By Jeffrey Steinborn
Can states tax cannabis commerce? Is cannabis properly a Schedule 1 controlled substance? The answers to these two questions, currently in the hands of the courts, could have a major impact on the future of the cannabis industry.
Taxation is a critical issue. Governments see cannabis as an answer to their cash problems. Taxation accompanies most cannabis legalization/regulation schemes. State and local governments fight over the revenue. In Washington, the inability of the Legislature to agree to share some of the revenue with local governments may well be the reason that no new regulations addressing medical marijuana came out this year.
Of course, there’s nothing wrong with taxing legitimate commerce, though some may be offended by a regressive tax — one that burdens the poor and middle class much more heavily than it does the wealthy. But can states tax conduct that is clearly illegal under federal law? A lawsuit recently filed in Thurston County Superior Court is designed to force the courts to address this issue.
Martin Nickerson Jr. is being prosecuted by Whatcom County for operating a medical cannabis dispensary. At the same time, the State of Washington is pursuing him for taxes the state believes should be paid on the cannabis he dispensed. In August, Mr. Nickerson filed a lawsuit in United States District Court, arguing that the state’s action in demanding that he pay taxes was unlawful for at least two reasons. First, it required him to incriminate himself by forcing him to admit to details of the very crime for which he is currently being prosecuted. Second, the federal Controlled Substances Act preempts the subject, and the states cannot tax conduct made illegal by the Controlled Substances Act. Mr. Nickerson asked for declaratory relief, holding that the state’s conduct was unconstitutional, and injunctive relief, enjoining the state from enforcing tax warrants against Mr. Nickerson.
The court accepted the state’s argument that the matter must be brought in state court and dismissed the lawsuit. Mr. Nickerson’s lawyer, my office-mate Douglas Hiatt, promised that he would refile the case in state court. In late October, he did just that.
Martin Nickerson, Jr. v. Washington State Department of Revenue, (et al) was filed in Thurston County Superior Court. The complaint asks for a declaratory judgment as to whether the Controlled Substances Act preempts Washington’s attempts to tax cannabis, and for an injunction to prevent the state from enforcing the tax warrants against Mr. Nickerson. The grounds argued are the same as the original federal lawsuit: preemption and self-incrimination.
Mr. Hiatt expects this case to move swiftly through the courts. He will ask for summary judgment and an injunction. The losing party will almost certainly appeal. The case will probably qualify for direct review by the state Supreme Court. From there, an appeal by writ of certiorari to the United States Supreme Court is the likely final step.
If a state tax on cannabis won’t pass constitutional muster, then all state laws attempting to tax or otherwise regulate cannabis are called into serious question. Some argue that the bringing of this lawsuit sets the cannabis reform movement back. Mr. Hiatt’s response is straight forward: the client has no choice but to challenge the option the state has given him, and the entire public including the cannabis industry is better served by getting these thorny questions answered as soon as possible.
This writer concludes the arguments have legs. Academically speaking, I believe the arguments are correct and supported by the precedents. Given the enormous political significance of the question, however, we should not be surprised to see the courts take some liberties. Of course, were cannabis not a Schedule 1 controlled substance, this issue might well be moot. And that is my next subject.
Since 1972, cannabis has been a Schedule 1 controlled substance. This means the government has concluded that cannabis has “no currently accepted medical use.” The manufacture, distribution or possession of cannabis is always a federal crime, the only exception being a federally-approved research project. Given the clear science that has developed in the last few decades, this has prompted some critics to state simply: “The government is lying.”
Or maybe they’re just ignorant of what’s going on around them.
While the executive branch of our government may choose not to look out the window, it may be that the courts will accept a recent invitation to do so. For the first time since the early 1970s, criminal defendants have been afforded an opportunity to establish that the Schedule 1 placement is arbitrary and capricious — i.e., unconstitutional. In late October, hearings were held before U.S. District Judge Kimberly Miller in Sacramento, California. She allowed defendants charged with a marijuana crime to present evidence that new scientific and medical information raises the question of “whether the continued inclusion of marijuana as a Schedule 1 controlled substance … passes constitutional muster.”
Cannabis advocates in attendance are optimistic. A scheduled three-day hearing was allowed to go on for five days. The judge was paying attention. The witnesses were some of the best experts in the country. They presented very well. Their testimony was interesting and compelling. Even the government’s key witness seemed to concede that cannabis does have some legitimate medical value.
The decision will likely come out in January. Should the judge rule that the Schedule 1 classification does not pass constitutional muster, that’s just the beginning of the litigation. From district court it goes to the 9th Circuit Court of Appeals. After that, the 9th Circuit may decide to hear the matter en banc, (the entire court). From there the appeal is to the U.S. Supreme Court. Quick answers are not likely.
The potential consequences of these cases are serious. A decision unfavorable to the government in either case would require legislators — and those who want to try to comply with the laws — to start at square one. New law, new regulations, new licenses — a whole new game. Whoopee! Full employment for lawyers.
Jeffrey Steinborn has been practicing law since 1968, primarily in criminal defense, but also adding his experience to the legalized cannabis industry.