A California medicinal marijuana business is on the hook for tax penalties for trying to pass itself off as a marijuana producer and improperly deducting business expenses, the U.S. Tax Court ruled.

The case involved Richmond Patients Group, which purchased marijuana in bulk from third-party vendors and processed it to sell to members. The company in 2014 and 2015 deducted its cost of goods sold from its gross receipts and filed an application to change accounting methods to further deduct business costs.

The Tax Court, in a memorandum opinion issued Monday, found that the business can’t claim deductions…