Good News, Bad News About Colorado’s Pot Industry

By Paul Gaita 02/20/15

Despite a windfall in tax revenues, marijuana retailers still struggle with federal laws.

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Legalizing marijuana has proven to be a windfall for Colorado’s tax coffers, with revenues from both legal and recreational pot generating more than $60 million for the state. But retailers themselves are reporting a less rosy picture, with resistance from the banking industry and the Internal Revenue Service (IRS) making significant reductions to their take of the vast profits.

Colorado reported sales of $386 million in medical marijuana and $313 million of recreational marijuana. That figure does not include profits from the sale of related products like smoking paraphernalia, or from the tourist industry, which saw increased income to hotels, and restaurants from in-state and out-of-town travelers. Such figures have led economists to predict that by 2016, Colorado can expect $94 million in marijuana tax revenue on an annual basis, which will mint pot as a $1 billion retail market.

Unfortunately, retailers will see only a portion of those profits. Section 280E which was enacted by the IRS in 1982, prevents businesses that traffic in Schedule I and Schedule II controlled substances from deducting any amount of their expenses. Banks are also unwilling to take pot retailers as clients, citing the possibility of federal intervention.

But hope appears to be on the horizon for retail outlets. The IRS issued a memorandum to accountants in late 2014 that stated that those who file taxes for marijuana companies will not be subject to increased risk of an audit or penalties.

The Drug Enforcement Agency, too, has sworn off raiding medical marijuana outlets that are in compliance with state law. The question now remains as to how much of the pot pie will be divided between stage agencies and the individuals and companies that sell it within the limits of the law.

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Paul Gaita lives in Los Angeles. He has contributed to the Los Angeles Times, Variety, LA Weekly, and The Los Angeles Beat, among many other publications and websites.