Cannabis Industry Risks
Marijuana being illegal under federal law, increased tax rates, limited access to banking and financial services, monopoly of marijuana research, procurement and forward planning risks, and technology and intellectual property risks are some associated risks with producing or selling marijuana in the US.
FEDERAL GOVERNMENT LAWS VS. STATE LAWS
- Under federal law, marijuana is categorized under schedule 1 which is perceived to have no medical value and a high potential for abuse.
- 46 states have permitted marijuana use in medical and/or recreational form.
- Despite the decriminalization of marijuana under state laws, the federal government strictly prohibits it and the Trump administration has taken a tougher line compared with the previous administration.
- The new Attorney General, William Barr, said that it prefers the Congress to take action instead of the administration. This puts the enforcement at a halt for now though he still strongly opposes the legalization of marijuana.
- In a piece of recent news dated July 2019, US lawmakers are attempting to legalize marijuana that could ease marijuana businesses in the future.
INCREASED INCOME TAX
- Since marijuana is still illegal at the Federal level, they are not allowed of any deductions and tax rate can go as high as 90% on gross income.
- Seven States which include Alaska, California, Colorado, Massachusetts, Nevada, Oregon, and Washington impose additional excise and sales tax.
- Some businesses used pins that act as a covert communication device when trouble arises. One dispensary spent $18,000 for a large vault, security cameras, and bulletproof glass.
- Structuring the ownership of Marijuana businesses can minimize the tax impact. In a scenario presented by the CPA journal, a C Corporation and having employees and vendors act as co-general partners can lessen the tax from $70,550 to $44,020.
- The legalization of marijuana, which is pushed by US lawmakers, can solely address this issue.
MARIJUANA BUSINESSES AS CASH-ONLY ENTERPRISES
- The Federal law prevents businesses to access bank accounts, credit cards, automated payroll systems, and business loans.
- Business owners and employees are forced to hoard cash rendering these individuals vulnerable to the constant threat to violence and crime.
- One of the most successful marijuana-infused product companies in the country was robbed last 2018 in California. The thieves destroyed trucks, safes, and computers before taking hundreds of thousands of dollars.
- Others opt to crypto-currencies to mitigate the risk.
- The Safe Banking Act will provide a solution for non-bankable marijuana businesses by allowing access to financial institutions with more certainty and safety. According to Congress.gov, the bill is still in progress.
MONOPOLY OF THE NATIONAL INSTITUTE ON DRUG ABUSE (NIDA)
- NIDA only allowed the University of Mississippi to conduct federally-approved medical and scientific researches and any other institution and private companies must coordinate with NIDA if they will conduct research.
- Many prohibitionists oppose the legalization of marijuana because there is a little science on it and the main factor why this is happening in the research monopoly of NIDA. As of Jan 2018, not a single application to grow marijuana for research was approved and there are 20 pending applications.
- Researches and Innovation in the marijuana industry are focused on tech products and vaporizers though they are currently banned from participating at CES2019.
- Republican Congressman Rob Bishop of Utah introduced the Marijuana Effective Drug Study Act (MEDS Act) which opens up researches regarding medical marijuana if approved. Natalie Ginsberg, Policy and Advocacy Director at MAPS, said that she was "cautiously optimistic" that the bill will be passed. According to Congress.gov, the bill is still in progress.
FORWARD PLANNING AND PROCUREMENT RISKS (INBOUND LOGISTICS)
- Though 46 states have permitted medical and/or recreational use of marijuana, not all of them legalized and various states have different laws. This resulted in complications in transportation as marijuana products cannot cross state lines with varying laws.
- Local manufacturers have an irrational allocation of their available supply and varying quality and this posed a supply and quality risks for retailers who usually procure products from multiple suppliers.
- Medmen, the largest dispensary in Colorado and whose motto is ‘We grow it, so we know it, addressed the issue by checking every product sourced and even hand-checking whether gummies have triangle-shaped THC stamp.
- The problem was eased when the eBay of cannabis sourcing was developed to streamline purchasing, invoicing, and order management.
TECHNOLOGY AND INTELLECTUAL PROPERTY RISKS
- A registered trademark can protect a unique mark used in commerce. However, the Lanham Act prevents the U.S. Patent and Trademark Office (USPTO) from granting a trademark on marijuana products because it is illegal.
- Interestingly, the USPTO may grant a patent to marijuana plant or application however, patent infringement claims face difficult hurdles as claims require a substantial level of proof and must be heard in Federal Patent Court. This requires an expert botanist or horticulturist to analyze the product which means the lawyer or the client should possess and transport cannabis into the courtroom, which may constitute a federal crime.
- This requires a highly restive condition and it depends on whether the judge will allow civil parties to bring Schedule I narcotics into the courtroom.
- Businesses may opt to obtain a trademark from foreign countries such as Canada however, a foreign trademark can only provide minimal protection.
- The recent study "Risk management within the cannabis industry" concluded that there is no easy way out for marijuana businesses to protect intellectual property rights unless marijuana is legalized.
This response leveraged reliable data from government and reputable news sites as well as studies regarding the risk associated with the marijuana industry. As for the RC on how risk may change going forward, I have included bills that if passed, could directly address the issue. I have included sentiments on whether the bills were likely to be passed as available. Ultimately all risks will be lessened if marijuana is legalized at the federal level.