Sacramento Dispensary in Battle with IRS

When the Obama administration promised last year that it wouldn’t interfere with states that legalize weed or the businesses that provide it, the IRS apparently never got the memo.

In that announcement, issued in August, the Justice Department said states could legalize, whether for medical or recreational purposes, and businesses could cultivate and sell the drug under state law, as long as certain federal priorities are enforced, such as keeping guns out of the pot market.

But the tax agency is still going full bore, treating marijuana providers like criminals and trying to force them to pay costs other businesses aren’t required to pay.

A Sacramento dispensary, Canna Care, is taking the IRS to court after the agency rejected every one of the collective’s business deductions except the cost of the weed itself. The pot shop’s owners are facing a bill of nearly $900,000 they say they shouldn’t owe. And they say they’re being discriminated against solely because the IRS doesn’t like what they do for a living.

“They don’t accept that I pay my employees well and that I provide them with full dental and medical insurance,” said Bryan Davies, CEO of Canna Care. “They don’t accept the rent of our place, our liability insurance, our workman’s comp insurance, our phones or our security, a big expense for us.”

All told, the IRS rejected $2.6 million in what Davies and his wife, dispensary director Lanette Davies, described as legitimate expenses from their 2006, 2007 and 2008 federal tax returns. But they were allowed to claim the cost of the weed itself as a deduction.

The IRS relied on a provision in the tax code that dates to the Reagan era. It allows the agency to reject business expenses that support drug-trafficking operations.

The tactic has been used across California, with the biggest target being the Harborside Health Center, the self-styled “world’s largest pot shop” located in Oakland. The IRS is negotiating with that dispensary’s owner over its demand for $2.5 million in back taxes.

Canna Care came close to settling with the IRS when the agency made an offer as low as $100,000. But the Davies decided they needed to take the case to court because the tax scheme punishes businesses that follow the law.

Canna Care is famous around Sacramento for its combination of weed and religion. Buds are sold with Bibles, and the dispensary offers nightly prayer sessions. The Davies take their principles seriously, and they didn’t want to let the government tax them extra.

“To me that’s buying protection money,” Lanette Davies said.

Canna Care’s lawyer Spencer Malysiak filed a court petition arguing the tax agency’s decision to accept the deductions violates the Equal Protection Clause of the U.S. Constitution.

The rejection “amounts to a de facto prohibition against medical marijuana dispensaries, and is tantamount to a criminal prosecutions,” Malysiak wrote.