Howard Gleckman believes that the federal government should reconsider their taxation of medical marijuana, given its widespread legality:
Firms can legally sell medical marijuana in 19 states and the District of Columbia and recreational weed in two. They must pay federal income taxes, but unlike all other businesses they are prohibited from reducing their taxable income by deducting business expenses. It is, to say the least, an odd state of affairs. Almost all firms are taxed on their income, that is, revenues minus expenses. But not businesses that sell drugs such as marijuana. In effect, they must pay a gross receipts tax, not an income tax. The loss of those deductions is a big deal.
How this came about:
Congress passed the law explicitly barring deductions for drug sellers back in 1982. According to a nice summary by Stephen Fishman at nolo.com, this happened after the Tax Court ruled that a cocaine dealer could reduce his taxable income by subtracting the wholesale cost of the drugs he peddled. It even let him take a home office deduction for his illicit activities. Curiously, the law (Sec. 280E, if you are keeping score) applies only to firms that sell illegal drugs. As Fishman notes, a professional hit man can deduct his cost of doing business. So can a prostitute. But a drug seller cannot.