Paying Medical Marijuana Dispensary Taxes Doesn’t Violate Constitutional Privilege Against Self-Incrimination
by Derek P. Cole on July 25, 2016
When cities tax medical marijuana dispensaries, does the requirement that dispensary operators pay the taxes violate the constitutional privilege against self-incrimination? No, says a California appellate court.
In City of San Jose v. Medimarts, Inc., the Sixth District Court of Appeal held that a corporate entity and its president could not invoke the Fifth Amendment privilege on the ground that paying the tax may subject them to criminal liability under federal law, which—at least on the books—criminalizes all transactions involving marijuana, even for medical purposes. The court’s decision settles an issue that has often been raised whenever cities or counties have proposed to tax or regulate medical marijuana operations.
The Right Against Self-Incrimination
The Fifth Amendment states that no person “shall be compelled in any criminal case to be a witness against himself….” This constitutional guarantee is the reason criminal defendants are not required to testify in cases in which they are accused of crimes. It is also the reason why criminal defendants are instructed that they have a right to remain silent when given Miranda warnings.
As the court in the Medimarts case noted, two aspects of the right against self-incrimination were important. First, the right applies only to activities that are “testimonial.” In other words, the right applies only when a person is asked to give testimony in the capacity of a witness. It usually does not apply to activities such as filling out government documents, like tax returns.
Second, the right applies to persons in their individual capacities. It does not protect corporate officers, for instance, when they are required to produce corporate records, including tax returns for the corporate entity.
Paying Taxes Isn’t Incriminating
In its ruling, the court focused mostly on the second aspect of the right against self-incrimination, holding that the because the city tax at issue required corporate entities to pay the tax, the Fifth Amendment right was not implicated. The tax was collected based on an ordinance that required medical marijuana dispensaries to pay up to 10% of their gross revenues to the city.
Because the tax was collected from the dispensaries, not their individual owners or officers, the court found that the “collective entity doctrine” applied. This doctrine holds that when a person—such as a corporate president—signs a document on behalf of an entity, he or she acts in a representative capacity for that entity, and thus cannot invoke a personal right against self-incrimination, even if he or she might still be exposed to criminal liability.
A Good Result
The court was clearly underwhelmed by the plaintiffs’ argument in this case. The reality is that medical marijuana dispensaries are often very profitable for those who run them, despite the asserted non-profit statuses under which they are incorporated. The notion the owners of these entities can avoid local taxes by hiding behind the right against self-incrimination would be a very difficult one to accept. Fortunately, the Medimart decision provides local agencies clear precedent to reject similar contentions if made in response to future ordinances proposed to tax or regulate medical marijuana transactions.