Screen Shot 2013-09-04 at 1.25.34 PMA New Department of Justice (DOJ) announcement is the latest in a series of events that suggest the federal government is serious about backing off enforcement of its marijuana laws.

In response to ballot initiatives in states such as Colorado and Washington, the DOJ made clear “that it is deferring its right to challenge their legalization laws at this time.”

The announcement came on the heels of a new memorandum updating the DOJs marijuana enforcement policy.  It outlines eight enforcement priorities including prohibiting possession to minors and preventing violence that state’s must maintain to keep the DOJ from conducting raids and prosecutions. While it leaves room for broad interpretation, and makes clear that the policy is subject to change, the response is undoubtedly a sigh-of-relief for growers and distributors across the country.

Here’s the bad news for the marijuana Industry: The IRS has no choice but to continue its policy of denying tax deductions to even legal dispensaries.

Related: Taxing Marijuana

“The federal tax situation is the biggest threat to businesses and could push the entire industry underground,” the leading trade publication for the marijuana industry reported.

Because marijuana remains classified as a schedule 1 drug, the IRS must enforce Section 280e of the tax code, which prohibits business that engage in the trafficking of controlled substances from deducting expenses.  Even some local governments in states where marijuana has been legalized follow the federal model of taxation, meaning that marijuana businesses must be incredibly profitable to stay afloat.

The IRS isn’t to blame here (for once). It does not create tax law, it enforces it.  Congress is responsible for setting tax policy, and is the only body of government which holds the power to change the internal revenue code.  Likewise, Congress could also declassify marijuana as a controlled substance to allow the IRS to treat marijuana distributors like normal businesses.

Until then, the IRS will stay at odds with state’s laws, the President’s promises, and the DOJ’s enforcement policies.

Related: Obama administration will not block state marijuana laws, if distribution is regulated

Reference the table above to see which states have passed marijuana legislation contradicting federal law. The current tally is about 63% of states and the District of Columbia.  

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