August 7, 2016 | by Staff
There are many reasons why someone may decide to become involved in the cannabis business. From wanting to help others to feel better by providing medical cannabis, to wanting to serve the huge market of recreational users, or to provide products such as cosmetics made with cannabis, there is no doubt that whatever aspect of the business that one chooses to become involved with, it can be very lucrative, and that is the major pulling factor for most. However, if one decides to become involved in the cannabis business, there are a few challenges that exist within the industry that they should be aware of, and which may affect their decision to become involved. We share some of these here.
The history of cannabis is a complicated one. This meme from TruthOnPot best describes it:
Which brings us to today. As more and more states enact laws to make the use of cannabis legal for medicinal and other purposes, many do not realize that federal laws that criminalize the possession, sale and cultivation of cannabis and therefore, there are serious conflicts between state law and federal law. Where there is conflict, the federal law takes precedent. In recent years, the federal government has made it known that its posture is that the prosecution of cannabis cases is not a priority.
There have also been measures put in place to minimize or remove the risk of federal prosecution of matters relating to medical cannabis. For example, in 2015, Congress approved a budget amendment (the Rohrabacher-Farr Amendment) that prohibits Justice Department funds from being used to prevent states from implementing medical cannabis laws and this would effectively end prosecution of individuals and small businesses involved.
Even with this amendment, there have been federal courts that have upheld the amendment’s protection, like in San Francisco and others like in Washington State that have refused to uphold this amendment, both of the cases occurring in 2015. This means that new law has not taken hold to protect the medical cannabis supplier; they are still in a difficult situation as the existence of their businesses can land them in trouble with law at any time and the outcome of such a case is uncertain.
While the medical cannabis situation is at least being discussed and steps taken to improve conditions, Federal legislation regarding legalizing the use of cannabis for recreational purposes have not made any significant headway and therefore is still a significant business risk.
While some state laws have been relaxed to allow the legal sale of cannabis, it has not meant that state authorities have embraced these changes. There have been many instances where counties will not grant the necessary licenses to for small business owners to run a legitimate business.
This means that if someone has set up shop selling cannabis products on the premise that it has been legalized by the state, only to find that there are difficulties getting the necessary approvals from the local authorities, they can quickly find that they are on the wrong side of the law, and subject to police action and shut down.
Taxes related to the cannabis business can be prohibitive. In the first instance, states have applied an excise tax on cannabis products. This is the same type of tax that is levied on alcohol, cigarettes and gambling activities. Taxes ranging from 15% to 35% on sales have been reported and the tax is applied at every step the supply chain which increases the cost of the product to the consumer.
This is not to be confused with the taxes due to the IRS on the business’ earnings. Under normal circumstances, a business is able to deduct all business expenses including state taxes from the IRS filing. However, Section 280 E of the IRS tax code states that “no deduction or credit shall be allowed for any amount paid or incurred in carrying on any trade or business if such trade consists of trafficking in controlled substances”, in this case Schedule I drugs is the controlled substance, which cannabis is defined as.
What this means is that if you are in the business of selling cannabis products and derivatives, you cannot deduct the normal business expenses from your gross profit before taxes are levied, therefore, a cannabis business pays far more tax than most other types of businesses.
Cannabis businesses are for the most part shut out from the traditional banking system. As incredible as this sounds, considering the billions of dollars that the industry generates, if one decides to get into the field, know that there may be a problem getting a bank to handle finances and facilitate standard operations like credit and debit card transactions. This is because of the conflict in state and federal laws as outlined above.
Because of the federal law restrictions, federal regulators of banks and other financial institutions do not fully accept the legitimacy of cannabis business and therefore impose unwieldy reporting requirements on banks, which in turn refuse to take cannabis business as their customers. Therefore, these businesses have a huge problem in moving and storing cash, but have found several ingenious, though risky methods of handling this problem.
As this is “new” business in the legal sense, there are requirements that are either being changed or just being implemented that can be detrimental to any business owner, but especially to small businesses. For example, in Colorado in 2015, the state brought into effect new regulations that affected the packaging of cannabis-infused edibles.
There was concern about the attractiveness of the packages to children and the fact that many edible products were not child proof. Therefore, companies had to invest heavily in updating or changing their labels and packages to meet new requirements. For example, a company that had been selling cannabis drinks in glass bottles had to change to opaque bottles.
Another major change made in packaging or how foods and drinks are sold is the requirement for it to be packaged in such a way that a “reasonable person” will be able to intuitively know what a dose is. Therefore food items like chocolates, for example, had to be packaged or divided in a manner that would allow the user to break off the recommended dosage.
The net effect of these changes is the increase in packaging and marketing costs for the small business owner.
There was also the problem of the suddenness of the changes. Many businesses were unprepared and their products had to be pulled from the shelves for months as they worked on meeting new requirements. The loss of revenue from occurrences such as this can effectively shut down a small business.
These are but a few of the challenges faced by small or medium cannabis business operators. It can be a very lucrative and rewarding business, but as it is with any business that one would get into, it is a good idea to do the due diligence and make sure that this is the business for you.
Categories: Cannabis Law
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