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Running a Marijuana Dispensary Isn’t Really All It’s Cracked Up to Be Once You Remember That Tax Compliance Is Kinda Important

It’s awesome when the Commissioner of the IRS calls the tax code “a monstrosity” like he did in a speech back in May but it’s even more awesome when the tax code messes with stoners worse than an assistant principal who still has something to prove to his dad.

The Vapor Room Herbal Center was a medical marijuana dispensary in San Francisco owned by Martin Olive. It seems that Marty did at least four things wrong
To start with, Mr. Olive couldn’t substantiate any of his cost of goods sold or expenses. Of course he couldn’t! Based on his line of work, I’m sure he lost his car keys every day. He had no chance of hanging on to a year’s worth of Lowe’s receipts. Plus – I’m going out on a limb here – I figure most marijuana wholesalers don’t have effective invoicing systems. As a result, the IRS wanted to collect an additional $1.5 million in taxes. Most stoners can’t count that high (although meth addicts do it daily).
Then once the IRS started poking around, they determined that Marty underreported his gross receipts, too, probably because some mentor-hippie told this neo-hippie, “If they pay you in cash, dude, the IRS can’t trace that – ergo, tax-free dinero.” This bumped the tax deficiency up to $1.9 million.
Just an observation at this point – if Mr. Olive’s tax deficiency was almost $2 million, it goes to reason that he sold around $5.7 million of pot. Not to give too much away, but I’m pretty sure $5.7 million of pot would completely eradicate glaucoma from the Earth.
Anyway. Then, of course, the accuracy-related penalty kicked in to the tune of about $380,000. Accuracy-related penalties are understandable because math is hard, especially when you’re distracted by the episode of Spongebob Squarepants playing in the background.
But the kicker was that the tax court disallowed the deduction of any expenses. Drug traffickers are not allowed to deduct ordinary and necessary business expenses under IRC § 280E. And he was a drug trafficker. Although he was operating his business under California law where medicinal marijuana is legal, medical marijuana is still against the law on the federal level. So on his state return, he’s an entrepreneur, but he gets to list drug trafficker as his occupation on page two of his 1040. 
What makes this even more ridiculous is that he was allowed to reduce his gross receipts by COGS (whatever amount the IRS determined that Spicoli could substantiate) because “COGS is not a deduction under the meaning of §162(a).” In other words, since he was selling weed, he couldn’t offset his revenue with any of his expenses, except the amount that he paid for his weed. And, yes, it probably is too late for you to get transferred to auditing.
These were Marty’s four “fer sure” mistakes. Certainly there were others, one of which was probably a neck tattoo.