What it Takes to Navigate the Marijuana Industry
The recreational marijuana business is in full bloom in Colorado. In just the first three months since marijuana was legalized, the state has raised $25 million from businesses for taxes, licenses, and fees, according to the Colorado Department of Revenue.
Looking forward, Colorado Governor John Hickenlooper predicts combined sales from recreational and medical cannabis (which has been legal for 14 years) will reach $1 billion by 2015, with $134 million going to the state. These numbers make clear that the nascent industry is not some Cheech and Chong joke; it's a serious business with well-defined rules and laws.
To help startups and small businesses navigate regulatory issues, cannabis industry tech firm Surna held the first Colorado Cannabis Summit on Thursday in Denver, featuring panels on state and federal laws, taxes and banking, branding, and employee training and safety.
Meg Collins, the executive director of Colorado-based trade group Cannabis Business Alliance, says about 500 companies have launched around the recreational marijuana industry since the law changed in January, including growers, dispensaries, and tech firms providing seed-to-sale tracking software.
The summit "gave people a good view of how committed this state is to regulating this industry, how committed the industry is to being regulated, and the partnership of the two to work together to create lasting businesses," Collins, who moderated the taxes and regulations panel, tells Inc.
Below, read a Q&A with Collins about the evolution of the industry, the challenges of marijuana still being illegal at the federal level, and what companies are doing to be taken seriously.
Inc.: What do you need to do to get into the recreational marijuana business?
Meg Collins: At the statute level, you need to already be a medical marijuana licensee [until July 1, when that rule disappears] in order to apply for a recreational license. It's a good idea to be well capitalized. You need to pass a background check, you have to be a two-year Colorado resident, you have to have a real estate location already--whether you want to be a cultivator, a store, or an edibles manufacturer--and you need to have the seed-to-sale tracking system. On the cultivation side, you need to have a system that tracks every plant from the moment it's a clone and gets tagged. That tag number stays with the plant all the way through the process, whether it's turned into a joint, made into oil, or used in the manufacture of an edible product. This makes sure there's no diversion.
Considering the federal laws have not changed, what is the general feeling among businesses? Is there a black cloud hanging over everyone?
MC: No. In my mind, it's states' rights--it's the crucible of democracy. The citizens of Colorado decided they wanted to legalize recreational marijuana after they decided to legalize medical marijuana in 2000. The federal government still maintains it's illegal, but as the vote was over 50 percent, basically Colorado thumbed its nose at the federal government. Many people believe that the War on Drugs has been an abject failure--you have people in prison and jails on charges for diminutive amounts of marijuana. It's crazy. There's tax revenues now associated with the sale of recreational marijuana, which will benefit school construction as well as research activities. They put a hook in the marijuana industry as a revenue generator and it worked to get it passed.
Will the federal government ever come in and shut it down?
MC: I don't think so. As of now, 21 states plus the District of Columbia have legalized marijuana for medical purposes and in Colorado and Washington recreational as well--that is a critical mass. Probably in the next year or two, six more states are going to make laws regarding medical marijuana. I think it would be very difficult, no matter who the administration is, to walk back those laws.
What are the banking issues recreational marijuana businesses face?
MC: Because it is federally illegal, most banks in the country in states where marijuana is legal are hesitant to accept marijuana clients as depositors. At this point, the Department of Justice and the Treasury Department issued on Valentine's Day guidance to the banks that was supposed to assure them that the Fed wasn't going to take any punitive actions against banks if they accepted marijuana deposits. But they did it in such a way that the banks would be performing even more of a police function through the suspicious activity reports, and the banks aren't interested in doing that. It's a huge issue. Colorado congressmen Ed Perlmutter and Garrett Polis have legislation that says banks in states that marijuana is legal could do business with [marijuana businesses] without losing their federal insurance protection. But nothing much gets done at the federal level, so we are not holding our breath.
What are the tax issues?
MC: On the tax side, there's a tax provision called 280e in the IRS code, and basically it doesn't allow the retail functions of marijuana businesses to claim any tax relief. Be it health insurance for its employees, be it payroll, improvement, advertising, be it any ordinary business expense, nothing can be taken as a deduction on the retail level because it's considered drug trafficking. On the cultivation side, because it's considered agriculture, we can take some deductions. The effective tax rate for marijuana businesses is over 60 percent.
What do high taxes do to this industry?
MC: It's an expensive industry to be in, so it attracts only the people who are passionate about marijuana and want to see the industry mature and grow. When you look at the fact that the industry started on the medical side, it's people passionate about the benefits of marijuana for providing pain relief, palliative care, relief of symptoms of certain conditions. You see people who believe the efficacy of the drug on the medical level. The side benefit for Colorado and Washington is that it allowed recreational businesses be legalized.
How has the industry evolved from a strictly medical industry to a recreational one?
MC: Colorado has benefited from the fact that we passed the medical marijuana initiative and went through the speed bumps before the industry came together in 2010 and got behind legislation to provide a legal framework for [recreational use]. The industry leaders at the time said that in order for us to be taken seriously, we need to be highly regulated, and that's what they accomplished.
Where do you see the industry in five years?
MC: Part of me thinks it will become more normal and mainstream because it is a revenue generator for the state. I come from the oil industry, so people ask me what's more regulated and I say right now, they are neck and neck. And for a new industry, that's a lot of regulation. I think it will continue to be heavily regulated, but the regulations will be tweaked to make them more common sense. ... I think it will be flourishing. We'll either have banking on the federal level or at least on the state level, and I think it will just become ho-hum. We'll have more research on the efficacy on the medical side and it'll be competitive and still be entrepreneurial. It's a fascinating industry.