The cities sued in district court, claiming Adams County didn’t have the authority under state law to tax a single product. Pictured: A customer researches marijuana strains at Euflora, the first retail marijuana store in Aurora, Colorado on Oct. 13, 2014. (Kathryn Scott Osler, Denver Post file)

This Colorado county may have to return $500K in marijuana taxes collected to fund scholarships

3% county tax violates rules laid out by Amendment 64, Colorado Court of Appeals rules

Adams County has been improperly collecting a 3 percent sales tax on recreational marijuana since July 2015, the Colorado Court of Appeals ruled Thursday, and may have to refund hundreds of thousands of dollars.

The court found the voter-approved special pot sales tax is invalid, reversing a lower court decision and siding with the cities of Northglenn, Aurora and Commerce City, which sued over the tariff.

“We hold that Adams County does not have either constitutional or statutory authorization to impose a special sales tax on retail marijuana,” the court ruling filed Thursday said.

That leaves all of the money collected by the tax in limbo — including more than $500,000 earmarked for college scholarships for underprivileged students — while the county decides what to do next. The exact amount collected was not immediately available, but Adams County included $1.2 million in projected revenues from the tax in its 2017 budget.

The handful of retailers who sell recreational pot in the county said removing the tax makes them more competitive with stores in cities where the tax rate is lower. And at least one observer says the ruling could have greater ramifications statewide, influencing issues other than marijuana sales.

The cities had initially sued in district court, claiming Adams County didn’t have the authority under state law to tax a single product. Coupled with their own taxes on pot, the cities argued that an additional county levy put retail cannabis retailers in their jurisdictions at a competitive disadvantage.

A judge ruled in Adams County’s favor in fall of 2015, and the cities appealed.

More than $500,000 of the taxes collected were used to fund four-year scholarships for 50 low-income Adams County students. The county commissioners were hoping to put $1 million from the tax into the Adams County Scholarship Fund.

A county spokesman said the scholarships that have been awarded will not be affected. Officials also said they don’t know how quickly the county will stop collecting the tax.

“This is fairly momentous decision with implications beyond marijuana,” said Kevin Bommer, deputy director of the Colorado Municipal League. “The Court of Appeals has clearly stated that any county lacks the statutory or constitutional authority to impose a special sales tax on marijuana. What it clearly reinforces is that counties have only the authority in which the general assembly has given them specific permission. The statutes have to say ‘counties are authorized to …’ ”

Since the court ruled the tax was invalid from the start, it’s likely Adams County will have to find a way to return the money, Bommer said.

The ruling did not specify how the funds should be handled, and the county did not have answers Thursday.

The Court of Appeals said in its ruling that Adams County’s special tax violates the constitutional structure created by Amendment 64, which legalized the sale, possession and consumption of marijuana for recreational uses. It also rejected the county’s claim that since the tax was passed by an election, the court did not have the authority to overturn the results.

“We reject this argument because whether the county held a valid election is irrelevant to whether it had the legislative power to impose a special sales tax,” the order said. “Unless the General Assembly or Colorado Constitution authorized the county to impose such a tax, the county simply does not have the power to enact such a tax, irrespective of a valid election.”

Bommer said the decision could complicate things for Pueblo County, which also has a special marijuana tax.

“Pueblo County has got a problem, in my opinion,” he said.

Adams County voters approved the 3 percent special sales tax on recreational pot sales in November 2014, when there was still a moratorium on cannabis retailing in unincorporated areas. The moratorium expired later that year.

Aurora and Northglenn each collect a 2 percent sales tax on recreational marijuana. Commerce City — which only has one pot store — imposes a 7 percent tax on the sale of all cannabis products.

“It’s very good news,” said Shawn Coleman, director of government affairs for Terrapin Care Station, which has a recreational marijuana shop on the Adams County side of Aurora. “Not just for the industry, but also for local governments that are looking at local taxes. It’s our position that we wanted to make sure when our customers are paying taxes at the counter, that those taxes are going to their benefit. The money that was going to Adams County was not going to Aurora.”

Coleman said the special tax issue was something he has only seen in Aurora. There are four other Terrapin Care Station stores in Colorado.

The Adams County tax also created an economic disadvantage for the Terrapin Care Station on East 33rd Avenue and other stores because it makes products more expensive.

The ruling “just allows us to be competitive with the other markets,” said Derrick Ledy, manager of bgood, which has a recreational marijuana shop in Northglenn. “That’s something we hear constantly: Why our tax is higher? It just gives us a better playing field.”

Removing the tax will bring prices at bgood in Northglenn in line with prices at its Denver store and at other metro competitors, Ledy said.

“It would help us a lot, just being able to match some of the prices,” he said.

Adams County spokesman Jim Siedlecki said county officials are disappointed with the court’s ruling.

“This was a tax that was approved in every jurisdiction in the county,” he said Thursday. “Essentially, this ruling right now puts in peril a scholarship opportunity for low-income kids.”

A decision on how to move forward with the ruling won’t be made until at least Jan. 3, when the county commission is next set to meet, he said. The county could file an appeal with the Colorado Supreme Court, which might stay Thursday’s ruling.

Northglenn city attorney Corey Hoffmann, said Adams County had been told the special sales tax was invalid before it went to voters for approval. He said the Colorado Court of Appeals ruled properly against the tariff.

“My hunch is that it would have been better if Northglenn wouldn’t have found out about Adams County’s special sales tax by reading about it in the newspaper,” Hoffmann said. “That’s my personal opinion.”

Aurora’s city attorney did not respond to a request for an interview and a Commerce City spokeswoman said the city was pleased with the ruling.

This story was first published on DenverPost.com