IRS Penalties Force Colorado Marijuana Retailers to Face Higher Tax Burdens

July 11, 2014

A Colorado based marijuana dispensary is suing the IRS. The Denver Post reports that a marijuana dispensary, Allgreens, is challenging the IRS for charging them a 10 percent penalty because Allgreen’s pays its federal income tax liability in cash—not electronically.

Since 2011, the IRS has required employers to deposit withheld income taxes through the Electronic Federal Tax Payment System (EFTPS). Mandatory electronic filing reduces administrative costs by eliminating postage and paper and reducing penalties due to late or lost mail. This benefits government and taxpayers. Businesses that do not file electronically are charged with a 10 percent penalty on their tax liability.

Since January 1, 2014 the retail sale of marijuana has been legal in Colorado, and as of January 1st, 130 retailer licenses had been issued to marijuana businesses in Colorado. But despite marijuana’s legality in Colorado, federal laws banning marijuana have discouraged banks from investing in marijuana dispensaries.

Wells Fargo commented on the banking industry’s reluctance stating:

In view of the complex, inconsistent legal environment relating to medical marijuana dispensaries, Wells Fargo Regional Banking has opted not to bank these businesses… and we have advised all such businesses that bank with us that they will need to close their deposit accounts.”

Allgreens’ attorney Rachel Gillette described the marijuana retailer’s inability to escape the penalty in writing:

“It was not that the taxpayer 'did not want' to make use of the EFTP System. Rather, the taxpayer is unable to secure a bank account due to the nature of its business. With no bank account and no access to banking services, the taxpayer is simply incapable of making’ the payments electronically.”

Without banks, the Colorado marijuana industry is still primarily a cash enterprise. As a result marijuana dispensaries are unable to fully comply with IRS regulations that require electronic filing each quarter—forcing a 10 percent penalty.

This adds to the multiple layers of tax that Colorado already levies on marijuana dispensaries. The state levies a 2.9 percent general sales tax, a 10 percent retail marijuana state sales tax, and a 15 percent retail marijuana excise tax. There are arguments for and against levying these marijuana excise taxes, but at least an excise tax is deliberate.

In contrast, the IRS penalty is not specifically tailored to marijuana sales, but it certainly effects them. This extra 10 percent introduces horizontal inequity into the tax code.

The principle of horizontal equity states that entities with similar incomes should be taxes equally. While an alcohol retailor in Colorado may make the same amount in sales as a marijuana dispensary, the marijuana dispensary faces a higher tax burden simply because its income is held in cash not in an electronic account. This is unfair.

Furthermore, taxes should be stable and neutral, not arbitrarily applied to specific types of retailers. Additionally, they should be simple and convenient as possible for taxpayers to pay. If a marijuana retailor cannot get a bank account than electronic tax filing, places an undue burden on dispensaries.

But as marijuana retailers search for solutions and attempt to comply by paying their withheld income taxes via cash, they are stuck with the 10 percent penalty.

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