CA Pot Biz Owes $4.2 Million in Back Taxes. Here’s why it matters.
A U.S. tax court has ruled that Bay Area cannabis dispensary, San Jose Wellness, was not entitled to deduct depreciation or charitable contributions under Section 280E of the tax code because of marijuana’s federal status as an illegal drug. The dispensary now owes nearly $4.2 million in taxes and penalties.
The company had argued that it could still take deductions for depreciation and charitable contributions because depreciation is not “paid or incurred during the taxable year” and that the contributions weren’t made “in carrying on” a trade or business. Furthermore, the plaintiff’s lawyers said San Jose Wellness is not in the business of trafficking in controlled substances.
Judge Emin Toro disagreed with all of the plaintiff’s arguments. In a 30-page opinion, he ordered the plaintiff’s to pay all taxes owed plus penalties.
These kinds of cases are closely monitored by the industry, as there are outstanding questions about tax deductions for a legally murky substance like state-legal cannabis. There are more cases to come. San Jose Wellness’ parent company, Harborside, Inc., is involved in a separate $11 million tax dispute that is pending in the Ninth Circuit.