Medical Pot Industry Faces Big Tax Bill

The Bay Area's budding medical pot industry is facing a big tax bill. The IRS has ruled Oakland's largest dispensary can not deduct business expenses.

In a letter last week, the IRS told Harborside Health Center that it can not deduct standard expenses like rent, payroll and health insurance ... because it traffics drugs.

Harborside's executive director Steve DeAngelo said the dispensary now owes the federal government $2.5 million in back taxes and penalties.

“This is not an effort on the part of the IRS to tax us,” DeAngelo said. “This is an effort on the part of the IRS to tax us out of existence”

DeAngelo said he's received a flood of calls from concerned dispensary owners and medical cannabis patients.

“Because as goes Harborside,” said DeAngelo. “So does the rest of the movement.”

DeAngelo says he got the news the same day he made a final payment on a more than $1 million tax bill to the City of Oakland, which imposes its own tax on dispensaries. He says he’s working with state and local officials in challenging the ruling.

“This is not just about Harborside,” DeAngelo said. “If the IRS is successful in closing Harborside, then you're going to see a very serious impact on local and state tax revenue.

Assembly-member Tom Ammiano and other state officials last month sent a letter(pdf) to Congress urging changes in the internal revenue code.

An IRS spokesman declined to comment on the matter.