Perhaps the biggest problem facing medical marijuana dispensaries are the federal tax consequences of operating such a business. While Colorado state voters have legalized marijuana, the IRS still considers marijuana dispensaries to be drug traffickers under federal law and IRS audits of marijuana dispensaries are on the rise. Section 280E of the United States Tax Code provides that no deduction or credit shall be allowed for any amount paid or incurred during the taxable year when the expenses are incurred in connection with the trafficking of a controlled substance. The disallowance of expenses is a very harsh punishment for businesses because businesses typically pay taxes on their net, not their gross income. It is important to note that cost of goods sold is not a deduction but is subtracted from gross receipts in order to determine a taxpayer's gross income. Thus, a dispensary who maintains sufficient records should be permitted to reduce their gross receipts by their cost of goods sold. Ultimately, the federal tax consequences could effectively put dispensaries out of business.