I recently blogged about a Californian lawmaker’s startling proposal to impose sales tax on an illegal industry: the marijuana business. A week or so after I posted that piece, Tennessee’s Supreme Court struck down the state’s excise tax on illegal substances — the so-called “crack tax” — on the bizarre grounds that it was not imposed on “merchants,” but on possessors of the substances in question.

Confused? Me, too.

If you’re wondering, first off, how any jurisdiction could simultaneously hold a drug to be illegal and make money off of it, here’s how it worked. If you happened to own, say, a gram of cocaine, you could anonymously send $50 to the Department of Revenue and receive in return an “unauthorized substances stamp,” which you would then affix to the container holding the substance. You would also receive the assurance that this particular transaction could not be used against you in a criminal court, and that the Department would not rat on you to law enforcement. You could still get busted, of course — the stamps didn’t provide immunity from criminal prosecution — but if that happened, at least you wouldn’t get hit for tax evasion as well. (The Department of Revenue has a handy FAQ page here.)

The law went into effect in 2005 and brought in more than $10 million before running into a bunch of constitutionality challenges in the state’s courts. In its July decision, the Supreme Court tossed out arguments that the law violated federal and state protections against self-incrimination and double jeopardy. But … and this is where it gets weird … the Court nevertheless ruled the law unconstitutional because it exceeded the state’s taxing authority.

Tennessee’s constitution authorizes it to impose excise taxes only on “merchants, peddlers, and privileges,” according to the Court. Clearly, possession of an illegal drug is no privilege, notes Justice Gary R. Wade in his affirmation of the lower courts’ judgment. What’s more, “the legislation at issue taxes only possessors, and makes no reference to one who sells or, by virtue of the quantity of the cocaine or other factors, displays the intent to sell.”

So presumably if the legislature were to choose to rewrite the law to target “merchants and peddlers,” the Tennessee crack tax could live to see another day …

A final twist on this convoluted tale: The guy who kicked off this entire series of lawsuits, not content with his victory, has now filed a class-action lawsuit against the state. Stephen Waters challenged the constitutionality of the law when he was taxed $55,000 after being caught buying a kilo of cocaine. He has filed suit to get his money back, plus attorney’s fees, according to this report.

Curiouser and curiouser … ###