In a remarkable statement respecting the denial of a cannabis company’s petition for certiorari and sending shockwaves through the cannabis industry, Justice Thomas took aim at the federal government’s inconsistent and incoherent treatment of cannabis. In his statement, Justice Thomas contends that the government’s current and confusing approach constitutes a “half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”
The Petitioner, in this case a cannabis company, challenged the Tenth Circuit’s ruling that disallowed certain business expense deductions taken by Petitioner under 26 U.S.C. § 280E of the Tax Code—the provision that precludes businesses dealing in controlled substances prohibited by federal law from taking ordinary and necessary business deductions. Section 280E has long been a thorn in the side of cannabis companies who complain that the provision treats them inequitably compared to other, more mainstream businesses. Indeed, cannabis companies operating in states where cannabis is legal argue that, given their legal status at the state level, section 280E shouldn’t apply to them and, as a result, they should be eligible to take ordinary and necessary business deductions.
It now appears that these cannabis companies may have support from at least one Supreme Court justice.
In writing his 5-page statement lamenting the federal government’s disjointed cannabis policies, Justice Thomas brought to light the reality many in the cannabis industry have faced: that the government’s “willingness to often look the other way on marijuana” as more states continue to legalize medicinal and recreational cannabis use while simultaneously precluding cannabis companies from seeking the same tax deductions as other businesses “is more episodic than coherent.”
In other words, the federal government’s one-foot-in-one-foot-out cannabis policies have resulted in a “contradictory and unstable state of affairs” that “strains basic principles of federalism and conceals traps for the unwary.” This dovetails an existential question many cannabis operators have asked for years: if I am compliant with my state’s laws, why am I not allowed to take the same federal tax deductions as other state-compliant businesses?
In poking holes in the federal government’s disconnected cannabis policies, Justice Thomas pointed to the fact that the government has refused to reschedule marijuana, which would alleviate this specific tax concern and would parallel many state laws regarding cannabis: “[d]espite the Federal Government’s recent pro-marijuana actions, the Attorney General has declined to use his authority to reschedule marijuana to permit legal, medicinal use.”
And the incoherent policies are “not limited to the tax context.” Justice Thomas highlighted the well-known fact that many cannabis-related businesses are forced to operate entirely in cash because certain banks and financial institutions are prohibited from servicing clients that violate federal law. What’s more, given the inherent danger of operating an all-cash business, cannabis operators would violate federal drug trafficking law if they hired a bodyguard for protection. Given this unfortunate reality, operating a cannabis company is often both distressing and perplexing.
In concluding his castigation of the federal government’s cannabis policies—and perhaps providing an off-ramp to circumspect politicians to finally reschedule cannabis—Justice Thomas asserted that:
“[i]f the Government is now content to allow States to act as laboratories and try novel social and economic experiments, then it might no longer have authority to intrude on the States’ core police powers to define criminal law and to protect the health, safety, and welfare of their citizens.” If that’s the case, he averred, a “prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.”
This statement by Justice Thomas—noted for his ironclad conservative bona fides—may be precisely the political cover that reluctant Republicans and Democrats in Congress need to finally change federal cannabis legislation.