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Federal lawsuit: Can Washington tax marijuana?

Published: Friday, May 9, 2014 1:57 p.m. CST

SEATTLE — A federal lawsuit is challenging Washington state's authority to tax marijuana as long as marijuana remains illegal under federal law.

The case arises from the state's attempt to collect sales taxes from a medical marijuana dispensary. But lawyer Douglas Hiatt, who filed it late Thursday, said it could throw a wrench in Washington's plans for collecting taxes on recreational marijuana, too.

The author of Washington's recreational pot law, Alison Holcomb, disagreed. She doesn't expect the lawsuit to get very far.

Hiatt is representing the dispensary's operator, Martin Nickerson, who is simultaneously being prosecuted criminally for marijuana distribution and targeted by the state Department of Revenue for not collecting and remitting taxes on the pot he was allegedly distributing. Nickerson can't pay the tax without incriminating himself in the criminal case, in violation of his constitutional rights, Hiatt argued.

Furthermore, the state, which says Nickerson owes more than $62,000, has seized more than $800 from his bank account. Hiatt said it's important to get an answer from a federal court about whether the state took that money legally.

Hiatt opposed Washington's recreational marijuana law and argues any meaningful drug law reform must come at the federal level. Nevertheless, he said he doesn't want to "look like the guy spoiling the party."

"I have no choice," Hiatt said. "I've got a client, he's got a problem, and we've got to fix it. It's a way to get some clarity on what's allowed."

The lawsuit asks the U.S. District Court in Seattle whether Washington's decision to tax marijuana sales is in conflict with marijuana's prohibition under federal law. If it is, the court could bar the state from collecting such taxes.

But Holcomb said there's little danger of that. The state isn't specifically taxing the marijuana at issue in Nickerson's case — it's applying a general sales tax to marijuana-related transactions, she argued.

That's an important difference, she said: If the state had imposed a specific tax on medical marijuana, then Nickerson might be implicating himself by paying it.

Instead, when collecting sales taxes on marijuana transactions and turning that money over to the Revenue Department, dispensaries don't have to identity for revenue officials what they sold — they just have to turn over the money owed on the value of the transactions they conducted, Holcomb said. For that reason, Nickerson wouldn't have been implicating himself by turning over the taxes.

And if Nickerson was so concerned about it, she suggested, he could have filed a letter along with his taxes insisting that his payment was not an admission of any illegal activity.

"The bottom line is he should have been paying his sales taxes along the way," she said.

Hiatt dismissed that analysis. He said that the Revenue Department has sent letters to Nickerson saying that he was selling marijuana and that he owed taxes on the pot he sold.

"They're assessing him based on the amount of marijuana they think he has sold," Hiatt said. "They're not applying a general sales tax to a business; they're saying, 'We're applying this tax to you because you're selling marijuana.' We're not talking about squirt guns."

The lawsuit also challenges a change made to the state's medical marijuana law in 2011, which expressly allowed cities and counties to adopt zoning requirements, business license requirements and to collect business taxes from marijuana-related operations. It argues that allows the jurisdictions to regulate a substance that's illegal under federal law, in conflict with the Controlled Substances Act.

The Revenue Department, which says Nickerson owes more than $62,000, has repeatedly warned medical marijuana dispensaries that they're required to pay regular sales and business taxes. Neither the department nor the state Attorney General's Office immediately responded to inquiries seeking comment on the lawsuit.

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