Cannabis businesses face many challenges it’s not easy being green!
Irish liquor lawyer goes green!
This week the Irish Liquor Lawyer goes green and talks about cannabis. Folks Mary Jane is coming to the State of Illinois and it is a matter of time before she is legal. So, with that in mind, we need to think ahead on how we should handle this industry.
Many states legalized cannabis including Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Vermont. Although the states are trending towards legalization, the federal laws still consider cannabis an illegal drug and this causes issues for the cannabis businesses. The lack of federal legal recognition makes it more difficult and expensive for cannabis businesses to operate.
Illinois needs to promulgate policies that address and may be somewhat remedy these issues, but at the same time maintain a safe and orderly marketplace for a dangerous substance.
How the state can help the cannabis industry
If the state legalizes cannabis we need to begin treating it like a legitimate industry and not some fringe element. This doesn’t mean we throw off the shackles and go laissez-faire on treating this industry. However, the state can promulgate policies that can benefit businesses and maintain a safe and orderly marketplace.
Illinois should consider favorable tax policies towards cannabis growers.
A federal tax return allows a business to report its income, and also allows it to deduct its business expenses to offset its income. But a business engaged in selling cannabis needs to report the income yet does not get the benefit of the expense deductions.
The IRS enforces a law that does not allow tax deductions or credits for the illegal trafficking of drugs. Because cannabis is an illegal drug, the sale of it is considered illegal trafficking. Yet, because the cannabis seller earns income, it must report the income even if illegal, because not doing so constitutes tax evasion.
Additionally, the federal government punishes the cannabis business by not allowing them to obtain traditional financing from a bank. Because cannabis is illegal at a federal level, the FDIC considers a bank working with a cannabis business as violating federal law. The DEA could also sanction a bank that loans money to a cannabis business.
With the traditional financing vehicles shut off, many cannabis businesses are forced to obtain nontraditional financing at a greater expense. These types of financing include everything from angel investors, crowdfunding, private equity investors, to home equity loans.
Based on the disadvantages present at the federal level, Illinois should allow deductions for cannabis sellers and in fact should consider providing additional and specialized tax credits or deductions for the industry. For cannabis producers, growing cannabis is an equipment intensive practice. A producer is required to utilize lamps for growing, a sound ventilation and hvac system, an extensive security apparatus which includes cameras and costly secured fencing, and tons of land. The State should think about providing a special accelerated deprecation for the equipment or a targeted sales tax exemption for startup equipment. This would not fully offset the federal tax disadvantages but would allow cannabis business some relief from business expenses.
Another idea is a specialized tax credit for a small cannabis business. Because of the different federal tax treatment and disadvantageous financing terms, running and starting a cannabis business is drastically more expensive than running a regular business. This means there is a higher barrier of entry for companies with less access to capital and running the business becomes relatively more expensive.
The state can not offset the disadvantages, but it could promulgate policies to offer relief.
Should we have minimum pricing
In the liquor world some states won’t allow a retailer to sell liquor below the cost in which they purchased the product. The theory being that if Walmart can sell the product below price, then a small liquor store that cannot afford to engage in this practice will be put in a competitive disadvantage, which in turn will lead to it going out of business. When the dust settles, there would only be standing the big box stores that can afford to utilize alcohol as a loss leader, while the small independent stores are shuttered.
I personally believe the market should settle the price. Amazon has put many stores out of business, yet we don’t require it to sell teddy bears at a minimum price. So why should we employ this practice in other areas?
A second argument for minimum pricing is that by allowing someone to offer cannabis at a low price, we could be flooding the market with cannabis. For example, if an ounce of cannabis is $10 at Store A, then it would induce more people to buy a harmful drug.
This could happen in theory but it is harder to imagine in practice. The expenses are so high in this industry, without the federal benefits allowed, that it would not make sense to engage in this practice. Also, unlike a Walmart, there is no loss leader element that would allow for the sale of cheap product.
Local and community input
Under the Illinois Liquor Control Act, the local government officials determine whether they want to allow the sale of alcoholic liquor within their borders. They control the issuance of retail liquor licenses and can deny a license or limit the number of licenses issued.
When cannabis becomes legal, the state should allow the local governments these same privileges. A locality should have veto power on whether a cannabis dispensary can setup shop in its jurisdiction. In fact, the state should go further and allow a locality the power to determine whether they want a producer of cannabis within their boundaries.
Although the state will legitimize the business by legalization, cannabis is still a dangerous substance and the locals should have a say on whether it should be allowed within its borders.
Safety and compliance issues
The state should consider safety and compliance measures carefully when it legalizes cannabis. Without these measures, the state is inducing an illegal and free wheeling drug market. Here are some suggestions to get ahead of the issue.
a) The state should utilize a tracking system for its marijuana plants. The state should use a bar code system where it can track the plants that are grown. This would ensure that the state can account for the legal supply at all times, and further it ensures that state growers are complying with federal law by not allowing cannabis to cross into other states and travel in interstate commerce in violation of federal law.
b) The state should require 24-hour video surveillance and should have an adequately fenced facility. I know it seems like we are turning the cannabis farm into a prison, however the facility needs to be secured tightly. The video cameras should not only watch over the growing area but the whole facility. This would ensure no employees are stealing the cannabis and selling it on the black market. Also, a secure fence, something akin to an eight-foot barbwire fence should be required. Although not a 100% deterrence, a barbwire fence along with the cameras would deter thieves from entering the property to steal cannabis.
c) Sell it only in dispensaries. Please don’t allow it sale in liquor or groceries stores. Further, make it illegal to enter if someone is under 21. We don’t want children around the product.
Even with legalized cannabis, there is a serious threat of a black market. What is the percent of black-market sales in the states that legalized cannabis? It is hard to get an exact and accurate figure but the percent ranges from 20%-50% black-market sales depending on the state. Even though it is hard to pin down an exact percentage, what is not disputed is that high tax rates will contribute to the increase in black-market sales.
I often hear people say legalize it and tax the hell out of it! Well great reasoning but taxing the hell out of it may induce more illegal sales. If we put a cannabis excise tax such as Washington’s sales tax rate of 37%, we can expect a healthy black-market in Illinois. The best solution is to highly tax it but do not go overboard. The legislature will have a balancing act of taxing the product high enough to not make it readily used, and not taxing it too much which would drive the price so high that it is higher than the black-market. Anywhere in the range of 15-20% tax rate is probably the best solution.
Also remember that cannabis is not a panacea for our budget woes! Remember your history, in Illinois the panacea was once the lottery and then legalized gambling. Cannabis will raise revenue but don’t depend on it to solve budget issues, only responsible budget policies can achieve this goal.
The safety and compliance issues of the proceeding section ties in with the black-market. To maintain a safe market for cannabis, we must ensure that it does not cross state lines. If the border states (Indiana, Iowa, Kentucky, Missouri, and Wisconsin) do not legalize cannabis, there is an incentive for growers to send the cannabis to these other states. The state mandated security system needs to be so tight at licensed facilities that smuggling or stealing product is nearly impossible. The state cannot fully prevent the black-market, however, it can significantly reduce its presence.
Another possible policy idea is to limit how much cannabis is grown in Illinois. In Oregon cannabis suppliers grew so much product that the oversupply fed black-markets in other states. These consequences lead to violations of federal law and could lead the federal government to shut down or heavily sanction the Illinois cannabis market. I am personally against caps; however, this is an issue that policy makers could debate.
A further solution is the state should restrict how much cannabis a customer could purchase. Oregon has a limit of 1 ounce per day. By limiting these amounts, Illinois could cut down on a Sam’s Club type purchase that may be smuggled into the black-market of another state.
There are issues that may seem peripheral but are actually very important for maintaining a safe and orderly marketplace.
- Cannabis dispensaries should be limited in their hours of operation. Since there is not a long track record on legalization, the state should proceed cautiously. Oregon’s law on 10:00 pm closing times is a sound guideline.
- The state should consider a ban on consumption in public. Nothing is fouler than the smell of stale marijuana! The state may want to limit consumption to private property or homes. We should proceed cautiously before allowing cannabis consumption in a public place. A row of Amsterdam like coffee shops might not be appealing for a locality’s residents.
Cannabis will be legal but complicated. As indicated earlier, Illinois needs to strike the right balance between fostering a favorable environment for the cannabis businesses and maintaining a safe and orderly marketplace. There is not a long track record for the legalized states, so Illinois policymakers will make decisions with imperfect information. However, I think Illinois can run a decent system if they follow some key principles: 1. Provide reasonable tax benefits to the cannabis businesses; 2. Implement laws requiring sound security policies; 3. Work with local governments to obtain their consent; and 4. Make sound policy decisions to reduce the black-market.
Illinois has got it wrong often times, let us hope they get it right here!