The Next Tax Base: Criminal Activity

We all know that welfare states are insatiable when it comes to tax revenue. Most of them will go to moral excesses just to get their hands on more money. One way they do that is by taxing addictive products, such as tobacco, alcohol, gaming and marijuana. Addiction taxes are very popular, and their popularity will only continue to grow until we do something structural about the relentless growth in government spending.

Government over-spending is indeed a serious issue, as are addiction taxes. But sometimes the political hunt for more revenue gets almost comical. Or how about a tax on illegal activities?

On the one hand, our elected officials do not want to recognize marijuana as a legal product – to some degree for the right reasons – but on the other hand they desperately want their hands on the taxes that legal pot-smoking could generate. Some states have legalized so called medical marijuana in order to tax it, while the federal government maintains that marijuana is always an illegal product. This tension between state and federal law puts dispensers of medical marijuana – the latest to join the big crowd of taxpayers – in quite a conundrum.

The Sacramento Bee reports:

A once-thriving San Francisco pot shop forced to close this week is also on the hook for a serious IRS bill, following a new U.S. Tax Court decision that could complicate life for others in the medical marijuana business. Call it a precedential bummer; or, perhaps, a rational application of tax law.

The trick here is that marijuana is illegal under federal law but legal under California law:

For businesses and consumers in the 17 states that permit medical marijuana use, the ruling quietly issued Thursday certainly goes well beyond the facility formally called the Vapor Room Herbal Center. In particular, the Vapor Room ruling could squeeze pot operations that claim deductions for caregiving services. “The dispensing of medical marijuana, while legal in California, among other states, is illegal under federal law,” Tax Court Judge Diane L. Kroupa noted. “Congress has set an illegality under federal law as one trigger to preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business.

Now… if the federal government considers the very product that the Vapor Room provides to be illegal, then how can they…

This is true even if the business is legal under state law.” The ruling means Vapor Room owner Martin Olive owes Uncle Sam a lot of money

…tax his business?

The owner of the Vapor Room sought to make tax deductions for expenses related to his business. But the business is illegal by definition under federal law. Since it is illegal by definition under federal law, how can federal law mandate that he pay taxes on any money earned from the business?

Mr. Olive, the owner of the Vapor Room…

…had gone to court to challenge the IRS’ determination that he owed more than $1.8 million in taxes, plus about $378,000 in penalties, for 2004 and 2005. Olive had reported the Vapor Room had gross receipts of $1 million in 2004 and $3.1 million in 2005. Tax investigators subsequently concluded that Olive had underreported his income, and that the Vapor Room really collected $1.9 million in 2004 and $3.3 million in 2005. Olive sought to deduct his various business expenses, ranging from rolling papers to zip-close bags. He also wanted to subtract the price he paid for the marijuana, as a cost of goods sold, from his total income.

But he can’t do that, because the federal government, which considers his entire operation illegal by definition, wants as much tax revenues as it can out of him.

So who is Uncle Sam going to squeeze next? Will they demand that your neighborhood brothel own up on its taxes for providing an illegal service?  What about customs duties on illegally imported firearms?

It is bad enough that government tells us how bad alcohol and tobacco are and still tax us every time we use those products. But it is outright absurd that government can benefit from activities that it itself has defined as illegal. The fact that the federal government does this is yet another sign of how big government erodes the ethical foundations of not just our government, but our society as a whole. If government can benefit from something that it considers illegal, then what moral barriers prevent private citizens from doing the same?

One comment

  1. Pingback: the legal definitions of money « power of language blog: partnering with reality by JR Fibonacci