Harborside Health Center vs Internal Revenue Service Federal Tax Code section 208E states “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. This tax code was put into effect under President Reagan to keep drug traffickers from claiming expenses on their taxes that would allow them to receive government money. Many people have believed for years that marijuana is a gateway drug and the people who grow or sell it are criminals. Now with the first state, California, legalizing marijuana for medical usage, questions of how to tax the medical marijuana dispensaries have arisen. Since 1996, this topic has become a forefront issue in politics.
Federal Tax Code section 280E was passed by congress in 1982, when the Internal Revenue Department brought a case against a convicted cocaine trafficker. The trafficker in reply to the IRS, filed a return where he claimed deductions for objects used to traffic said drugs (i. e. the guns bought for protection ect. ) Being that no regulations were put into place to combat this issue, the IRS was required to accept the returns. As a result of this, the trafficker was allowed to keep over half of his earnings.
The Tax Code was plainly meant to apply to people who were illegally trafficking drugs and trying to claim their “business expenses” to maintain their lifestyle. This did not pertain to organizations, such as dispensaries, set up to abide strictly to the laws of their state. So why try to tax a company trying to do the right thing with their business? Enter the case of Harborside Health Center v. the IRS. With 22 million dollars in annual sales, Harborside Clinic has quickly grown to be one of California’s most prestigious dispensaries.
The CEO of Harborside, Steven DeAngelo, is a visionary of his time. He is involved in an advocacy group for the medical use of marijuana, called Americans for Safe Access and believes that marijuana heals many aches and pains, depression, and a plethora of other ailments. He founded Harborside Health Center on the hope that they could help every individual person who comes through the doors feel truly cared for, valued, and respected. Their mission statement shows their care and concern for the patients who visit the dispensary.
This is the reason that they are one of the highest grossing companies in its line of business, crushing the competition. Like any company, Harborside files their taxes every year. Unlike many other businesses though, Harborside cannot claim typical things like rent, payroll and health insurance from their taxes. They, however, can claim the marijuana, edibles and other products they buy to sell as a business expense. A double standard for sure! This creates a large weakness for the company, by filing on their net income versus the gross income.
The end-game situation is that companies are taxed out of business. Harborside’s gross income totals 22 million dollars. Because of this, the back-taxes owed are about 2. 4 million dollars. Harborside’s greatest strength, of generating the most revenue, has also become its greatest weakness. Like many companies, Harborside has external influences affecting their company. These influences include the government and the dispensary’s clientele. On a federal level marijuana is still considered very illegal; however, the state governments of California, Washington, and Colorado have legalized it for medical use.
The nature of the business in itself is risky, not to mention the added risks of giving up over half your profits in back taxes. The federal government is dominating control over dispensaries and allowed the final say on whether or not a dispensary may continue to open its doors. Another external influence on Harborside’s business is their clientele. The customers are a business’s reason for staying open. Their goal is to make them feel comfortable and safe. With the government cracking down, customers are becoming scared to put their names on any list that involves medical grade marijuana.
It seems, with over 20 million dollars in annual sales, Harborside has found a way to maintain their customer’s privacy and comfort, making everyone feel a little bit better, at least for now. The Case Harborside Health Center vs. IRS The IRS began probing through Harborside’s taxes to identify any discrepancies. They found that they had come in breach with Tax Code section 280E prohibiting cost deductions by illegal drug traffickers. They are not the first to come into contact with the dreaded tax code.
Like many others before them, they are now fighting the back-taxes and the interest accrued handed to them. This case is still under investigation at this point but Steve DeAngelo CEO has until December 22nd to come up with a strong case to bring before the courts. The Strategy Henry Wykowski, the lawyer for Harborside, has undergone many situations much the same as Harborside and has taken the case on. He believes that he has found a way to keep the IRS and dispensaries happy. There are a few key things that dispensaries can do to avoid skirmishes with the IRS.
The first thing that a business can do is slide more deductions into the sale of goods category. The more they can turn into sale of goods deductions they can claim the better. The next thing that a company can do is to maintain a not-for-profit (or social welfare organization) status. There are fewer restrictions if a dispensary were to go that direction. Thirdly, the more square footage you provide to care-giving, (yoga, counseling, massages ect. ) the less you have to claim of the “federally illegal” materials.
The rule of thumb is that company’s should only have ten percent or less of the buildings square footage dedicated to medicinal marijuana. The rest of the footage should be devoted to some type of caregiving services such as massage therapy or yoga. If Harborside is to fight the IRS in tax court they can use any of these arguments for their cause. They are a waterfront not-for-business catering to over 94,000 clients. Business includes hypnotherapy, chiropractor, yoga, and acupuncture. Wykowski believes they can beat these tax accusations.
The Competition In recompense, the amount dispensaries being taxed, has gone up, meaning the competition has all but dwindled. Harborside has implemented numerous perks to bring their customers in. These perks include discounts for seniors and verterans, a care package program and an online order pick up allowing customers to feel welcomed and well taken care of in every aspect of life. With deep roots in cannabis activism, Harborside hopes to win their case. The CEO has been pioneer for the cause with 40 years of experience in the business.
To make sure that they ensure the most quality grade product, he partnered with Steep Hill Lab. Steep Hill Labs are state of the art, enabling the company to regulate the grade of marijuana sold to their clientele. This by itself stands out amongst other dispensaries for the fact that not all of them have laboratories. Harborside’s Philosophy on Hiring Harborside hires only compassionate people that care about their job and the people that they are helping. It is their job to ensure that every customer experiences good things every time they come in the door.
For their hard work and passion, they are rewarded with compensation packages such as dental and health insurance, competitive wages and paid time off. This company shows through its employees that it cares about the community and it pays off time and time again. Recommendations My recommendation for Harborside Health Center is to keep fighting the good fight. What I mean by that is, if a dispensary is abiding by the tax laws of their state and this country, how can they be considered traffickers. They pay their taxes just like anyone else.
The company should campaign with lobbyists in Washington to get their case out there and prove that they are a legitimate business. I also recommend petitions from the people of their city/state to change these laws. The power of the people can greatly be underestimated. If they got their case out to the country, the likelihood of them losing in tax court would greatly depreciate. The fact that they are a caregiving company greatly improves their chances to succeed. If they succeed at winning the fight, it will change the course of the industry and possibly the economy. Works Cited * www. harborsidehealthcenter. com http://www. slate. com/articles/news_and_politics/jurisprudence/2013/02/how_legal_marijuana_sellers_can_beat_a_draconian_federal_tax. html * http://www. woodllp. com/Publications/Articles/pdf/Medical_Marijuana_Dispensaries. pdf * http://www. law. cornell. edu/uscode/text/26/280E ——————————————– [ 1 ]. Federal Tax Code section 280E [ 2 ]. http://www. harborsidehealthcenter. com/serv-holistic. html [ 3 ]. http://www. harborsidehealthcenter. com/serv-carepkg. html [ 4 ]. http://www. harborsidehealthcenter. com/serv-labanalyze. html [ 5 ]. http://www. harborsidehealthcenter. com/about-jobs. html