STATE DEFENDANTS MOTION TO DISMISS AND BRIEF IN SUPPORT

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1 DISTRICT COURT, CITY AND COUNTY OF DENVER, COLORADO 1437 Bannock Street Denver, CO NO OVER TAXATION, a Registered Colorado Issue Committee, et. al., Plaintiffs, v. JOHN HICKENLOOPER, in his official capacity as Governor of Colorado; STATE OF COLORADO DEPARTMENT OF REVENUE; MICHAEL HANCOCK, in his official capacity as Mayor of Denver, Colorado; and DENVER TREASURY DIVISION, Defendants. JOHN W. SUTHERS, Attorney General MATTHEW D. GROVE, Assistant Solicitor General, 34269* SUEANNA JOHNSON, Assistant Attorney General, 34840* ROBERT H. DODD, Senior Assistant Attorney General, 27869* KELLY A. ROSENBERG, Assistant Attorney General, 35685* Ralph L. Carr Judicial Center 1300 Broadway, 8 th Floor Denver, CO Phone: Dodd: (720) Rosenberg: (720) FAX: (720) robert.dodd@state.co.us kelly.rosenberg@state.co.us *Counsel of Record Case No. 14CV32249 Div: 203 STATE DEFENDANTS MOTION TO DISMISS AND BRIEF IN SUPPORT

2 MOTION TO DISMISS Governor John Hickenlooper and the Colorado Department of Revenue (collectively State Defendants ), through the Office of the Colorado Attorney General, move to dismiss Plaintiffs complaint pursuant to Rule 12, C.R.C.P. 1. Rule 121, section 1-15 Certification: Attorney Matthew Grove has conferred with Plaintiffs attorney, Mr. Robert Corry, concerning this motion and the relief requested. Plaintiffs oppose this motion. 2. Plaintiffs complaint must be dismissed because the Court lacks jurisdiction over the subject matter. C.R.C.P. 12(b)(1). a. Plaintiffs have failed to exhaust their plain, speedy and adequate administrative remedies, available under Titles 24 and 39, Colorado Revised Statutes. b. To the extent Plaintiffs seek refunds on behalf of other unnamed taxpayers, they lack standing. 3. Additionally, Plaintiffs complaint must be dismissed because it fails to state a claim upon which relief can be granted. C.R.C.P. 12(b)(5). Accepting all Plaintiffs factual allegations as true, the complaint fails to state a claim for relief. 4. In support of this Motion, State Defendants submit the following Brief and legal argument. 2

3 BRIEF IN SUPPORT OF MOTION TO DISMISS John W. Hickenlooper, in his official capacity as Governor of the State of Colorado, and the Colorado Department of Revenue (collectively, the State Defendants ), move to dismiss the Plaintiffs complaint pursuant to C.R.C.P. 12(b)(1) and 12(b)(5). I. Introduction Plaintiffs have challenged the state s imposition of excise and sales taxes on retail marijuana pursuant to Proposition AA, which was placed on the ballot and approved by popular statewide vote in November Proposition AA followed on the heels of Amendment 64, approved by popular statewide vote in November Amendment 64, Colo. Const. art. 18, 16, directed the Colorado Department of Revenue to establish a system to license and regulate retail marijuana establishments, and explicitly contemplated excise and other taxes. 1 Plaintiff No Over Taxation is a registered issue committee formed to oppose Proposition AA and other local measures that would impose taxes on 1 Although Amendment 64 directed the General Assembly to impose an excise tax of up to 15%, the measure did not comply with the technical requirements of the Taxpayer Bill of Rights, Colo. Const. art. 10, 20. The General Assembly thus referred a TABOR-compliant measure containing the excise tax and a retail sales tax to the people for popular vote. See , C.R.S. 3

4 retail marijuana. Robert Corry is the registered agent for the No Over Taxation issue committee. The remaining Plaintiffs allege that they are individuals or businesses that wish to purchase or sell retail marijuana. They assert that the taxes imposed by Proposition AA (and by the City and County of Denver s Question 2A) violate Amendment 64 and the Fifth Amendment to the United States Constitution. Plaintiffs seek a declaration that the subject taxes are unconstitutional, preliminary and permanent injunctions against their enforcement, refund of taxes paid and destruction of state and city tax records. As discussed in detail below, this Court lacks subject matter jurisdiction over Plaintiffs complaint because it seeks a tax refund without prior exhaustion of administrative remedies. Moreover, even if administrative remedies had not been exhausted, the Plaintiffs lack standing to seek refunds on behalf of taxpayers other than themselves. This Court should accordingly dismiss some or all of the allegations in the complaint pursuant to C.R.C.P. 12(b)(1). Finally, even assuming this Court had subject matter jurisdiction, Plaintiffs complaint fails to state claims upon which relief may be granted, and this Court should dismiss it pursuant to C.R.C.P. 12(b)(5). 4

5 II. This Court lacks subject matter jurisdiction over Plaintiffs claims both because they seek a refund of taxes paid without prior administrative exhaustion and because they lack standing. A. Exhaustion As pertinent to the State Defendants, this action challenges the validity of the state s retail marijuana excise and special sales taxes imposed under article 28.8 of title 39, C.R.S. Among other things, Plaintiffs seek as a remedy an order granting a full refund of marijuana tax monies paid by any person or entity, and enjoining and restraining Defendants from any further collection, deposit, or laundering (sic) of the marijuana taxes, Prayer for Relief, C. Plaintiffs demand for a refund of taxes paid is unequivocal and permeates every aspect of the complaint. See Complaint, 70 ( all amounts must be returned, and all records... destroyed.); 81 (requesting Court to order confidential refund of all taxes collected illegally. ); 90 (requesting Court to enjoin future enforcement and collection of taxes); and Prayer for Relief, C (requesting a full refund of marijuana tax moneys and destruction of all tax records and identifying information after full refunds are made ). Plaintiffs, however, have never pursued administrative remedies for the refund of taxes paid through the Department of Revenue. Such administrative action is a mandatory prerequisite to judicial review of a claim for the refund of taxes paid. 5

6 The doctrine of exhaustion of administrative remedies serves as a threshold to judicial review that requires parties in a civil action to pursue available statutory administrative remedies before filing suit in district court. State of Colo. v. Golden s Concrete Co., 962 P.2d 919, 923 (Colo. 1998). The failure to exhaust administrative remedies prior to seeking judicial relief is a jurisdictional defect. Horrell v. Dept of Admin., 861 P.2d 1194, 1197 (Colo. 1993). This is especially true in tax relief cases. Hoffman v. Colorado State Board of Assessment Appeals, 683 P.2d 783, 785 (Colo. 1984); see also Kendal v. Cason, 791 P.2d 1227, 1228 (Colo. App. 1990). Plaintiffs have not even alleged compliance with administrative remedies in this case. Yet there can be no dispute that they have available a complete, adequate and speedy administrative forum in which to claim any tax refund to which they are entitled. Sections and 301, C.R.S., provide that the retail marijuana taxes imposed under article 28.8 shall be administered and enforced in accordance with the provisions of article 21 of this title and part 1 of article 26 of this title, except in the event of conflict, in which case the provisions of article 28.8 control. Under article 26, a sales tax refund claim shall not be assignable, and should be made by the same person who purchased the goods and paid the tax thereon as shown in the invoice of the sale (2)(b), C.R.S. 6

7 However, a vendor, such as the Plaintiff marijuana businesses, may file a claim for refund on behalf of a purchaser if it establishes to the satisfaction of the executive director of the department of revenue that the tax and any interest will actually be paid to the purchaser (2.5)(b)(I)(B), C.R.S. If the vendors cannot meet this threshold requirement, then only the taxpayerpurchasers themselves may request a refund. In either event, sections and -104, C.R.S., provide for an administrative hearing concerning a taxpayer s claim for refund. Taxpayers may appeal any decision of the Department of Revenue and receive a de novo hearing before the district court (1) and (2)(b), C.R.S. Absent an allegation that Plaintiffs have pursued and exhausted this administrative remedy, however, the complaint is facially inadequate to establish this Court s subject matter jurisdiction. The exhaustion doctrine applies with equal force when the party seeks declaratory relief. City & County of Denver v. United Airlines, 8 P.3d 1206, 1213 (Colo. 2000). Jurisdictional requirements such as exhaustion apply to actions for declaratory relief like any other action in district court. Id. Nor are Plaintiffs excused from compliance with the exhaustion requirement simply because the complaint includes constitutional claims. [T]he proper procedure to challenge the questioned statute and the administration thereof is by judicial 7

8 review after final administrative action has been taken. Dept of Revenue v. District Court 470 P.2d 864, 866 (Colo. 1981). 2 Plaintiffs have not exhausted their statutorily available administrative remedies, nor have they identified any applicable exception. This Court therefore lacks jurisdiction over the subject matter. B. Standing Plaintiffs have not asserted class action status for any of their claims and, therefore, their demand for a tax refund on behalf of any person or entity is beyond the scope of the complaint. Complaint, p.35. However, even if the complaint were somehow construed as an attempted class action, such relief would be improper because specific statutes governing tax refunds do not permit representative relief. To the contrary, the tax refund statutes at issue here require refund claims to be filed by the taxpayer (1)(a)( the taxpayer must file any claim for refund or credit ); (refund claim to be made by person who purchased goods and paid the tax, or by the vendor on behalf of the particular purchasers). Accordingly, Plaintiffs have standing to assert claims only on behalf of themselves, and not on behalf of any person or entity that is not a party to the 2 See also Id. at 867 (stating, contentions of unconstitutionality under Rule 106 provide no basis for jurisdiction in the district court. ) (emphasis by court). 8

9 case. See Huerfano County Bd. of County Comm rs v. Atlantic Richfield Co., 976 P.2d 893, 895 (Colo. App. 1999) ( under the [property tax] abatement and refund scheme, only taxpayers are authorized to appeal actions of the [Property Tax Administrator] to the [Board of Assessment Appeals], and then only to the extent that the abatement/refund petition has been denied. ). Plaintiffs attempts to expand the scope of relief in this case mirror those that were unsuccessfully asserted in Atlantic Richfield. In that case, the court of appeals held that the plaintiff county lacked standing to appeal the decision of the property tax administrator. The court held that [b]ecause there is no statutory authorization for the [county] to appeal that action under the abatement and refund scheme, the [board] properly dismissed the appeal for lack of standing.... Id. As was the case in Atlantic Richfield, the statutory procedures governing claims for tax refunds do not permit claims on behalf of any person. See Washington Plaza Associates v. State Bd. of Assessment Appeals, 620 P.2d 52, 53 (Colo. App. 1980) (rejecting standing for a property owner to seek a refund of tax paid by the previous owner, stating, One who does not bear the financial burden of tax suffers no loss or injury and has no standing to seek a refund. ) (citing Wimberly v. Ettenberg, 570 P.2d 535 (Colo. 1977)). The taxpayer Plaintiffs thus do not have standing to pursue a refund of the contested tax payments on behalf of anyone but themselves. 9

10 III. Failure to State a Claim Legal Standards Even if Plaintiffs have exhausted their administrative remedies and established standing for the relief that they seek, their complaint has failed to state a claim and so must be dismissed pursuant to C.R.C.P. 12(b)(5). In resolving a motion to dismiss under Rule 12(b)(5), a court must consider only the facts alleged in the complaint, documents attached to or referenced in the complaint, and matters of which the court can take judicial notice. Walker v. Van Laningham, 148 P.3d 391, 397 (Colo. App. 2006). A motion to dismiss under 12(b)(5) is properly granted where the allegations, viewed in the light most favorable to the plaintiff and accepted as true, cannot support a claim for relief as a matter of law. Rosenthal v. Dean Witter Reynolds, Inc., 908 P.2d 1095, 1099 (Colo. 1995). Although motions to dismiss under 12(b)(5) are generally disfavored, dismissal is appropriate where, as here, the complaint contains no allegations that would support relief upon any theory of law. See Walsenburg Sand & Gravel Co. v. City Council of Walsenburg, 160 P.3d 297, 298 (Colo. App. 2007); see also Barnes v. Westminster, 723 P.2d 164, 165 (Colo. App. 1986). 10

11 A. Plaintiffs First Claim for Relief: Self-Incrimination and Double Jeopardy Plaintiffs First Claim for Relief advances two legal arguments. The first claim is that Colorado s system of retail marijuana taxation violates the protections against self-incrimination found in the Colorado and Federal Constitutions. The second is that Colorado s system of retail marijuana taxation violates the double jeopardy prohibitions of the Colorado and Federal Constitutions. Neither of these claims is meritorious, and both should be dismissed as a matter of law. 1. Proposition AA does not violate the Fifth Amendment privilege against self-incrimination. Plaintiffs argue that Colorado s collection of retail marijuana taxes violates the self-incrimination prohibitions of the Colorado and United States Constitutions. Specifically, Plaintiffs argue that [i]n order to pay these [marijuana] taxes and be in compliance, the consumer, cultivator, or retailer are required to identify themselves as possessing, distributing, or selling marijuana, all violations of the federal [Controlled Substance Act]. Complaint, 34. a. The State is not prohibited from taxing illegal activity. It is a well-settled general rule that states may tax illegal activity. See Dep't of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 778 (1994); 11

12 Marchetti v. United States, 390 U.S. 39, 58 (1968); United States v. Constantine, 296 U.S. 287, 293 (1935). Indeed, state marijuana businesses routinely file federal income tax returns. Taxation of illegal activity only implicates prohibited self-incrimination when would-be taxpayers face a real danger of prosecution based on their tax payment. California v. Byers, 402 U.S. 424, 438 (1971) (Harlan, J., concurring). Under this standard, a potential defendant must have an articulated real and appreciable fear that the information the state gathered for tax purposes would be used to incriminate him. Hiibel v. Sixth Judicial District Court of Nevada, 542 U.S. 177, 190 (2004) (applying standard in Fourth Amendment context). To determine if a tax or regulatory scheme creates such a justified fear, courts must assess the substantiality of the risk of prosecution and conviction. People v. Duleff, 515 P.2d 1239, 1241 (Colo. 1973). Reflecting this principle, in Duleff, the Colorado Supreme Court held that license requirements for possessing illegal drugs would only raise self-incrimination concerns if gathered information is used as a means of discovering past or present criminal activity, 515 P.2d at 1241 (emphasis added). Here, however, as discussed below, the state collects taxes on retail marijuana not as a means of detecting criminal activity, but instead to provide necessary financial support for the comprehensive regulatory scheme contemplated by Amendment

13 b. Any potentially incriminatory information relates to facts the State could readily establish through other means. Importantly, if potentially incriminatory information is a fact the State could readily establish, such that any testimony regarding [its] existence or authenticity [is] insufficiently incriminating, then there is no bar to its collection. Baltimore City Dep t of Soc. Servs. v. Bouknight, 493 U.S. 549, 555 (1990). It is for this reason that courts have consistently upheld policies that prevent a witness from seeking undue protection by volunteering what the State already knows or will likely come upon without the witness s aid. Zicarelli v. New Jersey State Comm n of Investigation, 406 U.S. 472, 476 (1972). Accordingly, to determine if a tax or regulatory scheme implicates constitutional self-incrimination concerns, the key test is a functional one: does the regulation substantially raise the risk of prosecution beyond what it otherwise would be? In the instant case, the answer is clearly no. Plaintiffs sale and possession of marijuana is plainly something the State already knows or will likely come upon without the witness s aid. Zicarelli, 406 U.S. at 476. Self-reported tax data do not reveal that a licensed retail marijuana establishment is selling retail marijuana that fact is already in plain sight. A medical marijuana business that also sells retail marijuana must display prominent, public signage that it will only sell marijuana to individuals over the age of C.C.R 212-2, 13

14 Rule R304(B)(4). A would-be retail marijuana establishment must include in a license application the names of all officers, directors and managers, all of whom must submit to a criminal background record check , C.R.S. In addition, a retail marijuana licensee must keep a complete set of all records necessary to show all business transactions, which are open for inspection by the State Licensing Authority or its representatives during all business hours , C.R.S. And all retail marijuana establishments must electronically document every marijuana plant in their possession via a statewide tracking system. 1 C.C.R 212-2, Rule R309. Moreover, the information gathered from this inventory system may be used... for a purpose authorized by [the Retail Marijuana Code] or for any other state or local law enforcement purpose (2)(d), C.R.S. By contrast, every self-incrimination case cited in the complaint features a tax or license scheme that was an essential means of discovering underlying illegality. Duleff, 515 P.2d at These cases featured activities like clandestine lotteries and wagering pools, Marchetti, 390 U.S. at 46, home possession of illegal firearms, Haynes v. United States, 390 U.S. 85 (1968), personal drug possession for individual use, Leary v. United States, 395 U.S. 6, 10 (1969) aff'd, 544 F.2d 1266 (5th Cir. 1977), and secretly cultivated house gardens of marijuana. Duleff, 515 P.2d at If not for the mandated self- 14

15 reporting of tax or license schemes, such underlying activities would almost certainly go undetected. Thus, the regulations challenged in each case substantially created a high and novel risk of prosecution. This is decidedly not true of Colorado s retail marijuana taxes. The completion of a state tax return thus does not provide prosecuting authorities with any new information that substantially increases a taxpayer s risk of detection or prosecution. At most, such a fear is trifling or imaginary, Marchetti, 390 U.S. at 53 (internal citation omitted), and thus does not establish a constitutional violation. Retail marijuana businesses operate in plain sight, subject to a rigorous regulatory scheme, and any incriminating information is readily available from independent sources. c. Colorado s tax statutes contain rigorous taxpayer confidentiality provisions. Moreover, even if any incriminating information were not already in the public domain, the design of Colorado s revenue statutes effectively cures any remaining concern. Courts across the country have found taxes on illegal activities to be constitutional so long as taxpayers are afforded sufficient protections. For example, an Alabama court rejected claims that state taxes on illegal drugs constituted self-incrimination. The court noted that Alabama s statute obviated any self-incrimination concern by guaranteeing that any 15

16 information that the [Alabama] Department [of Revenue] improperly discloses is inadmissible unless it is obtained from another source. Further, anyone who violates this section by revealing confidential information is subject to a Class C misdemeanor punishable by a fine of $500. Briney v. State Dep't of Revenue, 594 So. 2d 120, (Ala. Civ. App. 1991). Likewise, the Iowa Supreme Court upheld a stamp tax on illegal drugs because Iowa s statute: [A]ssures anonymity to dealers purchasing drug tax stamps. Section 421A.10 [of the Iowa Code] explicitly prohibits any information obtained from a dealer, pursuant to compliance with chapter 421A, from being released or used against the dealer in any criminal proceeding except in connection with a proceeding involving taxes due under chapter 421A. State v. Godbersen, 493 N.W.2d 852, 857 (Iowa 1992) (internal citations omitted). See also United States v. Minor, 398 F.2d 511, 515 (2d Cir. 1968) aff'd, 396 U.S. 87 (1969) (upholding a tax on illegal drugs because a seller of narcotic drugs is not required to register or in any other way to incriminate himself ); State v. Smith, 120 Idaho 77, 79 & n.1 (1991) (recognizing Idaho s revised tax on illegal drugs included sufficient statutory protections to defeat self-incrimination concerns); State v. Hall, 207 Wis. 2d 54, 74 (1997) (noting a system allowing illegal drug tax 16

17 stamps to be purchased anonymously would obviate self-incrimination concerns). As was true in these instances, Colorado law expressly instructs the Department of Revenue that: (4)(a) Except in accordance with judicial order or as otherwise provided by law, the executive director of the department of revenue and his agents, clerks, and employees shall not divulge or make known in any way any information obtained from any investigation conducted by the department or its agents or disclosed in any document, report, or return filed in connection with any of the taxes covered by this article. The officials charged with the custody of such documents, reports, investigations, and returns shall not be required to produce any of them or evidence of anything contained in them in any action or proceeding in any court, except on behalf of the executive director in an action or proceeding under the provisions of any such taxing statutes to which the department is a party or on behalf of any party to any action or proceeding under the provisions of such taxing statutes when the report of facts shown thereby is directly involved in such action or proceeding, in either of which events the court may require the production of, and may admit in evidence, so much of said reports or of the facts shown thereby as are pertinent to the action or proceeding and no more (4)(a), C.R.S. Further, any person who violates subsection (4) of section 113 is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars, and, if the offender is an officer or employee of the state, the offender shall be dismissed from office (6), C.R.S. These provisions are functionally equivalent to the protections in place in Alabama, Iowa, and the other states that have upheld such taxation. Thus, even 17

18 were the information gathering of Colorado s retail tax scheme found to be selfincriminatory, the state s statutes effectively cure this concern. d. The complaint s allegations regarding federal prosecutions are not pertinent to the issues in this case and are contradicted by the documents they cite. Thus, Plaintiffs Fifth Amendment claims are not supported by law. However, even assuming arguendo the complaint had legal merit, Plaintiffs various anecdotes about pending federal prosecutions make no allegation that a single prosecution has been enabled or enhanced by Colorado s required retail marijuana tax documentation. Instead, all federal prosecutions mentioned in the complaint relate to medical marijuana businesses, not retail marijuana establishments. See Complaint, 24-28, 41, The retail marijuana taxes at issue in this case do not apply to medical marijuana businesses. See, e.g., , C.R.S. The complaint asserts that on information and belief the marijuana businesses that are the subject of United States District Court case 13-CR REB paid their marijuana taxes pursuant to Proposition AA and Denver Referred Question 2A. Those businesses were medical, not retail marijuana 3 No retail marijuana establishment operated and no retail marijuana excise or sales tax was effective prior to January 1, See Amendment 64; Proposition AA. 18

19 businesses, and could not have paid such taxes. And the allegations pertain to activities occurring prior to January 1, 2014, the first date on which retail marijuana establishments began operating and retail marijuana taxes would have been collected. See Complaint, Plaintiffs Exhibit A. Likewise, although Paragraph 50 of the complaint cites a Denver Post article for the proposition that critical evidence used in the federal indictments was financial and tax records of the marijuana businesses, the cited article discusses only financial documents. It says nothing about tax records. And again, because these businesses were not retail marijuana establishments, any existing tax records would not pertain to the retail marijuana sales or excise taxes at issue in this case Double Jeopardy Plaintiffs next claim begins from the observation that marijuana sales are federally illegal. On this basis, Plaintiffs contend that any retail taxation constitutes double jeopardy, since in theory marijuana vendors could be charged for both violating federal criminal law and for failing to pay Colorado state taxes: two punishments for the same offense. Complaint, 69. In support of 4 They could pertain, for example, to the federal or state income tax, or to the regular state or local sales tax, which applies to medical marijuana sales. None of those taxes is at issue in this case. 19

20 this claim, the complaint cites several cases of illegal drug sales taxes that were struck down as constituting such an additional punishment on top of criminal drug prosecution. See id. 64. This claim fails at the threshold. Even assuming arguendo that: 1) the challenged taxes are punitive, 5 and that 2) failing to pay state taxes on retail marijuana sales could be considered the same offense as possessing or distributing marijuana in violation of federal law, 6 double jeopardy does not prohibit separate sovereigns from prosecuting an individual for the same offense. Abbate v. United States, 359 U.S. 187, (1959); Chatfield v. Colorado Court of Appeals, 775 P.2d 1168, 1174 n.7 (Colo. 1989) (both state and federal governments may prosecute a person for the same offense without violating the double jeopardy clause of the federal constitution). Yet Plaintiffs double jeopardy challenge hinges entirely on the possibility that they could be placed into jeopardy by two different governments by the state for failure to 5 They are not. Applying the four-part analysis in Kurth Ranch, supra, the voterapproved taxes are not: 1) conditioned on the commission of a crime, 2) levied on marijuana that has necessarily been confiscated from an arrestee, 3) imposed for punitive purposes, and 4) egregiously high. See Kurth Ranch, 511 U.S. at This claim would also fail. The elements of failure to pay taxes and violating the CSA are distinct. See People v. Smoots, 2013 COA 152, (applying strict elements test to double jeopardy claim). 20

21 pay taxes, and by the federal government for violation of the Controlled Substances Act. 3. Conclusion: No Fifth Amendment Violation Colorado s retail marijuana taxes in no way violate the Fifth Amendment. A state taxing authority is not per se prohibited from collecting tax on illegal activity. Colorado s taxpayer confidentiality provisions cure any constitutional concern that may exist. And, most importantly, any retail marijuana establishment choosing to operate in Colorado must participate in Colorado s licensure scheme, which requires that the establishment report all of its business transactions to the state; the taxes at issue therefore do not substantially raise the risk of prosecution beyond what it otherwise would be. Likewise, because the complaint s double jeopardy claim is founded on incorrect assumptions about the scope of Fifth Amendment protections, Plaintiffs claim fails at the threshold. B. Plaintiffs Second Claim for Relief: Preemption and Public Policy Plaintiffs Second Claim for Relief alleges that officials, including the Governor of Colorado and the Mayor of Denver, have violated the federal Controlled Substances Act (CSA) through collection of retail marijuana taxes. Complaint, 58. Plaintiffs argue that such taxes are therefore void as a matter 21

22 of public policy and so should be struck down. Complaint, This claim is without legal merit and should be dismissed. The assertion that Colorado s retail marijuana tax is federally illegal misreads the CSA. Plaintiffs rely primarily on the Investment of Illicit Drug Profits provision of the statute. 21 U.S.C In relevant portion, the provision states that: It shall be unlawful for any person who has received any income derived, directly or indirectly, from a violation of this subchapter or subchapter II of this chapter punishable by imprisonment for more than one year in which such person has participated as a principal within the meaning of section 2 of title 18, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise that is engaged in, or the activities of which affect interstate or foreign commerce. Complaint, 58, quoting 21 U.S.C. 854(a). Plaintiffs argue that because Colorado is collecting taxes on retail marijuana sales, and because marijuana sales are barred under federal law, such taxes are income stemming from a violation of the CSA. Based on this assertion, Plaintiffs also argue that the government officials have engaged in a continuing criminal enterprise under the CSA, since they violate[d] a subdivision of the drug law. Id., 57, quoting 21 U.S.C. 848(C)(1)-(2). Additionally, Plaintiffs claim that Colorado s government violates the CSA because state officials manage, control and profit from locations used for the 22

23 purpose of manufacturing... marijuana. Id. 59. In this instance, the profit at issue is apparently the taxes that the state collects. Therefore, according to Plaintiffs, tax collection must be enjoined as a matter of public policy. Id Plaintiffs reading of the CSA has fatal flaws. First, the term income in the Illicit Drug Profits provision in no way encompasses a state s collection of revenue. Second, the term person in no way applies to state or political subdivisions. The CSA does not define income. Black s Law Dictionary, however, defines income as [t]he money or other form of payment that one receives, usu[ally] periodically, from employment, business, investments, royalties, gifts, and the like. 778 (8th ed.2004). Likewise, Webster s defines income as: a gain or recurrent benefit that is usu[ally] measured in money and for a given period of time, derives from capital, labor, or a combination of both, includes gains from transactions in capital assets, but excludes unrealized advances in value... the value of goods and services received by an individual in a given period of time. Webster s Third New Int'l Dictionary of the English Language unabridged) 1143 (1993). Taxation is qualitatively different from any of these activities, which focus squarely on individuals or corporations, and do not encompass monies raised via government regulation. 23

24 For this reason, courts have held state tax revenue to be outside the definition of income in a number of different contexts. In Stratton's Independence, Ltd. v. Howbert, the Supreme Court held that income may be defined as the gain derived from capital, from labor, or from both combined. 231 U.S. 399, 415 (1913). Taxation is neither a capital gain nor a labor gain. Accordingly, this definition excludes any monies generated through taxes. Despite a century s passage, this definition and understanding remain the doctrinally accepted meaning of the term income. See United States v. Ballard, 535 F.2d 400, 404 (8th Cir. 1976); Quartemont v. C.I.R., S, 2007 WL (T.C. Feb. 6, 2007); In re Wiegand, , 2007 WL (Bankr. D. Mont. Oct. 9, 2007) rev'd and remanded on other grounds, 386 B.R. 238 (B.A.P. 9th Cir. 2008); Tornichio v. United States, 5:97CV2794, 1998 WL (N.D. Ohio Mar. 12, 1998) aff'd, 173 F.3d 856 (6th Cir. 1999). Thus, the CSA s Illicit Drug Profits provision does not apply to Colorado s retail taxation of marijuana. Moreover, the CSA provisions at issue in Plaintiffs complaint apply only to any person who has engaged in money laundering. 21 U.S.C. 854(a). Because the term person is not defined within the CSA, we must defer to the United States Code s general definitional statute, which states that in determining the meaning of any Act of Congress, unless the context indicates 24

25 otherwise... the words person and whoever include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals. 1 U.S.C. 1. Notably, this definition excludes government entities or subdivisions. Recognizing this, the Supreme Court has expressly held that within this definitional statute, the absence of any comparable provision extending the term [person] to sovereign governments implies that Congress did not desire the term to extend to them. United States v. United Mine Workers of Am., 330 U.S. 258, 275 (1947). Thus, in the absence of strong contextual evidence that Congress intended otherwise, the CSA is inapplicable to government subdivisions and their collection of taxes. Nor does the contextual evidence save Plaintiffs claim: the legislative history reveals no evidence whatsoever that the CSA s drafters intended this provision to apply in the context of municipal taxation of federally illegal drugs. See 130 Cong. Rec. S (daily ed. Sept. 12, 1984); 130 Cong. Rec. S (daily ed. July 24, 1984) (statement of Sen. Chiles);130 Cong. Rec. S (daily ed. April 25, 1984) (statement of Sen. Hawkins) (discussing concern over individual drug kingpins and making no mention of municipalities); 130 Cong. Rec. S (daily ed. Feb. 3, 1984) (statement of Sen. Biden); 130 Cong. Rec. S. 804 (daily ed. Jan. 30, 1984) (statement of Sen. Chiles); 130 Cong. Rec. S. 813 (daily ed. Jan. 30, 1984) (statement of Sen. 25

26 Thurmond) (discussing concern over individual drug kingpins and making no mention of municipalities); 130 Cong. Rec. S. 604 (daily ed. Jan. 26, 1984). Equally telling is the fact that courts across the country have repeatedly affirmed government taxation on illegal drugs after the passage of the CSA with no court ruling to the contrary. See Dep't of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 778 (1994) (There is no doubt that a state can impose a tax on illegal drugs like marijuana); Briney v. State Dep't of Revenue, 594 So. 2d 120, (Ala. Civ. App. 1991) (upholding taxation of illegal drugs); State v. Godbersen, 493 N.W.2d 852, 857 (Iowa 1992) (upholding taxation of illegal drugs). See also 26 U.S.C. 280(e) (tax statute expressly acknowledging that illegal drugs are federally taxable while denying business deductions to narcotics traffickers); Olive v. C.I.R., 139 T.C. 19 (2012) (imposing federal income taxes on federally illegal sales of marijuana); Marchetti, 390 U.S. at 58; Constantine, 296 U.S. at 293. In light of this analysis, the charge that the CSA precludes state entities from taxing illegal drugs is unsupported by statute or precedent and so should be dismissed. C. Plaintiffs Third Claim for Relief: Excessive Taxes Plaintiffs Third Claim for Relief asserts the rate of marijuana taxation is excessive, thus violating Colorado Constitution. Plaintiffs support this claim 26

27 with two constitutional provisions: the Similar To Alcohol Clause and the Reasonably Practicable Clause. Both claims lack merit and so should be dismissed. 1. The Similar to Alcohol Clause Amendment 64 provides that the use of marijuana should be legal for persons twenty-one years of age or older and taxed in a manner similar to alcohol. Colo. Const., art. 18, 16(l)(a) (emphasis added). Plaintiffs assert that marijuana taxation is not sufficiently similar to alcohol taxation to pass constitutional muster. It is significant that the constitutional amendment uses the term similar and not the term identical. See THE AMERICAN HERITAGE DICTIONARY 1141 (2 nd College Ed. 1991) (defining similar to mean Related in appearance or nature: alike though not identical ). Amendment 64 itself recognizes that the taxation of retail marijuana and the taxation of liquor will not be conducted in an identical fashion. It directs the General Assembly to enact an excise tax at a rate not to exceed fifteen percent. Colo. Const. art. 18, 16(5)(d). By contrast, the state excise tax on alcohol is imposed based on volume and not as a percentage of value. See (1)(a) and (1)(c), C.R.S. (imposing, e.g., excise tax rates of 8.0 cents per gallon on malt liquors, fermented malt liquors and hard cider, 7.33 cents per liter on vinous liquors other than hard cider and cents per liter 27

28 on spirituous liquors, and imposing a rate of 10 dollars per ton on certain grapes). Moreover, the federal government imposes additional excise tax on liquor, but imposes no such taxes on marijuana. See United States Alcohol and Tobacco Tax and Trade Bureau informational listing of tax and fee rates, (last visited July 9, 2014). In sum, nothing in Amendment 64 mandates identical taxation between marijuana and alcohol, and, in fact, the Amendment itself expressly requires a tax on marijuana in a manner that is not identical to alcohol tax. While Plaintiffs may believe that the rates approved by Colorado s electorate are unacceptably high, that is a political question that has already been resolved by the voters and the General Assembly, and is not one for the courts to decide. 2. Unreasonably Impracticable Plaintiffs also argue that retail marijuana taxes are unreasonably impracticable within the meaning of Amendment 64. By its terms, however, the unreasonably impracticable provision in Amendment 64 applies only to Department of Revenue regulations not to statutorily imposed tax rates, much less those approved by voter initiative. Indeed, after defining the term unreasonably impracticable, the Amendment s only use of the concept comes in the following provision: 28

29 (a) Not later than July 1, 2013, the [Revenue] department shall adopt regulations necessary for implementation of this section. Such regulations shall not prohibit the operation of marijuana establishments, either expressly or through regulations that make their operation unreasonably impracticable. Colo. Const. art. XVIII, 16(5)(a) (emphasis added). As already noted, the taxes at issue in this case were not administratively imposed (nor could they be). They are the result of a measure referred to the general electorate by Colorado s General Assembly, and approved by the voters. Because the taxes were not imposed by administrative rule, Amendment 64 s prohibition on unreasonably impracticable regulations simply does not apply, and Plaintiffs complaint fails to state a claim upon which relief may be granted. D. Plaintiffs Fourth Claim for Relief: Unjust Enrichment or Quantum Meruit Plaintiffs fourth claim for relief states that equitable relief should be granted on a theory of unjust enrichment or quantum meruit. This claim lacks merit and should be dismissed. Plaintiffs claim that because the marijuana taxes are illegal, equitable principles demand that they be refunded. Complaint, 95. At the outset, it should be noted that this claim is wholly dependent on establishing the tax s illegality. For the reasons stated above, however, retail taxation of marijuana is not illegal, and so this argument must fall. 29

30 In any case, Colorado law requires a plaintiff to clear a high bar before recovering quantum meruit or unjust enrichment against a state or political subdivisions. In Normandy Estates Metro. Recreation Dist. v. Normandy Estates, Ltd., 553 P.2d. 386 (Colo. 1976), Colorado s State Supreme Court held that to recover on quantum meruit against a political subdivision, the [implied] contract must be one not positively condemned by law, as distinguished from one which is merely invalid because of want of power to contract. Id. at 390 (emphasis added). In other words, because a party with unclean hands cannot seek equitable relief, see, e.g. Bernhardt v. Hemphill, 878 P.2d 107, 113 (Colo. App. 1994), if one accepts Plaintiffs theory that marijuana taxes are, in fact, illegal, then under state law quantum meruit cannot lie. Finally, even if this were a case where quantum meruit could be granted, there is no cited authority under which state-collected taxes could be refunded on such a theory. Plaintiffs sole reference in this claim is to Salzman v. Bachrach, a case that turned on a dispute over home repair services between two private citizens. 996 P.2d 1263 (Colo. 2000). By contrast, neither Colorado nor U.S. Tax Court precedent can be found suggesting that such actions may lie for tax cases. Plaintiffs claims for quantum meruit or unjust enrichment relief lack legal merit and so should be denied. 30

31 CONCLUSION WHEREFORE, the State Defendants respectfully request the Court dismiss Plaintiffs complaint for lack of subject matter jurisdiction, or, in the alternative, for failure to state a claim upon which relief may be granted. Respectfully submitted this 10th_ day of _July, 2014, JOHN W. SUTHERS Attorney General /s/ Matthew D. Grove MATTHEW D. GROVE, 34269* Assistant Solicitor General SUEANNA P. JOHNSON, * Assistant Attorney General Public Officials Unit State Services Section ROBERT H. DODD, Senior Assistant Attorney General, 27869* KELLY A. ROSENBERG, 35685* Assistant Attorney General Revenue Unit Revenue and Utilities Section Attorneys for Governor John W. Hickenlooper and the Colorado Department of Revenue *Counsel of Record 31

32 CERTIFICATE OF SERVICE This is to certify that I have duly served the within Motion to Dismiss upon all parties herein via ICCES, at Denver, Colorado this _10th_ day of July, 2014, addressed as follows: Robert J. Corry, Jr. Matthew W. Buck 437 West Colfax Avenue, Suite 300 Denver, Colorado Charles Solomon Assistant City Attorney Robert McDermott Assistant City Attorney Denver City Attorney s Office 1437 Bannock Street, Room 353 Denver, Colorado Attorneys for Mayor Michael Hancock and Denver Treasury Division /s Matthew D. Grove 32