Pipe Dreams: What You Should Know About The Law Before Investing In Cannabis Products
What sort of business grosses $1.7 million and pays $866,000 in taxes? Hint: It's an old business that was once a thriving trade in the US. Search for images of this product and you'll see just how common it was to find some form of it in American households until it was banned in 1937.
If you guessed cannabis, and you aren't turned off to the idea of starting a cannabis company by the ridiculous tax rate, you should know about some of the other limitations of a cannabis-related business before making any investments.
Cannabis-related enterprises must make security their top priority.
There is one glaring concern in the requirements of the communities that allow cannabis sales and in the the demands of the US Justice and Treasury Departments. Security is the primary goal you will have to meet before obtaining final approval for any type of cannabis dispensary or other operation. This means lengthy waits between the initial application process and your grand opening, turning off any investors looking for quick returns.
Banks are reluctant to handle any cannabis-related cash or provide loans until the federal government makes up its mind about re-scheduling cannabis or legalizing it altogether. The huge amounts of cash generated by many cannabis businesses then create a massive security risk. You must prove you can provide a locked-down, monitored location before you open your doors.
The taxes on cannabis proceeds are exorbitant owing to an old drug law.
US Code 280E prohibits normal business deductions for income on sales of any controlled substances that are federally-classified as Schedule I or Schedule II products. This means that federal tax rates can be outrageous, even if state tax rates on cannabis businesses are progressive and fair.
There are efforts to change the Schedule I designation for marijuana and hemp products for tax purposes. Sales are through the roof in states where medical and recreational cannabis are legal, adding to the tax bases in those states and creating jobs and investment opportunities. Politicians want campaign donations and cannabis businesses are flush with cash, so more politicians will be getting on the pro-cannabis bandwagon. Still, until the IRS and the Feds get on the same tax page as the states, consult a knowledgeable tax attorney before buying any potential cannabis cash cows.
The laws are evolving and there are no experts.
There are no standard cannabis-business law specialties as of yet, although many attorneys have bravely jumped into the circus ring that is cannabis law. It may be difficult to locate a lawyer who understands all of the complex legal loose ends inherent in running a cannabis enterprise. You may have to contact corporate lawyers in other states who've handled similar issues as the ones you're having, then pay to have them coach a local attorney on the nuances of your marijuana or hemp product company.
The good news is that more attorneys are showing interest in cannabis business law. One specialty is concerned with workplace cannabis policy. If an epileptic employee uses cannabis to control seizures, is it legal for the company to terminate him for failing a cannabis drug screen? Is that a violation of the Americans with Disabilities Act? These and many other cannabis-fueled questions await business owners, employers and lawyers in the years to come.