Considering Cannabis?

As greenhouse growers evaluate the burgeoning cannabis industry, many factors will come into play. It’s a complex industry, which can be challenging to navigate. But for many, the potential for big business will outweigh any reservations. Below are 24 things you should know — from tax issues to compliance, security and banking — if you’re contemplating expansion into the fastest-growing industry in the country. See the July issue for Part I of this special two-part series for 34 considerations and tips on everything from the market opportunity to the application process and getting started, to greenhouse advantages, upgrades and transitions, and the potential risks.
 

Big potential, but it can be taxing

1. Taxes tend to be high, and the product is taxed multiple times, although medical marijuana taxes tend to be significantly lower than taxes on marijuana sold for recreational use. In Colorado, for example, taxes include the 2.9-percent retail and medical marijuana sales tax, 10-percent retail marijuana special sales tax and 15-percent marijuana excise tax.

In Washington state, there is “a 25-percent excise tax on each level of the system: producer to processor, processor to retailer, and retailer to consumer. In addition, business and operation (B&O) taxes on the production and local retail sales taxes apply,” according to the Washington State Liquor Control Board, which oversees the legalized marijuana market. Cultivators in Washington worry that such high taxes will tax them right out of business, and they are hoping tax cuts will be implemented.
 

2. Speaking of taxes, (and this is a big one) don’t expect to take your typical business deductions. One of the largest issues hindering the success of legal marijuana businesses and the industry as a whole is a little something called 280E. It’s a section of the U.S. tax code that was originally created in 1982 to prevent illicit drug dealers from taking business tax deductions. The federal government still considers state-legal marijuana businesses illicit, and therefore 280E still applies to these state-legal businesses.

Imagine not being able to take all of the deductions, such as payroll, rent and state excise taxes, you take for your greenhouse business. Then imagine still being taxed on income, sans those deductions. This is worth exploring fully and reviewing with your accountant. CPAs who specialize in the legal cannabis industry do exist and may be able to provide explicit details on the impacts on your business.
 

3. Tax revenue being generated in states where marijuana is legalized is appealing from an economic development standpoint. Using Colorado as an example, $63 million in tax revenue was generated for the state in 2014. For some perspective, we can compare that to the alcohol industry: Colorado generated $39.86 million in the entire year of 2013 from sales, use and excise tax on alcohol.

If all states legalized marijuana, the U.S. stands to gain $3.1 billion in state and local taxes per year — “more than twice the entire budget of the Small Business Administration in 2013,” according to calculations by NerdWallet (which based its projections on a formula that looked at a number of variables, including estimates of each state’s current marijuana-smoking population, the percentage of the total U.S. population and state and local tax rates).

“California could gain the most from taxes on sales of marijuana. The state stands to take in [more than $519 million], which almost covers the 2013 budget for the California Department of Parks and Recreation,” reported NerdWallet.
 

4. You may have to pay your taxes and other bills in cash. Most states will allow cash payments for taxes, considering the challenges most marijuana businesses have in finding banking services (more on this below). Washington State, for example, explains on its Department of Revenue website: “You may pay your taxes in cash at any Revenue Office. Appointments are necessary for tax payments of $20,000 or more. … We encourage early payments (before the 25th) if using cash. Penalties may apply if you don’t pay your taxes by the 25th.”
 

5. Be prepared to know each and every regulation, and make compliance your first priority. With marijuana’s illegal status at the federal level, the only protection from federal prosecution is 100-percent compliance with state laws. These regulations can be extensive (Colorado has 500 pages of regulations, according to Mashable) and can change frequently. Congress has passed an amendment (called the Rohrabacher-Farr amendment) designed to prevent the Department of Justice and Drug Enforcement Agency from interfering with state laws regarding marijuana legalization and commerce, and from prosecuting businesses in compliance with those states’ regulations. Again, the key here is compliance.

6. Tracking from seed to sale is usually a requirement. While not all states have this mandate, seed-to-sale tracking is becoming the standard. The main purpose is to ensure legal marijuana isn’t being sold to the black market. Some states, like Colorado, require each plant to have an RFID (radio frequency identification) tag that travels with the plant all the way to the dispensary. Each sale to the end consumer/patient is tracked back to the plant’s origins and lot number.
 

7. You will most likely need to use a state-mandated inventory management solution. As an existing greenhouse grower, you likely have your own inventory management system in place, and if you operate retail centers, you probably tie that into point-of-sale software. Be prepared to either scrap that system or do double transaction tracking, as the state will most likely require you to use their approved system. Which system that is can vary by state as well, and seed-to-sale tracking solutions vie for state contracts on a regular basis.

Security

8. Security costs can be more than you expect. “Security was a lot more aggressive and costly than we anticipated,” notes Kurt Van de Wetering of THC Health Inc., who applied in June for medical marijuana cultivation license in New York. (Only five licenses are being allotted to growers statewide.) Van de Wetering’s family business, Ivy Acres, grows perennials, ground cover and bedding plants, and is one of the largest suppliers to Home Depot.

As you can imagine, marijuana is a high-demand product, and one that puts cultivators and dispensaries at an elevated risk. Unfortunately, dispensary robberies are not uncommon, and cultivators often opt for growing in covert warehouses to prevent others from knowing what’s inside, as well as for what they believe to be increased security. Greenhouse facilities can be more costly to secure properly, although various factors are involved, including whether the greenhouse has solid walls.
 

9. Every state has security requirements. You will need to check the state’s regulations for complying with security measures that must be in place from camera placement to recording and storing video footage (and for how long), etc. To be compliant in most states, you will need a camera anywhere marijuana is present, including quarantine and grow rooms, and even the hallways between where the product is stored, explains security expert Noah Stokes, founder of CannaGuard Security, in a special Cannabis Business Times report, “Beyond Compliance: A Comprehensive Guide to Security for Cannabis Businesses.”
 

10. Your facilities will need to pass state inspections for security compliance. “There will be retrofitting requirements for security and compliance,” says Corey Hollister, CEO of American Cannabis Consulting. Understanding compliance regulations upfront will help prevent the need to overhaul or expand the security systems you put into place (incurring more costs).
 

11. Compliance doesn’t necessarily mean security. “When the building is empty for first inspection, compliance is easy, but once you put plants, employees and customers [for dispensaries] into the mix, there is a drastic reduction in obstructions,” Stokes writes. “However, with proper planning from the beginning, and good design, it’s possible to get a system that is not only compliant by state standards, but will ensure that your facility isn’t [an easy target].”
 

12. Unfortunately, theft risks can occur from within. Despite attempts to hire trustworthy staff, when it comes to a high-demand, high-priced product, temptation can occur. “When employees know that there is more than an adequate security system in place, they tend to make fewer bad decisions (as the risk of getting caught is greater),” Stokes explains. “This is all too often overlooked as an effective, if not most important, way of ensuring against theft attempts.”
 

13. Skip the pockets. In most grow facilities, employees will wear jumpsuits for environmental control, but the jumpsuits usually don’t have pockets — to keep the risk of theft down. This doesn’t have to suggest to employees that you don’t trust them, it’s just standard practice for marijuana growers.
 

14. Design security during the build process. If you are constructing a new greenhouse for growing cannabis, it can help to factor security into your design and budget.
 

15. Securing cash is another consideration. Vaults for storing cash are common, and access to areas where cash is stored is typically provided to the owner only. The fewer people who touch the cash, the better.
 

16. Product is usually stored in a separate vault than where cash is stored. The reasons for this are somewhat obvious — if one safe is compromised, you don’t have all your eggs in one basket — err, pot — so to speak.
 

17. Transporting product and cash is a security concern. Some companies say armored trucks and armed guards are not necessary, but more and more, this seems to be a common practice, as thieves will know that cannabis businesses are transporting large amounts of product and usually even larger amounts of cash to and from cultivation facilities and dispensaries. “Transportation security increases costs,” Hollister says. “The crop can justify the costs, but these are costs that must be factored in to your budget as well. It’s not the same as a produce truck picking up and dropping off produce.”
 

18. Address security and have a security team already in place for the application processes (the state wants to know that you will be operating a secure facility), as well as for addressing community concerns about safety. Van de Wetering says, “Security always seem to one of the biggest issues” among the local community. Therefore, Van de Wetering stresses the importance of informing neighbors and educating people during town meetings about the company’s security team and the extensive measures that are being taken to create a secure environment.

Banking

19. You will have a hard time finding a bank for your buck. Banking, or lack of basic banking services (savings and checking accounts) and financial services/loans, is one of the biggest challenges plaguing the legal marijuana industry. While marijuana remains a Schedule I drug, any banks that are federally insured servicing marijuana businesses are at risk of money laundering charges. The federal government has issued guidelines to banks to help them understand how they can eliminate some of the risk involved, but by and large, most banks are not willing to get involved.

“The conflict between state and federal law presents major banking challenges,” Hollister says. “If a company has an existing loan on a greenhouse, there have been instances where the banks have recalled the loan,” he cautions, when the bank learns of the intent to enter the marijuana market. Important considerations, therefore, Hollister notes, are whether you own your assets outright, and if not, who holds the loan and are they OK with the intended use?”

Another consideration, he says, is whether you are using any federal dollars. “Those could be at risk,” Hollister says.

At first, David Bonvillain — founder and CEO of Elite Cannabis Enterprise (which runs several cultivation facilities, including a greenhouse operation) in Loveland, Colo., and Elite Botanicals (a sister company focused on non-psychotropic cannabinoid cultivation, research and product development) — had no banking issues, he says. “But then I got kicked out of the bank I had been doing business with for 18-plus years. … Even just as a consultancy — they said to take my ball and go home, and closed all my accounts,” he explains. “So then I bounced to Bank of America, based on them stating they would do business with the industry in Washington (sort of) … Well that lasted about 45 days before they booted us, too, by freezing our accounts in the middle of payroll.”

Now in Colorado, Bonvillain banks at a local bank that he says is in the same town as his CBD hemp operation. “My neighbor is actually on the board of the bank and loves what we are doing (he is also active in charities and helping those in need), so he brought over the bank president and a few other folks to tour my greenhouse and talk to me. They are fully supportive and are helping however they can. It’s nice when everyone opens their eyes and ears (and mind) a bit, and does the right thing.”

Van de Wetering says he and his team have had conversations with a number of banks, not just their existing bank, in part because they are establishing a separate business from their Ivy Acres business. “Not everybody was receptive to working with us,” he says. “Some said they had discussed it with their board of directors, and they were intrigued, so I take that as a positive at least.” Van de Wetering was able to get “support,” he says, “but it’s not standard.”

And a few more things

20. Get involved in the industry. If you’re planning on getting involved in the industry as a business, it makes sense to get involved in the industry from an advocacy perspective, at least supporting those organizations that are fighting the fight for legalization.

Many in the industry have speculated that if all the businesspeople who were hoping to launch in Florida had supported the organizations that were actively pushing for the state’s medical marijuana amendment’s passage, the amendment would have likely passed. An opponent of the amendment invested $5 million lobbying against it, and advocates couldn’t compete without more support.
 

21. Get a lawyer. Legal counsel is advisable when starting any type of business, but with all the regulations and inherent risks surrounding the legalized marijuana market, and the absolute necessity to remain compliant with those regulations, it’s essential for cannabis businesses. Many successful businesses retain lawyers with experience in the industry, as they are typically more informed of the intricacies of the cannabis regulatory landscape and legal cases that have already set precedents in the industry.
 

22. Consider industry-specific insurance. Some insurance companies provide policies tailored to the needs of cannabis cultivators and dispensaries, including such offerings as “Raid Insurance,” which can cover the cost of confiscated product and lost business in the event of a raid — provided the business is not operating illegally and is in full compliance with state law.
 

23. “Be realistic about what you don’t know,” says Van de Wetering. “Get a lot of people on your team — friends and people outside your circle.” Van de Wetering sent 180 pages of regulations to his network to get a lot of different views and input on them. “I was not comfortable with how well-versed myself and my team were about dispensaries or pharmacies, so I got a walk-through,” he adds. He also flew out to Colorado, Washington and Nevada to meet with industry experts and consultants to learn more. “Load yourself up with knowledge,” he says. He also hired an assistant to help him manage the entire process, which he says was a tremendous help. “She was basically my partner in this.”

Still, Van de Wetering felt he needed additional help with the application process and filling in gaps where he and his team lacked expertise, so he hired Canna Advisors. Even for that process, Van de Wetering did his due diligence, flying out to their offices and having them come visit his facilities. He evaluated five companies before selecting one. The costs of hiring a consultant, he says, are worth the knowledge, experience in the industry and network of individuals brought to the application and the overall process. “They have a working knowledge of the industry that is so much greater than ours,” he says.
 

24. So is it worth it? “I have questioned that a bit for sure,” Bonvillain admits. “I have risked everything to do this ... But when I hear a story of how our CBD helped someone, I don’t even begin to question it.”

Aside from the personal benefits, the potential financial rewards can be appealing. For others, the monetary and legal risks may be too steep, and the regulatory framework too complicated to navigate. Check out Part I of this special report in Greenhouse Management’s July issue for more information and do your due diligence — tenfold for this market — to determine whether or not the cannabis industry is a viable business option for you.

Noelle Skodzinski is the editor of Cannabis Business Times (CannabisBusinessTimes.com), a leading national media brand serving businesses in the legal cannabis industry. Cannabis Business Times is owned by Greenhouse Management publisher GIE Media.