Activists sue to block marijuana sales tax in Colorado

Marijuana legalization advocates are suing to block state and local governments from collecting certain taxes on weed sold in Colorado, out of concern that businesses paying the fees would incriminate themselves at the federal level.

The suit, which addresses the complications that arise from a state legalizing a drug that remains illegal under federal law, was filed in Denver District Court by local attorney Rob Corry. The main goal is to reduce the 29 percent wholesale and retail taxes collected at the state and local levels on sales of recreational marijuana, and specifically block those taxes that apply only to their industry.

Recreational marijuana was legalized in Colorado when voters approved an amendment to the state constitution in November 2012. Legal sales began Jan. 1.

But the lawsuit contends that requiring those involved in Colorado's legal marijuana industry to pay taxes could get them in trouble with the feds.

"They're open records, and they are admitting to a federal crime," Corry said. "It's still a federal crime to sell marijuana and I don't agree with that law, but it is the law."

Corry filed the suit on behalf of six individuals, two of whom use only pseudonyms in the complaint. Colorado Gov. John Hickenlooper, Denver Mayor Michael Hancock, the Denver Treasury Division and the state Department of Revenue are listed as defendants.

The suit uses the rationale that federal law takes precedence over state law: "The underlying rationale of the preemption doctrine is that the Supremacy Clause invalidates state laws that 'interfere with, or are contrary to, the laws of Congress.'"

"The fact that there are marijuana-specific taxes," Corry maintains, "puts every single one of these business owners and every single one of these consumers in danger of federal prosecution, potentially. That's a violation of the Fifth Amendment."

But when it comes to taxes, the federal government also is entitled to its share, explained Amanda Cruser, a Denver area tax attorney who once worked for the U.S. Department of Justice. "On the federal side, if you don't pay your income taxes and you don't pay your employment taxes, you're going to be subjecting yourself to criminal tax charges," she said.

The irony of the federal government collecting taxes on a substance illegal under federal law is not lost on federal drug task force head Tom Gorman.

"As far as I know, if the federal government takes money from a criminal enterprise, that's part of money laundering," Gorman said. "When they can seize the money because it's illegal but then to take it in and use the money, to me would be a violation of law in itself."

In an August 2013 press release, the Justice Department said it had notified Colorado and Washington (the two states that have legalized recreational marijuana) that it would essentially look the other way -- at least for now. "The Department has informed the governors of both states that it is deferring its right to challenge their legalization laws at this time," the statement said.

That stance has done little to clarify the situation since this and subsequent administrations would reserve the right to change that policy. The lack of certainty has left both opponents and proponents of marijuana legalization frustrated and confused.

"I think the federal government needs to make up its mind whether they have supremacy over state law, and then enforce that law," Gorman said. "It makes no sense. The federal government needs to step up and say if you wanna change it, change it in Congress not state by state."

Corry, a legalization advocate, agrees. "This question of the tension between federal law and state law is the question that confronts the marijuana community every day," he said. "Our governor has been essentially impotent. He should demand that Congress should do something about this and we hope this lawsuit, by depriving them from tax revenue, will cause that to happen."