Court Rejects Attempt to Overturn Weed Taxes in Colorado

A federal court has rejected an attempt to nullify Colorado’s taxes on recreational weed.

A federal judge in Colorado denied a temporary injunction to a group that sued the state over the taxes. The decision doesn’t end the lawsuit, but it’s a big stumbling block for the group.

Marijuana GavelThe lawsuit claims the 25 percent tax is unconstitutional because it forces pot providers to incriminate themselves on their tax returns. If they pay taxes on weed that’s illegal under federal law, the argument goes, they’ll be testifying against themselves.

The Fifth Amendment to the Constitution provides protection against such self-incrimination. The government cannot force suspects, defendants, or witnesses to provide evidence against themselves.

Colorado levies two taxes on marijuana: a 10 percent sales tax and a 15 percent excise tax. The state’s regular 2.9 percent sales tax also applies.

Voters legalized pot in Colorado in 2012 when they passed Amendment 64 at the ballot. The first marijuana stores opened Jan. 1.

But weed remains illegal for any purpose under federal law. Even simple possession can bring serious penalties. That’s why the plaintiffs sought an order stopping the state taxes while the court considers the lawsuit.

Even without that injunction, the plaintiffs will continue to press the lawsuit. Their argument is simple: Not even the IRS can compel Americans to incriminate themselves.

They face major hurdles, however. A landmark Supreme Court decision from the 1930s, which resulted from the trial of Al Capone, held that even criminals must pay their taxes. What’s more, the U.S. tax code bars tax deductions from cannabis providers, even those who only sell legal medical marijuana.

The gulf between federal and state law, plus the risk of self-incrimination and the hard punch of taxes, could spur many providers to go underground.

Marijuana and TaxesProposed legislation in Congress could resolve the situation, though it’s not clear whether it has substantial support. The Marijuana Tax Equity Act would essentially legalize marijuana and allow state and federal governments to tax it without forcing taxpayers to incriminate themselves.

If the federal prohibition stands – a good bet considering the state of national politics – the taxes could put providers out of business, the plaintiffs say. On the other hand, the taxes bring in millions of dollars in revenue each month. That could make it harder for opponents to end the levies.

Since they’re barred from claiming deductions for their marijuana businesses, many providers instead try to deduct the costs of ancillary businesses. For example, if a medical provider also offers care-giving services, expenses of the care-giving portion of the business can be deducted.

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