The Feds Won't Legitimize Pot, But They'll Still Tax The Hell Out Of It

FILE - In this Sept. 18, 2012 file photo a caregiver picks out a marijuana bud for a patient at a marijuana dispensary in Denver. Pot smokers in Colorado were the biggest winners in the vote that legalized the drug. Now state regulators are working out the details of exactly how to tax it, so the benefits are shared statewide in the form of increased revenue. A state panel meets Thursday to draft final recommendations based on the voter-approved marijuana legalization question that asked for excise taxes up to 15 percent to fund school construction.(AP Photo/Ed Andrieski)
FILE - In this Sept. 18, 2012 file photo a caregiver picks out a marijuana bud for a patient at a marijuana dispensary in Denver. Pot smokers in Colorado were the biggest winners in the vote that legalized the drug. Now state regulators are working out the details of exactly how to tax it, so the benefits are shared statewide in the form of increased revenue. A state panel meets Thursday to draft final recommendations based on the voter-approved marijuana legalization question that asked for excise taxes up to 15 percent to fund school construction.(AP Photo/Ed Andrieski)

Nearly half of U.S. states have legalized marijuana in some form, whether medical or recreational. But marijuana remains illegal under federal law, and as a result, the legitimate businesses selling the drug are subject to sky-high tax rates.

Dispensaries can't deduct traditional business expenses like advertising costs, employee payroll, rent and health insurance from their combined federal and state taxes. That means dispensary owners around the U.S. often face effective tax rates of 50 to 60 percent -- and in some states, those rates soar to 80 percent or higher, according to members of the pot industry who spoke to The Huffington Post.

In other words, the federal government rakes in tax revenue from pot shops while prohibiting them from accessing the same financial benefits afforded to non-cannabis businesses.

"We now have thousands of basically small- and medium-sized businesses across the country in over 20 states that are perfectly legal, who are being discriminated against in terms of the tax system because they can’t deduct legitimate business expenses," Rep. Earl Blumenauer (D-Ore.) told The Huffington Post. "Their effective tax rate is two, maybe three times higher depending on where they are in their business cycle." Blumenauer introduced the Small Business Tax Equity Act (HR 2240) in 2013, which would allow marijuana-related businesses to make traditional tax deductions.

Federal tax code 280E, an antiquated Internal Revenue Service rule enacted in the 1980s under President Ronald Reagan's "War on Drugs" campaign, explicitly prohibits any deduction from any business that "consists of trafficking in controlled substances." Marijuana is currently listed alongside heroin and LSD as a Schedule I narcotic under the Controlled Substances Act.

"280E is left over from an earlier era, and it’s not fair," Blumenauer said. "It's time to treat marijuana like a grown-up, legitimate business, and have people play by the rules and be fair to them.”

In 2013, Blumenauer forged an unlikely alliance with conservative anti-tax crusader Grover Norquist when the Oregon lawmaker introduced his pot business tax reform bill.

"There is no reason why the tax code should deny ordinary and necessary business expenses to legitimate businesses established under state law," Norquist wrote in a letter to Congress urging the bill's passage. "The result is an arbitrary and punitive situation where legal employers face very high average effective tax rates that Congress never sought to impose on businesses."

In an attempt to better serve the marijuana businesses in Colorado, which began permitting the recreational sale of pot last month, state lawmakers approved a measure that allows dispensaries to claim some state income tax deductions, especially related to the growing of cannabis. But Colorado dispensary owners told HuffPost that their effective tax rates are still around 50 to 60 percent because anything related to the specific sale of the plant can't be deducted.

"All we want is to be treated like other businesses," said Mike Elliott, executive director for the Medical Marijuana Industry Group which represents marijuana businesses in Colorado. "The federal government doesn’t recognize our businesses as being legitimate, but they do demand our taxes. It’s really unfair treatment."

Elliott added marijuana business owners have no problem paying taxes, a widespread mentality among dispensary owners eager to convey the image that they are functioning as legitimate, law-abiding businesses. "We are on board with paying our taxes," Elliott said. "But right now these unusually high rates are just a means of punishing the businesses, a 'head in the sand' approach."

Dispensary owners are hopeful that changes in the federal tax code are coming. They point to recent statements from President Barack Obama, who said that he thinks marijuana is no more dangerous than alcohol, and Attorney General Eric Holder, who signaled that a change in federal banking access for marijuana businesses may be on the way.

“Allowing small, legal marijuana businesses to have the same tax treatment as any other small business is critical to ensuring the regulated industry can wipe out the black market," said Rep. Jared Polis (D-Colo.), who has sponsored a number of measures advocating tax and banking rights for marijuana businesses.

Not everyone is on board with offering legal marijuana businesses the same treatment when it comes to taxes. "We should give fewer -- not more -- incentives, to people cashing in on addiction. This is about creating the next big tobacco, and we want to now give them tax breaks?" said Kevin Sabet, a former senior adviser at the White House Office of National Drug Control Policy and founder of Smart Approaches to Marijuana.

As these marijuana businesses continue to pay exorbitant sums in taxes to the state and federal government, many dispensary owners say they're counting the days until the IRS decides to audit them. California's Harborside Health Center, widely considered the world's largest marijuana dispensary, lost a battle against the IRS in 2011 when it tried to deduct standard business expenses and was ordered to pay millions in back taxes.

"We haven’t gone through an audit yet," said Tim Cullen, co-owner of Denver's Evergreen Apothecary. "Of course we pay our taxes, but it just feels like it’s a matter of when, and not if, that audit occurs."

Since Colorado's recreational pot shops opened on Jan. 1, dispensaries have generated a tremendous amount of revenue for both the state and federal governments. In the first week alone, less than 40 dispensaries around the state reportedly took in more than $5 million in sales revenue, with approximately $1.2 million of that going to state coffers alone -- and those figures are from just a fraction of the more than 500 total medical marijuana shops that are eligible to apply for retail licenses in the state.

More than one dispensary owner, who requested anonymity when speaking about specific financial issues, told HuffPost that they estimated by the end of the year, they'll be paying more than $1 million in sales tax to the federal government. And for some businesses, that tax is in cash.

Since most banks refuse to work with marijuana businesses out of fear that they could be implicated as money launderers if they offer traditional banking services to the pot businesses, many owners conduct all of their transactions in cash. Beyond the burden of managing taxes and employee payroll, cash-only businesses can put retailers' safety at risk. NBC News recently detailed several heists that have occurred at Colorado dispensaries.

Rep. Ed Perlmutter (D-Colo.), an advocate for mandatory banking for marijuana businesses, said he's hopeful the recent remarks from the president and attorney general signal that at least some change is coming. He added that when it comes to these businesses, safety should be their top concern.

"The crime potential for an all-cash businesses, whether that’s robbery, burglary or assault -- a violent crime -- or tax evasion, fraud and skimming -- a white collar crime -- is pretty substantial," he said. “At the heart of the banking and tax issue is we want these businesses to be safe."

More than a dozen states are expected to legalize marijuana in the the coming years. One recent study has projected a $10 billion legal marijuana industry nationwide by 2018.

Before You Go

Former President Bill Clinton
Bill "Didn't Inhale" Clinton has supported decriminalizing marijuana for more than a decade and more recently has spoken out against the war on drugs.

“I think that most small amounts of marijuana have been decriminalized in some places, and should be," he said back in 2000 in an interview with Rolling Stone. "We really need a re-examination of our entire policy on imprisonment.”

He's since spoken about the issue of marijuana and drug prohibition a number of times. Last year, he appeared in the documentary, "Breaking the Taboo," where he argued that the war on drugs has been a failure.
Sen. Rand Paul (R-Ky.)
Paul exhibited his libertarian tendencies earlier this year when he explained that he'd favor reforming marijuana laws to either decriminalize or reduce penalties for possession.

“I don't want to promote that but I also don't want to put people in jail who make a mistake," Paul said. "There are a lot of young people who do this and then later on in their twenties they grow up and get married and they quit doing things like this. I don't want to put them in jail and ruin their lives."

Former Rep. Ron Paul (R-Texas)
As a congressman, Paul took his opposition to marijuana and drug prohibition a step farther than his son has so far. He supported a number of bills that would have removed the plant from its current status as a Schedule I substance under federal law, where it is considered alongside heroin and PCP. Because his history on the topic is so expansive, just take a look at the video to the left for a selection of his comments.
Evangelist Pat Robertson
While the 83-year-old Robertson may say a lot of things that make him sound like a kooky old man, he's also made a few remarks to endear himself to marijuana advocates.

"I really believe we should treat marijuana the way we treat beverage alcohol," Robertson said in an interview with The New York Times in 2012. "I've never used marijuana and I don't intend to, but it's just one of those things that I think: this war on drugs just hasn't succeeded."

Robertson has made similar remarks on his "700 Club" show before, but the Times, like many others, perhaps felt they must have misheard him.
New York City Mayor Michael Bloomberg
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In a state of the city address earlier this year, Bloomberg made it clear that he supported a promise by New York Gov. Andrew Cuomo (D) to push marijuana decriminalization. "I support Governor Cuomo's proposal to make possession of small amounts of marijuana a violation, rather than a misdemeanor, and we'll work to help him pass it." A similar effort specific to NYC has made some progress, but faces an unclear path forward with New York lawmakers.
Actor Bryan Cranston
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Some may think of Cranston as more of a meth guy thanks to Walter White, his character on AMC's hit show "Breaking Bad," but in real life he's spoken out against current pot laws, suggesting that recreational marijuana use isn't a big deal -- and shouldn't be treated like it.

“[T]o me, marijuana is no different than wine," he said in an interview with High Times. "It's a drug of choice. It's meant to alter your current state -- and that's not a bad thing. It's ridiculous that marijuana is still illegal. We're still fighting for it ... It comes down to individual decision-making. There are millions of people who smoke pot on a social basis and don't become criminals. So stop with that argument -- it doesn't work.”

[H/T Marijuana Majority]
Former New Mexico Gov. Gary Johnson (R)
Unlike many politicians, Johnson, a Libertarian presidential candidate in 2012, has unabashedly admitted using marijuana. But beyond his personal history with pot, he's been an outspoken advocate for legalizing and taxing it.

From his campaign platform:

"By managing marijuana like alcohol and tobacco - regulating, taxing and enforcing its lawful use - America will be better off. The billions saved on marijuana interdiction, along with the billions captured as legal revenue, can be redirected against the individuals committing real crimes against society."
Author Stephen King
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King hasn't been shy about advocating for a legal marijuana industry that could give easy access to recreational users and revenue to the states.

“Marijuana should not only be legal, I think it should be a cottage industry," he said in an interview with High Times. "My wife says, and I agree with her, that what would be really great for Maine would be to legalize dope completely and set up dope stores the way that there are state-run liquor stores.”

[H/T Marijuana Majority]
Rep. Dana Rohrabacher (R-Calif.)
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Rohrabacher was a co-sponsor of the 2013 "Respect State Marijuana Laws Act," which seeks to protect marijuana users or businesses acting legally according to state marijuana laws from being prosecuted under the federal Controlled Substances Act.

While marijuana has been made legal for various uses in a number of states, the Obama administration continues to enforce federal laws across the nation. This has led to numerous raids of marijuana-based businesses, as well as prosecutions of growers and other people involved in pot.

Rep. Don Young (R-Alaska)
Young was also a co-sponsor of the 2013 "Respect State Marijuana Laws Act."
Rep. Justin Amash (R-Mich.)
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Amash was also a co-sponsor of the "Respect State Marijuana Laws Act."
Glenn Beck
Back in 2009, when Beck had a Fox News show, he suggested that marijuana legalization could be a worthwhile solution to raging drug violence on the nation's border with Mexico.

"I think it's about time we legalize marijuana," he said. "We have to make a choice in this country. We either put people who are smoking marijuana behind bars or we legalize it, but this little game we're playing in the middle is not helping us, it is not helping Mexico and it is causing massive violence on our southern border."
Billionaire Richard Branson
From an op-ed by Branson arguing for an end to the war on drugs:

"Decriminalization does not result in increased drug use. Portugal's 10 year experiment shows clearly that enough is enough. It is time to end the war on drugs worldwide. We must stop criminalising drug users. Health and treatment should be offered to drug users - not prison. Bad drugs policies affect literally hundreds of thousands of individuals and communities across the world. We need to provide medical help to those that have problematic use - not criminal retribution."
GOP Mega-Donor David Koch
Koch may have funneled countless dollars to conservative candidates who oppose reforming marijuana laws, but back in 1980, when he was the vice presidential candidate for the Libertarian Party, he suggested that it was "ridiculous" to consider people who smoked pot "criminals."
Texas Gov. Rick Perry (R)
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In 2010, Perry told Jon Stewart that he believed in a federalist approach to marijuana laws -- that is, to allow states to determine their own approach and to tell the federal government to butt out. He's since suggested he'd be willing to support decriminalizing possession of small amounts of marijuana.
Comedy Central's Jon Stewart
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Stewart has made a habit of taking down politicians who exhibit an uncompromising stance on marijuana prohibition. In 2012, Stewart took New Jersey Gov. Chris Christie (R) to task for vetoing a marijuana decriminalization bill.

“Alright, as much as I disagree, I don’t think marijuana should be illegal, but it is illegal on the federal level," Stewart began. "Christie is a former prosecutor, a man of conviction, of principle, doesn’t believe that the state should supersede federal law."

The praise in the second sentence is a good sign that Stewart is about to shred Christie. Watch the rest of his takedown above.
Actor Jack Nicholson
In an interview with the UK's Daily Mail in 2011, Nicholson said that he personally still used marijuana, before making the case for ending the prohibition on pot as well as other drugs.

"I don't tend to say this publicly, but we can see it's a curative thing. The narcotics industry is also enormous. It funds terrorism and - this is a huge problem in America - fuels the foreign gangs," he said. "More than 85 percent of men incarcerated in America are on drug-related offences. It costs $40,000 a year for every prisoner. If they were really serious about the economy there would be a sensible discussion about legalization."
Former Utah Gov. Jon Huntsman (R)
In a 2013 American Conservative op-ed chock full of moderate Republican views, Huntsman snuck in a call to "applaud states that lead on reforming drug policy."

While Obama and his administration have responded to state marijuana reforms by saying they must enforce federal laws against marijuana, the president has the power to reschedule the drug, which would allow federal authorities to shift resources away from a prohibitive approach.
Former Alaska Gov. Sarah Palin (R)
Palin spoke out on marijuana in 2010, saying she didn't support legalizing it but also calling it a "minimal problem" for the nation.

"However, I think we need to prioritize our law enforcement efforts," Palin said. "If somebody's gonna smoke a joint in their house and not do anybody any harm, then perhaps there are other things our cops should be looking at to engage in and try to clean up some of the other problems we have in society." While Obama has spoken repeatedly about not being interested in prosecuting small-time marijuana users, he hasn't done anything to prevent them from being busted by law enforcement in states where the drug is still illegal.
Comedian Jimmy Kimmel
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Kimmel notably took a shot at Obama while serving as host of the 2012 White House Correspondents Dinner, questioning a continued marijuana crackdown under the president's administration. He then went on to say that the issue of its continued illegality was a serious political concern for many Americans.

(Check out the video above.)
Former President Jimmy Carter
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Carter hasn't minced words in expressing his opposition to harsh marijuana and drug prohibition policies.

In 2012, the former president said he was fine with state legalization efforts, though he himself doesn't necessary support legalizing the drug.

“As president 35 years ago I called for decriminalizing -- but not legalizing -- the possession of marijuana,” Carter said. “Since then, U.S. drug policies have been very horrible to our own country because of an explosion in prison populations.”
Former Virginia Attorney General Ken Cuccinelli
A staunch conservative who failed in a run for the U.S. Senate last year, Cuccinelli suggested in 2013 that he was "evolving" on marijuana legalization, and that he supported the rights of states to determine their own pot laws.

"I don't have a problem with states experimenting with this sort of thing I think that's the role of states," Cuccinelli said, according to Ryan Nobles of WWBT.
Columnist Dan Savage
Savage slammed Obama for perpetuating the war on drugs while on HBO's "Real Time With Bill Maher" in 2009.

“The proof will be in the policy. The war on drugs has gotten a really bad rap, when you ask people if they support the war on drugs they say no ... [Obama's] budget once again has the same old drug warrior policy ... I reject the assumption that everybody who is using drugs needs treatment or is an addict and needs to get arrested ... Not all drug use is abuse.”

He's kept up the fight for drug policy reform since.

[H/T Marijuana Majority]
MSNBC's Al Sharpton
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Sharpton has repeatedly spoken out in favor of reforming drug laws. In 2011, he suggested that the nation had wasted trillions of dollars in an ill-fated effort that had weighed particularly heavily on the African American community.

“We've been fighting the war on drugs since the '60s. And guess what? Trillions of dollars later, we are losing," Sharpton said during a segment on MSNBC. "When you look at the disparities in sentencing drug offenders, hasn't this kind of injustice undermined the legitimacy of our criminal justice system?”

[H/T Marijuana Majority]
Former Rep. Tom Tancredo (R-Colo.)
Tancredo came out aggressively in favor of reforming marijuana laws in 2010, telling the Colorado Independent that the correct path forward was "Legalize it. Regulate it. Tax it."

Tancredo continued, “The arguments against marijuana today are the same as the arguments against liquor years ago.”

Years later, the former congressman agreed to smoke pot on camera with a documentary filmmaker, a deal that he later backed out of.

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