Mammoth Farms has filed a class action lawsuit against the Colorado Department of Revenue and the Marijuana Enforcement Division, alleging state regulators have unlawfully inflated the tax base for certain marijuana products by blending distinct product categories when calculating the state’s average market rate.

The lawsuit, filed in Denver District Court, names the Colorado Department of Revenue, the Department’s Marijuana Enforcement Division and Heidi Humphreys, in her official capacity as executive director of the Department of Revenue. Mammoth Farms, a Colorado marijuana business, brought the case individually and on behalf of other similarly situated operators.

At issue is Colorado’s 15% excise tax on unprocessed retail marijuana, which is applied to the average market rate in certain transactions. The complaint argues that state law and regulations require separate calculations for different categories of marijuana, including bud and bud allocated for extraction.

Instead, Mammoth alleges the Department has improperly combined bud with bud allocated for extraction, inflating the rate for lower-value product used for extraction. The lawsuit says that practice has increased tax obligations for compliant operators and created unequal burdens depending on whether a business is vertically integrated.

The complaint points to an example in which one pound of bud allocated for extraction valued at $100 would generate a $15 tax for a non-integrated company, while a vertically integrated company could owe $41.25 because the tax is based on a $275 average market rate.

Mammoth also alleges the state knew the data used to calculate the rate was distorted by questionable transactions, including suspected diversion, inversion and sham pricing, but continued using the rates rather than removing flawed data or enforcing against bad actors.

The lawsuit cites a sharp drop in the bud allocated for extraction rate after certain operators left the market, falling from $349 per pound to $40 per pound for one quarter. Mammoth argues that drop shows the rate had been artificially inflated by activity regulators should have addressed directly.

The complaint brings claims under Colorado’s Taxpayer’s Bill of Rights, arguing the methodology amounts to a tax policy change, tax-rate increase or new tax imposed without voter approval. It also alleges due process violations and ultra vires action, arguing the agencies exceeded their legal authority.

Mammoth is asking the court to declare the state’s calculation method unlawful, require separate average market rate calculations by product category, halt related audit referrals and penalties, and order refunds with interest for affected businesses over the previous four fiscal years.

Counsel for Mammoth is Brownstein Hyatt Farber Schreck.

“I’d rather regulators enforce against bad actors than hide them inside a tax formula,” Justin Trouard, CEO of Mammoth Farms, told The Marijuana Herald.