat it as such, no matter what a state law may say. The code says no deduction or credit shall be allowed for any amount paid in carrying on a business in a controlled substance. The only deduction allowed is cost of goods sold and it’s used to reduce the gross profits.

These businesses found that it is critical to make sure the expenses are properly categorized as their tax returns are sure to be scrutinized. Accurate record keeping is critical not only for the marijuana businesses, but also the state governments that want to make sure they are collecting all the taxes owed to them. This isn’t a small amount of money. For example, Colorado collected $43 million in taxes for the fiscal year of 2014-2015 and local governments received over $547,000 from this kitty.

 

IRS Advice On Marijuana: Deduct It…But Prepare For 50% Tax

DISTRICT OF COLUMBIA: Four states have legalized recreational marijuana, and 23 states plus the District of Columbia have legalized medical use. But federal law still classifies it as a controlled substance, regardless of how legal it is in the states. There’s a lot more than taxes at stake, since federal drug crimes and seizures are nothing to sneeze out. Yet taxes are huge issues too.

Paying state tax on marijuana admits you are violating federal criminal law, right? It sure seems that way, which is why there’s a lawsuit challenging the taxes as violating your right not to incriminate yourself. Yet state efforts to tax this new cash crop and its blooming legitimacy are growing. But what about the IRS? It is federal, and Marijuana remains illegal nationally. Even so, the tax law is clear that even criminal income has to be reported to the IRS. Remember Al Capone?

As a result, even legal medical marijuana businesses have big federal income tax problems: tax evasion if they don’t report, and a considerably smaller risk of criminal prosecution if they do. More imminent, though, is the risk of being bankrupted by their IRS tax bill. That’s because Section 280E of the tax code denies even legal dispensaries tax deductions because marijuana remains a federal controlled substance. The IRS says it has no choice but to enforce the tax code.