The November 29, 2018 US Tax Court decision in the Harborside case provides some excellent background on the state versus federal marijuana/cannabis brouhaha (see 151 T.C. No. 11, PATIENTS MUTUAL ASSISTANCE COLLECTIVE CORPORATION d.b.a. HARBORSIDE HEALTH CENTER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; Docket Nos. 29212-11, 30851-12, 14776-14. Filed November 29, 2018 available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11828).
The decision was all about the infamous section 280E of the Internal Revenue Code. That section was added to the Code after a series of cases found that criminals could deduct “all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.”Section 280E was added to prohibit businesses engaged in illegal activity from deducting business expenses such as payroll, employee benefits, and rent, from gross income for the purposes of determining federal income tax. In this Harborside case, the Court found that (i) a state-licensed medical marijuana distributor is in the business or trade of trafficking a controlled substance, and (ii)since Harborside’s sole trade or business was trafficking in a controlled substance, IRC s. 280E prevented it from deducting business expenses. At pages 48-49, the Court wrote that “all taxpayers – even drug traffickers – pay tax only on gross income, which gross receipts minus the cost of goods sold … which is the costs of acquiring inventory, through either purchase or production.”
There are some interesting facts and observations around Harborside’s “booming business” that “generated a gusher of revenue.” That aside, at pages 17-18 the Court addresses the conflict between federal and state law and, in a footnote, makes the very interesting– and for adult-use cannabis and/or recreational marijuana advocates, perhaps a chilling – observation that only medical/medicinal cannabis regimes and businesses, not adult-use regimes and businesses, have some protection against prosecution by the Department of Justice. The Court wrote:
The conflict between federal and state law went to the Supreme Court in 2005 when two California medical-marijuana users tried to enjoin the U.S. Attorney General and the Drug Enforcement Agency from enforcing federal marijuana law against them. See Gonzales v. Raich, 545 U.S. 1, 7(2005). The Court upheld the federal prohibition on marijuana sale and possession with respect to medical-marijuana users, both under the Commerce Clause, U.S.Const. art. I, sec. 8, cl. 3, and the Supremacy Clause, U.S. Const. art. VI,cl. 2. Raich, 545 U.S. at 22, 29.
One might think the Supremacy Clause would have stifled the spread of state attempts at legalizing what remained illegal under federal law.But one would be wrong. And Congress complicated the situation by enacting a series of appropriations riders that prevent the Department of Justice (DOJ)from using any funds “to prevent * * * [States that permit medical-marijuana use] from implementing their own laws that authorize the use, distribution,possession, or cultivation of medical marijuana.” Consolidated Appropriations Act, 2017, Pub. L.No. 115-31, sec. 537, 131 Stat. at 228; see also Consolidated Appropriations Act,2016, Pub. L. No. 114-113, sec. 542, 129 Stat. at 2332-33 (2015); Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, sec. 538,128 Stat. at 2217 (2014). When interpreting such a rider, the Ninth Circuit said that DOJ prosecutions of individuals who complied with state medical-marijuana laws interfered with the implementation of such laws and were therefore impermissible. United States v. McIntosh, 833 F.3d 1163, 1177-78 (9thCir. 2016). [Footnote 13 – see below]. So, medical marijuana is illegal under federal law, but the statutes criminalizing it may not be enforced–at least not by the DOJ.
Footnote 13 – Note as well that these appropriations riders limit DOJ prosecutions of activity that would be legal under medical-marijuana laws. Thirty-three states now allow medical marijuana use: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan,Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico,New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,Utah, Vermont, Washington, and West Virginia. Nat’l Conference of State Legislatures, State Medical Marijuana Laws, Tbl. 1 (last updated Nov. 8, 2018),http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.So do the District of Columbia, Guam, and Puerto Rico. Id. Thirteen states permit medical use of some low-potency marijuana products: Alabama, Georgia,Iowa, Indiana, Kentucky, Mississippi, North Carolina, South Carolina,Tennessee, Texas, Virginia, Wisconsin, and Wyoming. Id. Tbl. 2. Alaska,California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont,Washington, the District of Columbia, and the Northern Mariana Islands have repealed bans on recreational marijuana use. Id. Tbl. 1. No case law on how these appropriations riders will affect federal enforcement of federal law in these states has yet emerged.
So the US Tax Court has recognized that current law – the annual federal spending bill – prevents the Department of Justice from using any funds to prevent States that permit medical-marijuana use from implementing their own medical marijuana laws, and at least one federal appeals court has extended that protection to individuals who comply with those state medical-marijuana laws. But there is nothing in the law – statute or case law – that extends these same prohibitions and protections to states’ recreational marijuana laws, and to individuals who are complying with those laws.