5 Challenges Plant-Touching Cannabis Companies Face
Costly taxes, rents, regulations and more—these restrictions are keeping legal cannabis businesses from big profits.
Before you run out and open a dispensary, there are a few things you should know about cannabis companies. Though we use the term ‘cannabis company’ to describe all sorts of businesses, there are really two distinct types: plant-touching and non-plant-touching weed businesses. A unique set of challenges face the former: cannabis companies that grow, transport and sell weed.
Non-plant-touching cannabis companies, though necessary to the industry, encounter fewer obstacles. Marketing weed, manufacturing bongs, building software for dispensaries—companies that perform these functions can, more or less, operate like non-cannabis entities.
But there exists a long, sometimes insurmountable list of obstacles between plant-touching cannabis companies and profits. Here we’ve compiled a list of the big ones that keep law-abiding weed producers, sellers and distributors down.
Ridiculously High Taxes
Though many challenges face cannabis companies, you cannot overestimate the impact of tax rates. They often determine where businesses set up shop in the first place. For instance, Oakland, California’s 10 percent tax rate encourages weed businesses to relocate to nearby cities with half the tax rates.
And on top of city taxes like Oakland’s, cannabis businesses also pay high state and federal taxes. Just because cannabis is illegal federally does not mean that the federal government doesn’t tax weed businesses. This is thanks to a law from the ’80s that came into being when a cocaine dealer attempted to deduct his business expenses. Internal Revenue Code 280E states that you cannot subtract business expenses from gross profits “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”
Non-plant-touching businesses pay taxes on net profits, which is gross profits, meaning what you sold, minus expenses and cost of goods sold. Cannabis businesses have to pay taxes on gross profits minus the cost of goods sold, not factoring in expenses. This means that the cost of rent, marketing, health insurance, utilities and whatever it took to start the business cannot be deducted. This can mean that you’re paying more money in taxes than you made in a year.
Plant-touching cannabis businesses can pay three times what a non-plant-touching business pays in taxes. Jennifer Benda, a cannabis lawyer and partner at Fox Rothschild, told Green Rush Daily, “70 to 80 is generally what people throw around.” A typical business will pay between 25 to 38 percent in taxes. 80 percent is enough to put anyone out of business.
Though many challenges face cannabis companies, a lack of banking is perhaps the best-understood obstacle. Most plant-touching marijuana businesses don’t have access to banking. This goes back to marijuana’s Schedule I classification. The federal government can charge banks with money laundering for accepting weed business’ money.
The consequences of the banking system’s unwillingness to accept weed money are far-reaching. As a result, these companies cannot pay their taxes electronically and must conduct virtually all their business in cash. Not only is this a hassle—think armored cars and security—but it also means that fewer business report earnings, which translates to fewer tax dollars.
On top of this, cannabis businesses cannot access bank loans. If you want to open your own plant-touching company, you better have a lot of liquid cash on hand.
Real Estate Restrictions
Just because a state has legalized weed doesn’t mean that you can grow or sell weed in your jurisdiction. Like dry towns—places that have banned the sale of alcohol—there are plenty of weed-free townships. And depending on the way states wrote their cannabis laws, it can be really easy to ban weed.
This is a big issue in California and Massachusetts. According to the Orange County Register, only 30 percent (144 out of 482) of cities in California allow cannabis businesses. This creates ‘pot deserts’, meaning places within states with legal weed that are miles from a dispensary. For instance, over 40 percent of California is 60 miles away from a dispensary.
Though Massachusetts has significantly less landmass than California, many people are anxious that weed businesses have too few options. 189 of the 351 jurisdictions in Massachusetts have banned weed. This is because elected officials, rather than voters, get to decide what’s legal, and what isn’t.
Since Massachusetts is such a small state, there are even fewer options when it comes to producing cannabis. Though population hubs like Boston, Cambridge and Somerville permit weed businesses, weed growers cannot afford the high rent in urban locations. Furthermore, zoning restrictions make it next to impossible to produce weed in townships with high population density.
In places like Massachusetts and California, it can be a struggle to find a legal space to grow weed. And affording the rent in these competitive real estate markets adds another layer of difficulty.
A special set of challenges face cannabis companies because the cost of doing business is so much higher. A lack of outside investment amplifies these financial hurdles. Until recently, most businesses had to be self-funded. Weed entrepreneurs put everything they had into building cannabis businesses, only to have most fail. Luckily, as more states move towards legalization, investors are increasingly looking to invest in weed.
Though more and more people are investing in cannabis, the perception of risk is much higher. Not only do federal restrictions threaten the existence of businesses that succeed, but profits are far from certain considering financial obstacles like taxes, rent and simply getting a business up and running. Plus, many see cannabis businesses as less legitimate than others. This means both more illegal as well as more disorganized than the typical non-weed business. No one wants to give their money to someone they imagine is a stereotypical stoner.
And those who are investing in weed are mostly keeping it a secret. Though most Americans support legalizing weed, high-profile investors are reluctant to publicly invest, considering weed’s reputation among a significant conservative population.
All these factors mean that at the end of the day, most investors are only interested in non-plant-touching cannabis businesses.
Fewer Ancillary Services
Every business needs a good accountant and a good lawyer. This is especially true when your business operates within an industry as legally and financially complicated as cannabis. Unfortunately, some lawyers market themselves as knowledgeable when it comes to weed, but don’t actually specialize in it. We recommend finding a lawyer with a focus on cannabis law. However, because cannabis is such a new industry, cannabis lawyers are few and far between.
The same challenges face cannabis companies when it comes to finding a cannabis accountant. As mentioned above, paying your taxes as a cannabis business is complicated and expensive. To stay afloat, some weed companies set up separate non-plant-touching entities. These separate businesses can deduct expenses and therefore pay a more reasonable tax rate. If you want to do this, you’re going to need a shrewd cannabis accountant.
Challenges Face Cannabis Companies
There is no doubt about it: We are in the middle of a green rush. No industry in modern times has grown as quickly as cannabis, which means big financial opportunities as investors, entrepreneurs and ancillary service providers. However, there are some unignorable roadblocks between legal weed and big dividends. Though the cannabis industry is a fascinating and increasingly lucrative place to be, don’t make the mistake of thinking it’s as chill as smoking a joint on your couch.