Judge Rules Harborside Owes Back Taxes

Harborside, the pioneering Oakland, California-centered cannabis mega-dispensary, owes the U.S. Internal Revenue Service $11 million in back taxes, a U.S. tax court judge ruled last week.

But in a very Harborside judo move, the publicly-traded cannabis company characterized the bill as a huge win — a bold stroke which isn’t entirely wrong — and what’s more, it’s a bill that the company may never have to pay.

Initially known as Harborside Health Center, the dispensary was made internationally famous thanks largely to its charismatic, media-savvy and instantly recognizable co-founder, Steve DeAngelo. Harborside now operates locations in Oakland and in San Jose. Between 2007 and 2012, the dispensary operated like a normal business, deducting “normal” business expenses on its federal tax returns.

Meanwhile — in addition to negative attention from the federal Justice Department, which tried to shut the operation down with an ultimately fruitless forfeiture suit — the dispensary sold an enormous amount of cannabis: $25 million worth in 2012 alone, according to its tax filings.

Problem is, neither Harborside nor any other cannabis business are considered “normal” under a section of the federal tax code originally intended to punish 1980s-era cocaine kingpins. Section 280E says businesses can’t make deductions for “trade or business” involving the “trafficking of controlled substances.” Harborside did do that and the taxman took notice.

The IRS had initially hit Patients Mutual Assistance Collective Corporation, the legal entity that operated the two Harborside locations, with a staggering $36 million worth of back taxes and penalties, enough to sink almost any outfit.

Armed with probably the best legal counsel in the industry, Harborside appealed, and this ensued a yearslong court battle arguing whether 280E applied. Last year, U.S. Tax Court Judge Mark V. Holmes ruled that it did.

But, based on findings that Harborside was being honest when it believed 280E didn’t apply and that it had been doing what it could to comply with the law since, on Oct. 17, Holmes signed off on a series of stipulated settlements that would see the dispensary pay “only” $11 million in back taxes.

$11 million is not $36 million, but $11 million is still $11 million. (We are good at math and good at business.) And The Harborside Group, which now owns two dispensaries in Oregon as well as grow operations in Salinas and Yolo County on top of the California flagships, is not exactly flush: Now publicly traded on the CSE, an alternative stock exchange based in Toronto, Harborside reported about $7 million in sales (after cost of goods was calculated) to $13 million in expenses, not counting the expected tax bill.

But in a press release Monday, both Andrew Berman, Harborside’s current CEO, and DeAngelo, pointed out that Holmes and the tax court did recognize that cannabis dispensaries can take some deductions in cost of goods sold — a very important point in a commodity-based business like selling weed  —  and the dispensary had already budgeted exactly that large of a tax hit in its current financial statements. What’s more, Harborside appears to be banking on never having to pay, ever.

Harborside “fully intends to appeal this ruling to the Ninth Circuit Court of Appeals,” the company told its investors in its most recent financial statement. Such an appeal, the business hopes, will modify or reduce Harborside’s current bill, “and in the future, eliminat[e] it for every other state legal cannabis business in the United States,” DeAngelo said, according to the press release. “The issues at stake are of importance to the entire cannabis industry.”

(And it appears that while the appeal is ongoing, a process that could take years, the dispensary doesn’t have to pay anyway.)

This doesn’t make surviving in the weed world in 2019 any easier. Harborside went public on the Canadian Securities Exchange, an “alternative stock exchange” located in Toronto, where cannabis is legal on the national level (a thing that the United States hasn’t quite figured out yet) in mid-2018. Life as a publicly traded company hasn’t quite been kind: after trading in the $4-$5 range, shares of HBOR were going for $1.34 during trading on Thursday, according to the most recent figures, and some recent acquisitions were canceled.

Harborside’s fate and the fate of its tax bill are not entirely in its own hands: it and other businesses have been steadily lobbying Congress to modify 280E to allow marijuana businesses following state law to make standard deductions — or, failing that, to get Congress to remove cannabis from the Controlled Substances Act, at which point 280E would no longer apply.

Will that happen? If so, when? Nobody can say. Nancy Pelosi’s Democratic-controlled House of Representatives hasn’t proven very willing to call marijuana reform bills for hearings, let alone pass them, which doesn’t really matter as Mitch McConnell’s Senate is unlikely to approve them no matter what the House does. But it’s not hyperbole to state that as Harborside goes, so goes cannabis —and so far, the dispensary has fended off worse challenges than this.

TELL US, have you ever had trouble with the IRS when it came to paying your taxes?