Plaintiff says state owes over $100 million in refunds

This article was produced in partnership with ProPublica’s Local Reporting Network.

The regulators of Colorado’s first-in-the-nation recreational marijuana market have allowed so many sham transactions in the industry to proliferate that honest cultivators and manufacturers shoulder an unfair excise tax burden, claims a lawsuit filed on Thursday that seeks class-action status.

The lawsuit, filed by a large-scale marijuana cultivator in the state, claims the state owes millions of dollars in tax refunds. It alleges failures in enforcement by the Marijuana Enforcement Division have allowed “distortions” in how the state calculates the average market rate (AMR) for unprocessed marijuana that the state uses to set owed industry excise taxes.

The state calculates the AMR by tracking sales transactions reported by manufacturers and cultivators, but the lawsuit claims Colorado has allowed so much fraudulent reporting that the state’s estimated market values are bogus.

It claims that the state’s average market rate for marijuana “has ceased to function solely as an estimate of lawful category-specific market value.” Instead, that calculated rate “functions, at least in part, as a rough proxy for the amount of unpoliced distortion” state officials knowingly allow to exist in the market, according to the lawsuit.

Heather Draper, a spokesperson for the Marijuana Enforcement Division, said agency officials do not comment on pending litigation.

The lawsuit is being pushed by Justin Trouard, the owner of Saguache-based Mammoth Farms, the largest marijuana cultivator in the state. Pueblo-based cultivator and manufacturer Stratos also has agreed to be a named plaintiff. Trouard said other expected plaintiffs are in the process of obtaining legal representation, and that attorneys with the Brownstein Hyatt Farber Schreck law firm will ask a judge to grant class-action status.

He estimated that if the lawsuit is successful, the state will be forced to refund hundreds of millions of dollars in tax collections to marijuana businesses.

“I think that it’s very safe to say that this is the largest financial crime against the taxpayers of Colorado in the history of the state,” Trouard said.

The lawsuit names as defendants the Colorado Department of Revenue, the Marijuana Enforcement Division and Heidi Humphrey, the executive director of the revenue department.

The lawsuit follows a private meeting in March between regulators at the Marijuana Enforcement Division and Colorado Leads, a marijuana industry trade group, during which industry representatives called for regulators to crack down on excise tax fraud.

ProPublica and The Denver Gazette obtained an audio recording of that meeting and revealed earlier this month that Kyle Lambert, the enforcement division’s deputy senior director, acknowledged during the meeting that the amount of chemically converted hemp being sold illegally as marijuana is far greater than the agency has publicly disclosed.

Lambert also described anomalies in the system the state uses to track marijuana production and sales, saying the extent of suspicious transactions in the system “would probably explode your minds.”

Dominique Mendiola, the senior director at the enforcement division, has said Lambert was “speaking frankly to highlight the scale of the problem.” She said the transactions he had described did not on their own “amount to definitive evidence of fraud.”

Jordan Wellington, a marijuana industry consultant and lobbyist, argued during the meeting that “the gaps are known and being exploited,” posing an “existential threat” to the entire marijuana industry in the state.

The lawsuit notes that, in certain instances, the average market rate the state has calculated for unprocessed marijuana used in manufacturing has fluctuated dramatically, in one instance dropping from $349 per pound to $40 a pound from Nov. 1, 2024, through Jan. 31, 2025 – an 89% drop.

It claims the true reason for that dramatic drop stemmed from the agency finally cracking down on a manufacturer the lawsuit alleges was inflating the market through black-market diversion and illicit transfers that had been allowed to go on for years. That operator, who has declined requests for comment, agreed to relinquish its license after state investigators determined it was using banned hemp to manufacture popular vapes falsely labeled as coming from marijuana.

The lawsuit claims that the state has violated Colorado’s Taxpayer’s Bill of Rights, the constitutional amendment passed by voters in 1992, that prohibits any “new tax,” “tax rate increase,” or “tax policy change directly causing a net tax revenue gain” without “voter approval in advance.”

The lawsuit claims part of the problem is that the average market rate for raw marijuana in some instances has been inflated when dishonest manufacturers paid a premium for material they illegally diverted for black-market sales outside the state of Colorado.

“Defendants are aware that this happens and have failed to take steps to end the practice,” the lawsuit states.

Industry insiders argue that hemp often is used to cover up such illegal diversion and to make cheap, imposter products that then get passed on to Colorado consumers.

Last year, Mammoth Farms unsuccessfully sued the state seeking an overhaul in industry regulations. That lawsuit claimed the state had failed to prevent rogue manufacturers from illegally using hemp to manufacture THC distillate that then is falsely labeled as coming from marijuana and is used to manufacture vapes and edibles sold in dispensaries.

Regulatory actions and test results cited as evidence in lawsuits have shown manufacturers have exploited regulatory loopholes to continue using chemically synthesized hemp to make products. Regulators and lawmakers have banned that chemical synthesis process. But manufacturers have a powerful incentive to continue to use the process because using hemp to make distillate is far less costly than using marijuana.

A Denver District Court Judge tossed that lawsuit, saying Mammoth should have first sought rule changes from the state before seeking judicial intervention.