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Washington pot grower sues state over taxing federal crime

Published time: May 12, 2014 20:30
AFP Photo / Miguel Rojo

AFP Photo / Miguel Rojo

A Washington man is suing representatives of that state for taxing his marijuana crop, saying the state can’t tax him because he’s being federally prosecuted for that very crop, and that paying the tax would be a violation of his 5th Amendment rights.

Martin Nickerson Jr. is the operator of Northern Cross Collective, a medical marijuana dispensary in Bellingham. He says he is simultaneously being prosecuted criminally for marijuana distribution and targeted by the Washington Department of Revenue (DOR) 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, his lawyer argued in the lawsuit complaint.

Washington voters approved a 1998 initiative to allow the use of medical marijuana. In 2011, the DOR began to notify marijuana establishments that it would begin to tax marijuana transactions. Washington voted to legalize marijuana for recreational use in November 2012.

According to the complaint, in March 2012, the Bellingham Police Department executed a search warrant for Northern Cross Collective, seizing money and other items. The same day, the collective was also raided by the Skagit County Drug Enforcement Agency, a task force made up of federal and local agents. The task force arrested Nickerson and two employees on several felony counts relating to possession and distribution of pot, according to the Bellingham Herald. His lawyers argued in a lawsuit seeking an injunction into further law enforcement actions that Nickerson and his employees had taken great pains to keep Northern Cross's distribution activities within the confines of Washington’s medical marijuana laws.

In November 2013, the DOR issued both Nickerson and the Northern Cross Collective Gardens excise tax assessments totalling nearly $54,000. In December, Nickerson and Northern Cross received a tax warrant for unpaid sales taxes totalling over $62,000. At the beginning of this year, Nickerson appealed the tax assessments, but was formally denied by the DOR. In March, Nickerson’s ban, JP Morgan Chase, garnished money in his account to the state.

Nickerson wants to know whether the state can "grant authority to local and county governments to authorize licensing and collect taxes on an activity that is a crime," Courthouse News Service reports. He also wants the state enjoined from collecting taxes and garnishing money until the lawsuit is settled and the court has decided “whether the state of Washington's actions are preempted by the federal Controlled Substances Act."

The Supreme Court ruled in 1927 that unlawfulness of an activity doesn’t prevent taxing that activity. That case, the United States v. Sullivan, said that gains from illicit traffic in liquor during Prohibition were subject to the income tax. Mobster Al Capone and Soviet spy Aldich Ames were both prosecuted for tax evasion on their illegal activities. The Supreme Court ruled in 1976 in Garner v. United States that the 5th Amendment may allow a person to refrain from revealing the source of illegal income.

“The State of Washington DOR officials violated Federal law requiring that the Plaintiff commit additional violations of federal law because the must comply with monthly tax reporting and tax payments,” the complaint says.

Nickerson previously signed on to a lawsuit in 2013 regarding the Bellingham City Council’s unanimous vote to impose interim zoning restrictions on medical marijuana outlets by an 'emergency' ordinance, the Herald reported at the time.

Nickerson’s lawyer, Douglas Hiatt, said the lawsuit could throw a wrench in Washington’s plans to collect taxes on now-legal recreational marijuana because it asks whether the state’s decision to tax marijuana sales is in conflict with the drug’s current prohibition under federal law, the Associated Press reports. Hiatt opposed the state’s recreational pot law because he thinks any meaningful drug law reform must come at the federal level.

But Alison Holcomb, the author of the state’s recreational pot law, says Washington isn’t specifically taxing Nickerson’s marijuana. She says the state is applying a general sales tax to pot-related transactions. This means that dispensaries don’t have to identify what they sold to the DOR, she argues, they just have to report and pay taxes on the revenue.

"The bottom line is he should have been paying his sales taxes along the way," Holcomb told AP.