Medical marijuana sellers have a tax headache

Before sellers in states like Washington and Colorado go diving into their stash of newly legalized recreational marijuana, they might want to take a longer look at the big tax bite the Internal Revenue Service is taking out of medicinal marijuana profits. Often forgotten in the state-level marijuana industry discussion is the fact that pot is still illegal on the federal level, which means folks with marijuana-based businesses can face an effective tax rate as high as 75%, according to CNNMoney.

The IRS offered its stance on drugs' role in the tax code way back in "Scarface"-era 1982, when it implemented provision 280E after a convicted drug trafficker successfully claimed weapons, bribes and his yacht as business expenses, according to anti-provision group 280E Reform. The provision was originally drafted to target cocaine dealers, but it includes all drugs named under the Controlled Substances Act -- including marijuana.

Folks who sell medical marijuana in 18 states that have legalized the practice are still subject to the provision that bars those selling illegal substances from deducting expenses related to that business. Though they may be considered legitimate expenses on the state level, rent and payroll paid by medical marijuana dispensaries can't be taken as a write-off on the federal level.

The IRS says it's just doing its job and says it's up to Congress to change the tax law if it sees fit. In a letter written to former California Rep. Pete Stark (D) in 2011, the IRS says Stark and his colleagues will need to come up with an exception for medical marijuana facilities if Congress wants their owners to stop paying an effective rate between 50% and 75%.

Though marijuana classes are available for would-be weed entrepreneurs and sales devices like pot vending machines are currently in the works, President Barack Obama's administration hasn't given marijuana-related issues much priority nor has it changed the federal government's stance against marijuana sales. It's still a gray area and a gray market, though all the IRS sees is green.

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