CannaBizDisputes™

The U.S. Supreme Court denies petitions for certiorari all the time without much fanfare. However, in Standing Akimbo, LLC v. United States (https://www.supremecourt.gov/opinions/20pdf/20-645_9p6b.pdf), an unremarkable denial of certiorari gained some attention because of an accompanying Statement of Justice Thomas, in which Justice Thomas raised questions about whether Congress’s ban on local cultivation and use of marijuana is necessary and proper under the Commerce Clause of the US Constitution. In his Statement, Justice Thomas suggests that the inconsistent federal treatment of cannabis may fundamentally undermine the rationale the Supreme Court applied in 2005 to uphold federal regulation of intrastate cannabis business activity.

Although Justice Thomas’ Statement did not overturn any existing prohibition on commercial cannabis under federal law, his rationale may be used by cannabis business advocates to urge Congress to reconsider the longstanding treatment of marijuana as a prohibited Schedule 1 drug under the Controlled Substances Act. As Justice Thomas notes, the federal government’s “half-in, half-out” approach does little to establish a coherent policy; to the contrary, it only serves to make life difficult for businesses seeking to avail themselves of new opportunities created by state legislative reforms.

At issue in Standing Akimbo, LLC v. United States was the petitioners’ efforts to preclude the IRS from obtaining disclosure of certain records relating to their income. The petitioners operate a medical marijuana dispensary in Colorado, as permitted under Colorado state law. Ordinarily, for federal tax purposes, businesses may deduct from their income certain ordinary and necessary business expenses (such as rent or employee salaries). However, Section 280E of the U.S. Tax Code makes life especially difficult and expensive for cannabis companies by creating an exception to the deductibility of these ordinary and necessary business expenses. When the business in question deals in controlled substances prohibited by federal law, no such offset applies, and the business must pay taxes on income without reduction or deductibility (except for the cost of the goods sold).

The IRS questioned whether the petitioners had taken improper deductions for their dispensary. Claiming fear of criminal prosecution, the petitioners declined to provide audit information to the IRS. The IRS then issued summonses for information about petitioners’ business operations to the Colorado Department of Revenue’s Marijuana Enforcement Division, the state entity responsible for regulating licensed marijuana sales. The petitioners raised a series of challenges to the IRS’s summonses at the District Court and before the Court of Appeals for the Tenth Circuit, but those courts rejected their challenges. The petitioners then sought Supreme Court review. The U.S. Supreme Court, however, left the Tenth Circuit’s decision undisturbed and did not address the various constitutional challenges.

Justice Thomas agreed that the Supreme Court should not hear the case. However, he noted that “the Federal Government’s current approach to marijuana bears little resemblance to the watertight nationwide prohibition” present when the Supreme Court, in Gonzalez v. Raich, 545 U.S. 1 (2005), found the Commerce Clause of the U.S. Constitution authorized Congress to enact “comprehensive legislation to regulate the interstate market in a fungible commodity [cannabis]” and that “exemptions for local use could undermine this ‘comprehensive’ regime.” Id. at 22-29. At the time of the Raich decision, the Court stressed that the Congress had decided “to prohibit entirely the possession or use of [marijuana]” and had “designate[d] marijuana as contraband for any purpose,” id. at 24-27 (emphasis added), such that prohibiting any intrastate use was “necessary and proper” to avoid a “gaping hole” in Congress’s “closed regulatory system.” Id. at 13, 22.

According to Justice Thomas, federal policies of the past 16 years have greatly undermined the reasoning in Raich. Indeed, Justice Thomas called the current federal approach a “half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana . . . strain[ing] basic principles of federalism . . . .” Justice Thomas notes that although the Controlled Substances Act still flatly forbids the intrastate possession, cultivation, or distribution of marijuana, memoranda issued by the U.S. Department of Justice in 2009 and 2013 outline a policy against intruding on state legalization schemes or prosecuting individual complying with state law. Moreover, since 2015, Congress has prohibited the Department of Justice from spending funds to prevent states’ implementation of their own medical marijuana laws.

Justice Thomas went on to say that against this background, it was understandable for business owners in Colorado to think that their intrastate marijuana operations would be treated like any other enterprise that is legal under state law. However, he noted that the patchwork of federal laws and enforcement creates much uncertainty for these businesses. In addition to the disparate treatment under the federal tax code, state sanctioned cannabis businesses often must operate in cash because of federal prohibitions on financial institutions from accepting deposits and providing other banking services to cannabis businesses. In sum, Justice Thomas concluded, “If the Government is now content to allow States to act ‘as laboratories’ . . . then it might no longer have authority to intrude on ‘the States’ core police powers’ . . . . A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.”

For more information on the topic discussed, contact:

• Paul D. Sarkozi  |  sarkozi@thsh.com  |  212-508-7524