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California Medical Marijuana Dispensaries Barred From Business Expense Tax Deduction

Jeff Chiu / File / AP

This Feb. 1, 2011 file photo shows medical marijuana clone plants at a medical marijuana dispensary in Oakland, Calif.

Jeff Chiu / File / AP

(AP) - A federal appeals court says California medical marijuana dispensaries cannot deduct business expenses from their taxes. That's because pot is illegal under federal law. The decision is a financial setback for pot shops, which have flourished since California voters legalized use of pot for medical purposes.

The case involved a San Francisco dispensary called the Vapor Room that was shut down three years ago under pressure from the U.S. attorney. Owner Martin Olive claimed $650,000 in business expenses on 2004 and 2005 federal income tax returns but the IRS rejected them.

The Ninth U.S. Circuit Court of Appeals upheld that decision. It said federal law denies expense deductions involving traffic in controlled substances.