Recently, the Supreme Court denied a petition for a writ of certiorari appealing from the 10th Circuit decision in Standing Akimbo, LLC v. United States, 955 F.3d 1146 (10th Cir. 2020), itself an appeal of an adverse Colorado District court decision.
Justice Thomas dissented from the denial of certiorari at some length, however. Statement of Justice Thomas, June 28, 2021, Standing Akimbo, LLC v. United States, 594 U.S. __ (2021). His dissent discusses Gonzales v. Raich, 545 U.S. 1 (2005), a case in which the Supreme Court decided 6-3 that prohibiting entirely local (in California) consumption of cannabis for medicinal purposes was a legitimate exercise of Congressional power under the Commerce Clause. The rationale (quoting from the Thomas certiorari dissent) was that “Congress had enacted comprehensive legislation to regulate the interstate market in a fungible commodity and that exemptions for local use could undermine this comprehensive regime.” As Justice Thomas points out, the federal government’s actions in the succeeding 16 years have undermined this reasoning, resulting in “a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”
With respect to Section 280E, his footnote about tax is worth reading in its entirety:
In their petition for a writ of certiorari, petitioners contend that the lack of a deduction for ordinary business expenses causes the tax to fall outside the Sixteenth Amendment’s authorization of “taxes on incomes.” Therefore, they contend the tax is unconstitutional. That argument implicates several difficult questions, including the differences between “direct” and “indirect” taxes and how to interpret the Sixteenth Amendment. Cf. National Federation of Independent Business v. Sebelius, 567 U. S. 519, 570–571 (2012); Taft v. Bowers, 278 U. S. 470, 481–482 (1929). In light of the still-developing nature of the dispute below, I agree with the Court’s decision not to delve into these questions.
However, the view of the government is that it’s not a complicated issue at all:
Congress’s broad authority to impose taxes on business comes from Article I of the United States Constitution. The Sixteenth Amendment did not constrain or alter that authority in any way. What the Sixteenth Amendment did was to undo the result in Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895), which held that a tax on income from property is a direct tax that must be apportioned. But even Pollock, the Supreme Court’s most aggressive interpretation of the Direct Tax Clause, makes clear that a tax on business proceeds is not a direct tax. Because the Sixteenth Amendment has no impact on Congress’s authority to tax business proceeds, Section 280E would not violate the Constitution even supposing that it had the effect of imposing a tax on more than a marijuana dispensary’s income.
Brief for Appellee (Department of Justice) at 13, Patients Mutual Assistance Collective Corp. v. Comm’r, 995 F.3d 671 (9th Cir. 2021), No. 19-73078.
The IRS continues to advance this line of reasoning in current Tax Court cases, notwithstanding the fact that no court has ever endorsed it — even Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018), which upheld the constitutionality of Section 280E under the Sixteenth Amendment, failed to mention this esoteric theory.
Questions about the interpretation of the Sixteenth Amendment are also arising in non-cannabis tax contexts. Recent legislative proposals to tax unrealized gains on a mark-to-market basis or to impose a wealth tax clearly implicate Sixteenth Amendment issues.