Supreme Court Final Day

In this June 20, 2019, file photo, the Supreme Court is seen under stormy skies in Washington. Two issues that could determine the distribution of political power for the next decade await resolution on the Supreme Court's final day of decisions before a long summer break. Chief Justice John Roberts could well be the author of decisions on both politically charged topics Thursday, June 27, whether to allow a citizenship question on the 2020 census and place limits on drawing electoral districts for partisan gain.

A Denver medical marijuana dispensary has asked the U.S. Supreme Court to decide whether federal law explicitly overrides Colorado’s system of legalized marijuana, and also whether the Fourth Amendment shields cannabis companies’ financial information from tax investigators.

"Thirty-seven states and the District of Colombia [sic] have legalized cannabis and the federal government is refusing to stand down. There is not enough support in Congress to address the conflicting laws,” wrote James D. Thorburn, attorney for Standing Akimbo, in a petition submitted to the Supreme Court. “Federal agencies are overstepping their constitutional bounds in the wake of the lack of legislative resolution.”

Thorburn has litigated a series of cases before federal courts in Colorado challenging the authority of the Internal Revenue Service to obtain financial information of cannabis businesses from the state of Colorado. When IRS investigators began reviewing the tax compliance of Standing Akimbo and other retailers, the companies did not substantiate their filings to the IRS’s satisfaction.

The owners of Standing Akimbo believed the IRS was surreptitiously searching for evidence for federal prosecutors to use against them for drug trafficking crimes. The IRS instead requested product tracking details from Colorado’s Marijuana Enforcement Division and the Marijuana Enforcement Tracking Reporting and Compliance system.

The U.S. Court of Appeals for the 10th Circuit determined that the Fourth Amendment, which protects against unreasonable searches and seizures, did not shield the privacy of Standing Akimbo’s business data.

“Taxpayers chose to operate a marijuana business under Colorado law and, thus, agreed to provide certain information to the Enforcement Division,” wrote Judge Gregory A. Phillips in an opinion from April of this year. The plaintiffs “have no ownership, possession, or propriety [sic] interest in them.”

In the petition for Supreme Court review, Thorburn disagreed, arguing the IRS needed to obtain a search warrant and show probable cause. He contended that the “sole question” was whether the Controlled Substances Act, which still outlaws marijuana at the federal level, preempts Colorado’s regime of legalized cannabis.

“Absent the explicit direction by Congress prohibiting that which is expressly legal under Colorado law, Congress did not override Colorado [state] cannabis distribution laws in favor of the CSA,” reads the petition to the Supreme Court. While acknowledging Congress has the power to restrict marijuana sales, Thorburn did not believe Congress explicitly intended to prevail over state law.

Following Colorado voters’ legalization of retail marijuana in 2012, Robert A. Mikos, a professor of law at Vanderbilt University, published an essay suggesting state laws that regulate marijuana are consistent with Congress’ intent in passing the Controlled Substances Act because they similarly restrict the use, distribution and possession of the drug.

However, “[n]either the United States Supreme Court, nor any federal appellate court, nor the United States Department of Justice (DOJ) has yet opined on Congress's intent to preempt state marijuana reforms,” Mikos observed.

The conflict between state and federal law, if it exists, seemingly grew after Election Day, as four states legalized retail marijuana and Mississippi voters greenlit medical marijuana.

On the other contested issue in the Standing Akimbo case, the 10th Circuit as recently as October stood by its analysis in other cases brought by Thorburn on behalf of Colorado cannabis retailers. The litigation similarly involved the use of section 280E of the Internal Revenue Code, which prevents businesses from making deductions if they are “trafficking in controlled substances.”

Standing Akimbo has asked the Supreme Court to declare the law unconstitutional because it taxes “artificial income,” meaning business expenses paid on top of income.

The National Cannabis Industry Association agreed that the tax provision majorly affects businesses’ taxable income, estimating a marijuana company with $1 million in gross income would have a 70% effective tax rate, compared to 30% for a comparable business in another industry.

“Cannabis entrepreneurs want to pay federal and state taxes,” the group explained in a fact sheet. “But the current taxation climate has convinced some cannabis entrepreneurs to either ignore 280E on their tax filings, or forego paying taxes altogether. These businesses would rather gamble on the IRS overlooking their filing than see their revenues evaporate due to 280E.”

Jennifer Benda, a tax and cannabis attorney with Hall Estill in Denver, observed that the Supreme Court has declined to take up similar cases challenging section 280E.

"While a more conservative court may be more sympathetic to business-friendly tax arguments," she said, "it remains to be seen whether a conservative court would extend this generosity to marijuana businesses while they are still illegal under federal law."

The federal judges in Colorado who have considered the claims of Standing Akimbo and others in the cannabis industry have upheld the broad investigative authority of the IRS. Although the agency declined to give the business owners immunity from prosecution, the courts have found no evidence the agency was acting in bad faith or intended to use its findings for criminal prosecutions.

"If you think that this is 'just tax, what’s the big deal,'" Thorburn said after the 10th Circuit ruled against his clients in October, "please keep in mind that the American Revolution was born out of the abusive tax collection practices of the British revenue agents."

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