OAKLAND (CBS 5) – The Internal Revenue Service has ordered an Oakland medical marijuana dispensary to pay millions in back taxes. Advocates fear the decision could deal a serious blow to the industry.

“The IRS has given us a tax bill of $2.5 million,” said Steve DeAngelo, executive director of Harborside Health Center.

The Internal Revenue Service launched a two-year audit of Harborside, under a specialized tax code called 280-E. It intended to stop wholesale drug dealers from legally deducting business expenses while selling illegal drugs.

DeAngelo said, “The IRS is claiming we are a drug trafficking organization.”

But Harborside is licensed and pays taxes in the city of Oakland. In fact, the dispensary is in the top 10 of city taxpayers.

Recently, Oakland announced plans for expanding the medical marijuana industry, hoping to capitalize on increased tax revenue. But the tax code denies pot clubs from taking standard business deductions for rent, payroll and health insurance, because federal law classifies marijuana as illegal.

“We will be taxed out of existence,” De Angelo said.

Despite the tax code, Harborside can deduct certain expenses. “This is the crazy part of it,” DeAngelo said. “The IRS is allowing us to deduct all of the money that we paid to purchase the cannabis itself. But will not allow us to deduct things like our payroll.”

DeAngelo told CBS 5 the dispensary intends to fight the tax bill in court.

(Copyright 2011 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

Comments (8)
  1. Me says:

    Yep, let’s legalize this garbage…….just goes to show what type of “people” smike this ((*&**…CBS 5, are ya gonna print THIS one????…..you wouldn’t print my last one….

  2. Willis McGillis says:

    Why does the government want to destroy such a large source of tax revenue? People ljust don’t make sense sometimes…Whatever, its 420 bro

    1. Jimster says:

      Because they can’t control it once people realize they can grow there own and not pay tax on it.

  3. tn says:

    Thanks to electronic technologies (internet), pot clubs may be the next “has been” business like the travel agencies, video rental stores and phone booths. As citizens learn more about how to grow this stuff in their backyard, pending theft from neighbors and teenagers, your tomato plants will be replaced with cannabis plants. It appears the government wants to make as much money as it can, while the demand is so high (no pun intended), and availability is limited; artificial supply/demand economics. Maybe then, the Mexican drug traffic and violence will drastically diminish since we (law-abiding US and A citizens) can legally grow our own. The flip side is laws will have to be created to keep neighborhood gardening thefts under control. Coming to a newspaper (that’s another dying business) near you: “Teenager Shot for Repeated Backyard Cannabis Theft.”