Tax Write-Offs for Pot Club Expenses Barred

     SAN FRANCISCO (CN) – A California medical marijuana dispensary’s expenses are not tax deductible, a Ninth Circuit panel ruled Thursday.
     A tax court concluded that Martin Olive, who operates the Vapor Room Herbal Center in San Francisco, could not deduct the dispensary’s 2004-2005 expenses because the dispensary is a “trade or business…consisting of trafficking in controlled substances…prohibited by federal law” which the IRS bars from deductions enjoyed by lawful businesses.
     Olive appealed the tax court’s conclusion, arguing that medical marijuana sales are not the Vapor Room’s sole trade or business since the dispensary is “set up much like a community center” and offers complimentary activities and amenities such as yoga, massage therapy and snacks, according to the panel’s 10-page opinion.
     But these services are not part of the Vapor Room’s “trade or business” because patrons are not charged a separate fee for them, Circuit Judge Susan Graber wrote for the panel.
     To illustrate her point, she used the analogy of two hypothetical bookstores – one offering complimentary seating, coffee and staff recommendations, the other selling coffee and pastries in addition to books, which customers can consume in a cafe-like seating area.
     The first bookstore’s “trade or business” is selling books, Graber said, and the second’s is selling books, food and beverages. She said the Vapor Room was analogous to the first bookstore in this case.
     For that reason, Olive cannot argue that his dispensary’s “trade or business” consists of anything besides the sale of marijuana, and the tax court was therefore right to conclude that its expenses are not tax deductible, the panel found.
     Graber wrote that the enforcement of the tax “does not prevent people from using, distributing, possessing or cultivating marijuana in California.”
     “Enforcing these laws might make it more costly to run the dispensary, but it does not change whether these activities are authorized in the state,” she wrote. (Italics in opinion.)
     Neither side could be reached for comment on Thursday.

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