A San Francisco federal appeals court dealt a financial setback to medical cannabis dispensaries on Thursday: Unlike other commercial enterprises cannabis businesses can’t deduct business expenses from their taxable income because their product is prohibited by federal law.
The ruling by the Ninth U.S. Circuit Court of Appeals was also another blow to the Vapor Room, which operated as a pot-inhaling shop and social club in the Lower Haight neighborhood from 2004 until July 2012, when it shut down under pressure from U.S. Attorney Melinda Haag, who said she would seek its eviction for being too close to Duboce Park. Federal law increases penalties against marijuana dispensaries that are less than 1,000 feet from a school or playground, and the Vapor Room was 597 feet from the Duboce playground.
The business has continued as a delivery service, and owner Martin Olive recently announced plans to reopen at a new location.
Olive had claimed $650,000 in business expenses on its 2004 and 2005 federal income tax returns, but the Internal Revenue Service balked. The court in Thursday’s opinion upheld the IRS’ tax assessments for Olive for those years. While the Vapor Room provided free snacks, movies and massage therapy, the court said, its only commercial product was marijuana, and federal law denies deductions for the expenses of “trafficking in controlled substances.”
Olive’s lawyer argued that the tax law, which dates from the 1980s, shouldn’t apply to marijuana businesses legalized by state laws, starting with California’s Proposition 215 in 1996. The court disagreed.
A Sacramento dispensary owner told me last month that her business does not advertise specifically because the expense cannot be claimed as a tax deduction.