Note: This is a rapidly evolving space in many ways and is very difficult keep up with the changes. The shops themselves aren’t evolving, but the circumstances around how they’re forced to operate (ownership, laws, regulations, etc.) are changing daily. And one story effects the other
All retail is difficult. Cannabis retail is especially difficult because of the state and federal regulatory environment. As of this writing, cannabis is
still illegal at the federal level. It’s a schedule 1 drug without any “benefit” … at least according to our government. And as of this writing, the DEA has stated that they are going to reclassify cannabis as a Schedule 3 drug, which will still leave it highly regulated. This change won’t make much of a difference to what happens with the banking system and legal cannabis operations.
Whether cannabis is a Schedule 1 or Schedule 3 drug, dispensaries will remain prohibited from using the banking system. This includes taking credit and debit cards along with having a bank account…like a checking account. Stores that sell alcoholic beverages like wine or spirits aren’t effectively different from cannabis dispensaries, but alcohol is legal, federally. To further complicate the issue, cannabis regulations are wildly different in all the legal states. At the end of the day, it’s still retail and retail is about pleasing customers and getting them to open their wallets. Then there’s 280E and the IRS.
Rule 280E – The Elephant in the room
Rule 280E pretty much says that all funds made by cannabis stores are ill-gotten gains and there are no deductions for ill-gotten gains. No deductions for anything that is deductible by normal businesses. Normally deductible items like light, heat (and A/C), salaries, etc are all deductions for normal businesses. Not so for a cannabis retailer. A dollar in the till is taxable. The whole dollar. Cannabis retailers are required to declare ALL the income they receive and NO DEDUCTIONS are allowed from that income. Is it unfair? What do you think?
Despite all the restrictions and hoops to jump through to open and operate a marijuana dispensary, more cannabis retailers are opening every day even as many are closing. I’ve visited hundreds of retailers and talked to dozens of owners and I can say, beyond the shadow of a doubt, that banking is the biggest issue for them. Because cannabis is a cash-only business and since retailers can’t deposits to legitimate bank accounts they also have the enormous danger of having large amounts of cash hanging around. It can be a bit scary. A bit? Some banks though are quietly helping cannabis retailers. Yes, it’s a bit risky for the bank, but there is a risk/reward factor in the banks working with retailers.
Regulations
Cannabis regulations are much like alcoholic beverage regulations. Each legal state has its own rules and regulations. Some of the legal states rules and regulations make no sense at all. For example, in Illinois, no cannabis flower cannot be exposed for people to see or smell. While wine is enhanced by its aromas, so is cannabis. If the regulations allowed for ‘tasting’ (OK, smelling) in-store much like alcoholic beverages, it might make a bit of sense. In a wine store, you can’t just open up a bottle and smell it before you buy it, but Illinois is draconian. And stupid.
On the other hand, some states (Michigan and Nevada) have pretty much made the cannabis retail rules a lot like the alcoholic beverage rules.
Renegade Federal Agencies
Then there’s U.S. Customs and Border Protection who believe they’re allowed to seize cannabis, even if this is not their jurisdiction. Their contention is that since cannabis is still illegal, that it’s OK to seize legal cannabis because it’s close to the border with Mexico. This agency is out of control and is clearly overstepping its bounds, but there seems to be no balance to what they’re doing. The growers and retailers who have had product seized can probably sue in a state court and win, but the agency after losing would probably appeal to a federal court, which would probably find in their favor.
Until the Federal government either removes cannabis from Schedule 1 or any schedule for that matter, it’s still going to be a mess for retailers. My hat is off to those who choose to become retailers or growers. It’s a tough road to hoe and I admire those who have chosen to be pioneers.
