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The U.S. Supreme Court.

The Biden administration has responded to a Denver dispensary's petition in the U.S. Supreme Court by arguing that federal law makes no exception for “state-legal marijuana,” and that states such as Colorado may not authorize businesses to violate that law.

“Marijuana is listed on Schedule I of the Controlled Substances Act ... without any exception for ‘state-legal’ marijuana,” wrote Acting Solicitor General Elizabeth B. Prelogar in a brief filed on Feb. 12. “States may not countermand Congress’s decision to prohibit trafficking in marijuana. Such activity violates federal law even when it does not independently violate state law (and even when it is affirmatively permitted by state law).”

James D. Thorburn, the Colorado attorney who is appealing the case of Denver-based medical dispensary Standing Akimbo against the United States government, expressed disappointment that the Biden administration continues to argue that states’ regulated cannabis regimes are legally void.

“That is precisely the federal government’s position and has been for many years,” Thorburn said. “We were hoping that the Biden administration would soften that stance. It, unfortunately, has not and is doubling down.”

The underlying case, and a series of others like it that Thorburn has also litigated, challenges the Internal Revenue Service's authority in connection with their investigations of cannabis companies’ tax compliance.

At issue is Section 280E of the Internal Revenue Code, which denies business deductions to enterprises “trafficking in controlled substances.” The effect is to raise the tax rate for marijuana companies relative to their counterparts in other industries.

When the IRS began reviewing Standing Akimbo’s tax compliance, it received unsatisfactory substantiation of the company’s finances. The owners believed the IRS was actually looking for evidence to use against them for criminal drug trafficking prosecution, even though the IRS denied this.

The IRS issued summons to the state of Colorado for product tracking details from the Marijuana Enforcement Tracking Reporting and Compliance system. A panel for the U.S. Court of Appeals for the 10th Circuit sided with the IRS last year, finding dispensaries had no ownership of the data they submitted to the state system, and therefore the IRS had not subjected them to an unconstitutional search and seizure.

In a related case decided in 2019, the 10th Circuit also ruled the plaintiffs had not proven the IRS was wrong to disallow Section 280E deductions given the current state of the law.

“The Taxpayers are understandably frustrated with the loss of their business expense deductions under § 280E. Despite operating in accordance with state law controlling the distribution of medical marijuana, the Taxpayers are subject to greater federal tax liability than other legitimate state businesses,” wrote Judge Carolyn B. McHugh. “But state legalization of marijuana cannot overcome federal law.”

During the 2020 presidential campaign, Joe Biden said that he supported demoting marijuana from Schedule I, a legal status given to highly dangerous drugs with no accepted medical use. However, the solicitor general's brief has disappointed advocates of legalized marijuana.

"The Biden administration has a huge opportunity to right the wrongs of the 'war on drugs,'" said former Rep. Jonathan Singer, D-Longmont, who was involved in cannabis legislation in the General Assembly. "In Colorado, legalization is arguably the most popular statewide issue we've seen in a long time. It got more votes than Barack Obama did."

Under the Obama administration, when Biden served as vice president, the U.S. Department of Justice produced guidance to federal prosecutors about enforcement of federal marijuana laws given the legalization in multiple states. While reaffirming the department's commitment to carrying out the will of Congress, "jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective regulatory and enforcement systems...[are] less likely to threaten the federal priorities," the guidance read.

Alyson D. Jaen, a cannabis law attorney with Fortis Law Partners in Denver, said that only "time will tell" if Biden follows through on his campaign promise. But until federal law changes, she predicted the U.S. government would continue to argue in court that marijuana remains outlawed and the IRS has the authority to investigate the industry.

"Cases such as this highlight the need for sweeping marijuana reform, especially when it comes to banking," Jaen added. "Marijuana companies that operate within legal state markets and legally abide by state laws and regulations should not continue to be penalized and pay much higher tax rates than other businesses."

Prelogar asked the Supreme Court to decline to take the case and let the 10th Circuit's ruling stand. She also noted that even if states opt against the criminalization of marijuana, "Colorado may not authorize any individual or business to violate federal law."

Fifteen states and the District of Columbia have legalized retail marijuana for adults, while 35 states and D.C. have adopted medical marijuana. In the 2020 general election, voters in five states approved retail cannabis, medical cannabis or both. Singer said that the federal government for the past decade has largely treated the issue as a local-control item.

"As long as we're not contributing to illegal markets or making the black market worse, Colorado and other states that have agreed to regulate it can go forward," he said. "This is definitely something that I hope lights a fire under the administration to really clarify and protect what the majority of states either medically or recreationally have decided to do."

The case is Standing Akimbo, LLC v. U.S.A.


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