Taxing Legal Marijuana: A Hazy Issue for Municipal Bankruptcy

The past 25 years have marked a growing trend toward the legalization and decriminalization of marijuana. Twenty-eight states have legalized the drug’s medical use, with seven states and Washington, D.C. going a step further by legalizing its recreational use for adults over the age of 21. Despite the actions taken by those states and our nation’s capital, the federal government’s position regarding the use of marijuana remains clear: possession, cultivation, or distribution of the drug constitutes a criminal offense under federal law.

As the number of states where marijuana is legal continues to rise, this glaring tension between state and federal law has begun to manifest itself outside the criminal justice system, namely in U.S. bankruptcy courts. A host of bankruptcy courts have recently ruled that state law-compliant marijuana businesses are barred from federal bankruptcy protection due to the criminal nature of their business in the eyes of federal law. Not only have businesses directly handling the drug been precluded from filing for bankruptcy, so too have businesses with income more remotely derived from marijuana-related activity.
In addition to their unsettling implications for business owners, these holdings may pose a serious problem for fiscally distressed municipalities looking for relief in chapter 9 — specifically municipalities that currently tax marijuana sales or those hoping to incorporate such a tax into a chapter 9 plan for readjustment. In her article Taxing Legal Marijuana: A Hazy Issue for Municipal Bankruptcy, published on Law360, Weil associate Katherine Lewis contends that recent case law on the issue, as well as the architecture of chapter 9’s plan confirmation requirements, support the conclusion that municipalities may be precluded from the benefits of federal bankruptcy protection.
A previous version of the article won 2nd Place in the American Bankruptcy Institute’s 8th Annual Bankruptcy Law Student Writing Competition.