Legalized cannabis isn’t good business – yet

NY Post image

by Ed Zwirn
Originally published on the NY Post – April 26, 2015. Read the original article here…

Marijuana has been smokin’ hot lately, with Wall Street trying to tap into the reefer madness with all sorts of funds aimed at businesses in Colorado and Washington state.

That being said, legalizing or decriminalizing cannabis is not the same as making it good business.
Federal law still considers marijuana a Class I drug (with no redeeming medical value), effectively denying marijuana entrepreneurs access to banking and other financial services and forcing them to operate using large sums of cash.
Some 23 states (and the District of Columbia) have passed measures allowing for some degree of legal recreational and/or medicinal cannabis consumption.

In the Big Apple, Mayor de Blasio announced in November that cops would no longer be arresting people caught with 25 grams of pot or less. On the state level, a limited medical marijuana law is set to take effect next year.

In the Senate, New York’s Kirsten Gillibrand (along with New Jersey’s Cory Booker and Kentucky’s Rand Paul) have already introduced a bill that would prohibit federal prosecution of state-legal medical marijuana and at the same time allow banks and credit unions to take on marijuana clients without fear of the feds.

But it is probably the tax issue that is proving most daunting to legal marijuana.

The National Cannabis Industry Association, a beltway group that lobbies for the budding pot industry, points out that under the Tax Code, state-legal cannabis cultivators and dispensaries cannot take ordinary business-expense deductions and thus wind up paying effective tax rates of 50 percent to 85 percent.

“The businesses that are getting penalized the most by this provision are the ones that are trying the hardest to do the right thing,“ says NCIA Deputy Director Taylor West.

Under the so-called Small Business Tax Equity Act introduced in the House and Senate on April 16, Section 280E of the Internal Revenue Code would be tweaked to allow state-legal cannabis providers to take these deductions.

Significantly, the bill enjoys a degree of backing across the ideological and partisan divide, having garnered three Republican co-sponsors (including New York Rep. Richard Hanna, whose 22nd district includes Utica and Binghamton) and the support of Grover Norquist and his Americans for Tax Reform.

Consumer marijuana spending is by definition hard to quantify, the evidence at this point would seem to indicate that Americans spend tens of billions of dollars on cannabis (both legal and illegal) each year.

Matt Karnes of GreenWave Advisors puts that number at “well north of $50 or $60 billion.” According to a report issued by GreenWave late last year, if the weed were to become legalized nationwide, medical use alone would probably come to around $13.5 billion by 2020.
Even in New York, where the state’s so-called Compassionate Care Act will allow for only a limited number of marijuana dispensaries throughout the state, Karnes projects revenues of $239 million for 2016 and more than $1.2 billion by 2020.

Please Note: A chart appearing in the print edition of this article cited GreenWave Advisors as saying that the marijuana market would generate $60 billion in revenues in the first year after legalization. In fact, this number was an estimate of total current marijuana revenues (legal and illegal combined). A report issued by GreenWave Advisors said that the legal retail market would generate $35 billion in 2020, assuming that this is the first year of totally legalized marijuana.

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About Ed Zwirn

Ed Zwirn is a journalist/editorial professional with a focus on financial trends and practices. He lives out in the woods in Bethel, NY, not far from where the Woodstock Music and Arts Festival was held in 1969. As a financial writer, his work has appeared in The Wall Street Journal, The New York Post, CFO Magazine and news services including Dow Jones Newswires and Informa Global Markets. Ed also spent three years in Ukraine, where he ran an English-language news service. He now divides his time between his freelance journalism, song and poetry writing, and barbequing and lawn-mowing on his 2.5 acre property.