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Legal or illegal, pot growers must pay federal taxes if Prop. 19 passes

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Should Proposition 19 pass next month, California’s prospective legal marijuana dispensers will have to persevere through much of the same hard work and startup headaches as any other new business.

That includes filling out an SS-4 form [PDF]. And making sure their employees have completed W-2s [PDF]. And then actually paying federal taxes, assuming the federal government doesn’t raid their shop first.

Much of the attention paid so far to the ballot initiative is focused on tax revenue that legal marijuana sales might generate for the cash-strapped state of California.

But these above-board dispensaries would have to be paying out to the IRS as well.

“If someone is in business, for example they have a retail store, they would be expected to pay employment taxes and file the appropriate tax return forms,” said Richard Panick, an IRS spokesman. “The issue is, as far as the issue with tax administration, are they in compliance – the business or an individual – with the tax law?”

The IRS doesn’t have jurisdiction over deciding whether the tax-generating commerce is illegal – and selling marijuana will remain so under federal law regardless of the will of California voters.

The IRS is charged with ensuring tax dollars are properly paid, whether by tire manufacturers or prostitutes – not whether the dollars are gained through criminal activity. Panick noted that Al Capone’s convictions were for tax evasion, on income that was probably ill-gotten.

Just how much tax revenue marijuana sales would generate is dependent on a legion of variables and, therefore, unknowable at this time. As the California Legislative Analyst’s Office report on the topic summarizes:

The actual level of revenues generated would depend upon the rate of such levies and how the measure changed the consumption and sales price of marijuana. Moreover, the amount of all of the various revenues that could be generated under this measure would depend considerably on the extent to which the federal government enforces its laws against marijuana in California.

It is conceivable that on the same day the IRS issues a new marijuana farm an employer identification number, the Drug Enforcement Agency could arrive with a search warrant.

Nine former DEA administrators have asked the U.S. Justice Department to go further than that.

In August, they sent a letter [PDF] to Attorney General Eric Holder asking the Obama administration to file suit against California if Prop. 19 passes. The proposed lawsuit would contend the initiative conflicts with the Controlled Substances Act. The letter states:

Lastly, we note that the Department of Justice acted quickly to assert the Constitution’s Supremacy Clause in its recent suit to declare null and void certain provisions of an immigration bill passed by the state of Arizona. We would expect the Department of Justice to act just as swiftly and for the same reason to uphold the Supremacy Clause of the U.S. Constitution and the preemption provision of the [Controlled Substances Act] to prevent Proposition 19 from becoming law.


Filed under: Public Safety, Daily Report


Comments are closed for this story.
just say now's picture
Who would ever think that Nine former DEA administrators and the Mexican drug cartels would be working towards the same goal, keeping marijuana illegal in the United States.
Mike69and1-2's picture
State and Federal taxes? So opponents are in fact correct... Prop 19 will in fact fill the coffers of organized criminals and murderers.

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