There is good reason that investors are seeing dollar signs when it comes to decriminalizing marijuana. It has even been dubbed “The Green Rush” and, just like the Gold Rush, those willing and able to take some risks are set to profit. New businesses with comparably low start-up cost and high earning potential make grow houses and dispensaries look like an investor’s dream, but there are a few important financial considerations before you try to hit your own mother load.
Here in part two of our series we will look at the money trail and take stock of what could be some of the biggest challenges to making a pot business successful: start-up hurdles, taxes and fluctuating revenue streams.
Hurdles to Starting Up
Before you pick out the perfect store-front in town, beware. State and local municipalities are heavily dictating where dispensaries can be located in relation to schools, parks, and main streets. There are laws governing square footage, and some mortgage companies will foreclose on a property citing a violation of the mortgage if a marijuana business is operating out of the space. These laws are backed up with prison sentences and hefty fines, so no one is likely to test the waters.
On top of the hurdles of choosing the right location, the application process can be riddled with fees. Initial processing fees, annual fees, cultivation fees, fees tacked on for each partner, manager and employee, and high taxes are all part of operations – in addition to regular overhead like payroll, insurance and security for what currently has to be an all-cash business. States are performing background checks and financial inquiries on those who apply for a license, too. And all that is just to get an opportunity to get started in the first place.
Taxes, taxes and more taxes
As the first state to legalize both medical and recreational marijuana sales, Colorado has been the guinea pig. Overall, $53 million in recreational marijuana tax revenue and another $16 million from medical marijuana came into the state in 2014.
Medical marijuana, while slightly more difficult to purchase legally, is taxed at only 2.9% while recreational marijuana, available to anyone over the age of 21, is taxed at 28%. On top of that, there are strict limits to what dispensaries and growers can deduct on federal taxes, which means businesses are paying taxes on “phantom income” – money they never actually get to see, like administrative costs and payroll. In most other industries companies are able to deduct these expenses.
In Washington state, the second state to legalize the sale and purchase recreational marijuana, a 25% tax is issued at each stage of the business – from grower to processor and processor to retailer – and retailers are currently expected to pay federal income tax on the money they make before they pay taxes at the state level. The combination of federal tax liability, sales tax, and income tax is one of the many factors that are still being sorted out. While these elements of the business will likely see some changes, new businesses are dealing with them as we speak and the hefty taxation is resulting in a lot of retailers. Many just barely able to break even.
Fluctuating Revenue and Unexpected Expenses
Legalized marijuana is a novelty. Colorado, Washington and Oregon all have strong seasonal pulls which means stores in these locations can be prone to seasonal tourist fluctuations, which can be intensified based on the store location and hard to plan for in an industry that doesn’t have a baseline.
As regulations change frequently there are a lot of chances for unexpected expenses to creep up. Changes in packaging standards, the ongoing expense of maintaining licensure through annual fees and adopting standards as they pass into law can break a new business that doesn’t have the cushion in place to handle the changes.
Another factor in revenue is current sale price. With all the taxes added on, buying marijuana legally can be more expensive then buying it on the street. Staying competitive while being able to make a profit is tough. As supply and demand find their norm, this will likely be normalized, but when growers are stilling figuring out their crop, and sellers are competing with the black-market the result can be low profits.
Most studies show that more people are choosing to by legal marijuana then black-market, partly because of the regulations that are in place. Do you or would you pay more for potentially better weed? Let us know how you would navigate all the financial hurdles by talking to us @StarterNoise #PotBiz
