So you want to make some money selling legal marijuana? Well, I don’t blame you. Nearly half the country now has some form of legal medical marijuana and four states have legalized recreational use of marijuana, as well.
There’s a lot of money to be made.
But hold on, weed is still illegal at the federal level and federal laws take precedence. In fact, setting up a marijuana business is a minefield of legal contradictions and complications, so it’s good you’ve come here for advice. I’m no lawyer, but I have been looking into the legalities of cannabis for weeks now and can help you keep your business as legal as possible.
Basically, you are looking at five major legal issues: old school police, crazy taxes, banking, product regulations, and politics. Cause I mean, Obama grew up on Maui Wowie but the next president might be a major buzzkill.
So, OK. Point number one. How are you going to deal with the courts and the fuzz? Even in states where marijuana is legal under state law, these guys are not on your side.
Take California. A lot of people think California is THE place to set up shop since it was the first to see the green light on medical marijuana, way back in 1996. These days you just go see “Doctor Green” on the Venice boardwalk, tell him about your occasional insomnia, and he writes a recommendation for some locally grown, relaxed-to-the-max, Cali Kush.
Los Angeles is pretty chill. But in other parts of the state, it’s not that cool. For instance, there are like a hundred pot shops in San Diego, but the city won’t license most of them. And the feds keep knocking down doors.
I mean, take my man Winston Ludlam. He works hard growing his crop to ease the suffering of countless cancer patients and anyone with a medical marijuana card. He supplies a couple different collectives. But then, last fall, the cops stumbled upon a car full of guys getting ready to rob Winston’s growing operation. His defense attorney, Mike McCabe said they were minutes away from a home invasion robbery.
“They were getting ready to go in with guns and steal the money and the pot,” he said.
Now this looks bad for Winston, because not only did he almost get robbed, now it looks like maybe he’s got ties to some black market dudes.
“If they know about it,” McCabe said, “they must be selling it out the back door.”
Thing is, in December, Congress passed a spending bill that prohibits law enforcement from using federal money to go after medical pot. Congress basically said, “Stop raiding the medical marijuana industry.” And it was not a request.
Now, the spending bill took effect January 1st, and the DEA didn’t get a warrant to search Winston’s operation until January 2nd, so he shouldn’t have been raided. But the DEA found a loophole. State cops and courts aren’t affected by the new rule. They can’t prosecute people for medical marijuana. It’s not against state law. The feds can prosecute medical marijuana, but are barred from spending money on the raid.
So they got a state cop to make an arrest and then took it from there.
“Our position is that the agent had no right to act as an agent of the state of California,” McCabe said. “He was violating the directive of congress by acting as he did.”
Bottom line: I don’t recommend setting up shop in San Diego. But you’ve got to be careful everywhere. Even in Colorado, half the counties made it illegal to open a shop. So that’s a major bummer! But it’s all cool as long as you know the locals are mellow.
The second legal issue you’re going to have to deal with is taxes. And this is no joke. Make a mistake and it will wipe out your profit. Might even land you in jail.
Remember. Washington State got a lot of squares to vote for this based on the taxes. They said it would make the state budget fat as a Peter Tosh birthday joint.
But that means the man gets a hit off every bud you sell. And you can learn a lot from how that’s affected the business there. A few weeks ago, I went to meet LeRoy Ellis who works in this sweet little shop called Main Street Marijuana, in Vancouver, Washington. It’s in an old jewelry store. They’ve got more than 50 strains on display under the glass, plus edibles and oils. The store was packed. You got the sense they’d only let three or four more people in the door.
But even selling a lot of product, profit can be hard to come by. Main Street Marijuana buys a gram of cannabis for $10 and sells it for $22—a standard mark-up. Except the business loses two dollars to sales tax, and five dollars to Washington State’s 25% excise tax. (That’s a tax the state put on marijuana because it’s considered a vice.) And that tax is taken out at every step of the supply chain — grower to processor to seller.
“You’re left with a $1.04,” says Ramsey Hamide, the store’s owner. He says taxes are the number one issue affecting his business, which is only now beginning to stabilize. So far, recreational marijuana has been better for the states than for the growers and sellers.
And as a business owner, you also have to deal with the IRS, which comes with it’s own set of problems.
The IRS doesn’t actually care how you make your money, so long as you file taxes on whatever you made. Don’t do it, and that’s tax evasion. Which is how they took down Al Capone! So you have to file taxes.
Legitimate businesses can deduct almost everything they spend money on, including state taxes. But marijuana businesses can’t. Section 280 E of the IRS tax code states that schedule I drugs aren’t deductible as a business expense.
“That was added to the tax code decades ago to address perceived abuses by drug dealers,” said lawyer Matt Goldberg. “Like Miami Vice style, boats and cars and travel and excess in the lives and businesses of big time drug dealers who were trying to take those things as deductions.”
So when the excise tax pumps up the price of Ramsey’s product, it also turns up the volume on his taxable income. Normal businesses could deduct all of those taxes, but until federal law gets changed, marijuana taxes are going to be high as an osprey in an updraft.
- Stay with me. Only a couple more legal hurdles. But this one hits you where it hurts. Banking.
You’re going to have to stash all that dough you’re making, but at some point duffle bags full of greenbacks get impractical and might get “lost.” But walk into a Wells Fargo wearing a marijuana logo and you’re going to get the stink eye.
“It’s in a sense illegal for any nationally chartered bank to provide banking to the marijuana industry,” said Ohio State law professor Doug Berman. “Technically they would be providing banking to illegal drug dealers.”
Banks aren’t willing to risk federal drug charges, so pot shops can’t get loans, and have to pay their employees and their bills in cash.
So, what’s your best bet for stashing this other kind of green?
A local bank. If there is one. I mean, a week ago Oregon had exactly one bank offering checking accounts to cannabis companies—a tiny outfit called M Bank. But then it said compliance with government regulations was going to be way too hard.
So now, in Oregon your options are burying the money in the backyard or using it to insulate your walls.
There is one other option. Quietly set up some account with a bland-sounding name like Mary Jane’s Chocolates and keep a very low profile. If the bank finds out, they will close your accounts, even though the Obama administration has been writing memos since 2009 basically telling the Department of Justice to look the other way.
It doesn’t matter. Banks won’t touch this industry until the law changes.
On to legal issue number four. Regulation.
You might remember this. Last year New York Times columnist Maureen Dowd ate a weed candy bar while covering the Colorado pot economy. They found her three months later in a homemade teepee, sculpting Cinderella’s castle out of marshmallow fluff. At least that’s what I heard.
She pointed out that Colorado is littered with Ganja gummy bears and kids can’t tell the difference. And I see her point there, because states aren’t used to watching this stuff. Usually the FDA handles that. But the FDA is part of the federal government, so they can’t exactly tell businesses how to make their illegal drugs safe for consumption.
So that means there’s going to be lots of unpredictable legal changes to the economics of selling pot.
“The law is itself is so much in flux that it’s quite possible that the industry could get revved up around one product that could become illegal,” Berman said.
When it comes to product regulations, each state is its own testing ground, trying to find the sweet spot between legality and total prohibition.
So think carefully before you market those psychedelic starbursts.
This is all pretty stressful, I know. Don’t worry. There’s only one legal issue left: the politics of pot. Because the next president probably won’t have grown up hot-boxing a Volkswagen like Obama did.
But even a choirboy candidate like Mike Huckabee might think twice before cracking down.
“There’s a sense that if you want to have a chance to both encourage younger voters to come to the polls and get them on your side it may be dangerous to oppose marijuana reform,” Berman said.
Not only that, but Republicans generally champion the idea that states should have more power to self-govern. Come down against marijuana and you’re suddenly a hypocrite.
So why are the feds doing it? Why hasn’t the government lifted criminal penalties, simplified taxes and banking, and helped states regulate products? One thought is that all this constant shifting and backtracking helps keep businesses smaller.
“You’re not going to get the tobacco industry coming in and commercializing this,” Berman said. “You’re not going to get alcohol industry taking a chance while there’s still all this legal uncertainty.”
Whenever a new marijuana business opens, the trick, for a while, is figuring out how to keep the product ON the shelves. Flooding the country with pot all at once would be like Reefer Madness, 2015. In an interview with CNN Obama said that if companies with huge marketing budgets and distribution networks got into this industry, levels of abuse would increase as well.
So these taxes, banking problems, and contradictory regulations are like the government’s way of saying: chill out, dudes. Let’s build things up without everyone getting all paranoid and stressed.
The stoner-in-chief is doing his best to keep fellow tokers out of jail, but this isn’t going to happen all at once. So if you still want to get into the business, just remember: keep it mellow, don’t boggart the joint. There’s plenty to go around. Something tells me you’ve got this.