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What is the State of the Cannabis Industry?
I'd like to consider myself an optimist, perpetually attempting to view the glass as half full, not half empty. But desperate times call for desperate measures—and the cannabis and hemp industries are pretty pathetic currently.
What are the problems holding back the nascent marijuana biz? Plenty. They range from a lack of merchant banking to an onerous and unsustainable tax burden to a variety of limitations based on the Schedule I status of this controversial herb at the U.S. federal level.
While the world watches and stalwartly marches into the 21st century by embracing cannabis legalization, America—the supposed innovators of the global economy—are allowing stuffy old school stigma to put the brakes on what would otherwise be a very active and profitable industry.
What are the Problems?
The state of the cannabis industry. A variety of factors threaten to squelch and perhaps even extinguish the cannabis industry. These include (but are not limited to):
IRS 280E
Schedule I
Lack of merchant banking services
State of the Cannabis Industry: IRS 280E
IRS 280E prevents cannabis businesses from deducting operational expenses, something that nearly every other business in America can do. Many industries suffer thin margins as it is (a sign of a healthy competitive environment), so a lack of write offs means their profit margin gets trampled. Often, decimated.
Here's the language of 280E (courtesy of Cornell Law School):
"No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Recently, Jesse Redmond from Water Tower Research reported that MariMed, a multistate operator "committed to health and wellness," protested 280E by storming the Boston Harbor on July 12. According to Redmond, "the team boarded a schooner, chanted "no taxation without representation" and threw boxes labeled "weed" into the Boston harbor.
According to Redmond, "the team boarded a schooner, chanted "no taxation without representation" and threw boxes labeled "weed" into the Boston harbor.
PR campaigns of this type are increasingly common as cannabis companies try to defend their turf while maintaining a profit. Accomplishing this seems to be an increasingly challenging burden for the vast majority of cannabis companies. According to MJ Biz Daily in April:
"The Internal Revenue Service has been fixated on the state-legal marijuana industry for more than a decade, largely because it’s been extremely lucrative for the federal agency to audit cannabis companies. IRS audits of marijuana businesses have generated far more in unpaid taxes, or revenue, per hour for the agency than audits of mainstream industries such as automobiles—up to four times more in certain cases."
MJ Biz Daily reported that "Section 280E commonly results in state-legal marijuana businesses paying upwards of 80%-90% in federal tax rates and sometimes as much as 100%." When one stops to think about this reality, it quickly becomes apparent that the culture war that began in the early 20th century to prohibit cannabis has not abated. Between one-third and half of America seem determined to ban or otherwise thwart the cannabis culture.
State of the Cannabis Industry: Schedule I
Cannabis and hemp were officially outlawed in the United States at the federal level in August of 1937. However, in 1970, the Nixon administration added the herb to the list of regulated drugs that were perceived to have detrimental effects, such as addiction and negative health consequences.
The consequences of Schedule I status for cannabis—what many scientists consider to be a relatively benign drug with a number of potential values for human and mammalian health—have been vast and obviously endured for more than half a century. Schedule I means that research aimed at uncovering the true value or harms delivered by cannabis/hemp/marijuana is hampered.
To learn more about the consequences of the "war on drugs," see our exclusive interview with Weldon Angelos from The Weldon Project.
Schedule I has also resulted in the imprisonment of millions of otherwise innocent Americans, often for small amounts of the substance. To learn more about the consequences of the "war on drugs," see our exclusive interview with Weldon Angelos from The Weldon Project.
In October 2022, President Biden announced that he would push forward on cannabis policy reform and release those who had been convicted of simple marijuana possession. However, Biden's announcement turned out to be political theater, releasing none of the 2,800 federal prisons of cannabis (most of those imprisoned for cannabis have been done so unders state, not federal, laws).
State of the Cannabis Industry: Lack of Merchant Banking
Cannabis companies currently suffer from a lack of merchant banking. Large and well funded marijuana companies are typically able to secure the capital and financing necessary to run their businesses. Small and mid-sized organizations, however, lack this ability. Often, small cannabis companies are deprived of merchant banking services again and again and forced to seek out other service providers (often at exceptionally high interest rates and with other financial penalties).
For years, members of Congress have been touting the Safe Banking Act as a way to remedy this situation and provide innocent cannabis companies with the secure merchant banking services they require to do business.
"For years, members of Congress have been touting the Safe Banking Act as a way to remedy this situation and provide innocent cannabis companies with the secure merchant banking services they require to do business."
For years, members of Congress have been touting the Safe Banking Act as a way to remedy this situation and provide innocent cannabis companies with the secure merchant banking services they require to do business and transact with customers and clients. However, the Safe Banking Act has proven to be a rouse and a literal tease. After more than half a dozen attempts to get the necessary votes, backers of the plan have failed to make any real progress.
On July 14, Natalie Fertig, the cannabis policy reporter for Politico, posted an article entitled "Schumer's Weed Plan Hits Bipartisan Resistance." It provides more valuable information on this pivotal topic.
State of the Cannabis Industry: The Results
The results of Schedule I status, a lack of solid merchant banking services, and IRS 280E excessive taxation has resulted in a proverbial trainwreck for the cannabis industry. Most cannabis companies are not profitable.
Sad reality: Those that are often achieve this state on their balance books by not paying their federal taxes. Cannabis stocks have tanked. Those who bring optimism to the game and cheer for Safe Banking and other reforms intended to provide real support and logical infrastructure for the burgeoning marijuana industry are often heavily criticized.
"Will this situation improve in the near future? Many pundits claim that real reform won't occur until many of the prohibitionists in Congress are gone."
Will this situation improve in the near future? Many pundits claim that real reform won't occur until many of the prohibitionists in Congress are gone (either through death or being voted out of office). To learn more, check out our exclusive interview with Sam Richard from OnPoint Labs, an industry professional who brings a moderate and measured perspective to the situation.
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