The Internal Revenue Service has joined the fray in the ongoing conflict between state compassionate use laws, such as the Arizona Medical Marijuana Act (AMMA), and federal law classifying marijuana as an illegal drug for all purposes. The ruling invokes a little-known provision of the tax code, enacted at the height of the Reagan Administration War on Drugs to target drug kingpins.
The provision bans any tax deductions related to trafficking in controlled substances. The IRS applied the provision to disallow deductions for such ordinary business expenses as employee wages and rents taken by a not-for-profit California marijuana dispensary. The effect of disallowing the deductions means that the dispensary owed federal taxes on its gross profits.
Arizoneout commends readers to a very interesting report on the ruling posted yesterday on the Bottom Line business blog on msnbc.com. The msnbc.com report contains an interview with the dispensary operator, who says he could not continue in business if the ruling stands. He says he will appeal.
What Arizona employers should take away from the ruling is that it makes it even less likely that the dispensaries permitted by the AMMA will ever get off the ground. That part of the law is stalled now because of a lawusuit filed by the state. But that doesn't mean employees won't be using medical marijuana. Instead, the current situation is likely to continue indefinitely, when most Qualified Patients (QPs) and their Designated Caregivers (DCs) are forced to grow their own.
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