Business
Only 24.4% of Cannabis Operators Profitable Due to 280E, Other Challenges
According to Beau Whitney of Whitney Economics, policy solutions include safe banking, 280E reform, and opening up interstate commerce.
A new report on the U.S. cannabis market is making the rounds, and paints a pretty dire picture of where the industry is today economically, with just 24.4% of survey respondents saying their business is profitable. High Times recently sat down with Beau Whitney, the CEO of Whitney Economics, who headed up the economic analysis of the data their survey found to get a more complete picture.
No Longer Able to ‘Work from Stoned’ Harms Cannabis Economy
You might remember when the COVID-19 pandemic started in the spring of 2020, many states said cannabis was an essential industry that couldn’t be closed down and cannabis sales were “booming.” Unfortunately, behavioral changes after the pandemic have taken a toll. “People could no longer Work from Stoned,” which Beau said “hurt the industry at a time when they needed more revenue but [received] less.” While Whitney’s data found that just ten out of 36 state markets were not growing, “The growth is coming from states that just launched, and while they are growing, it is a much smaller chunk of the total cannabis market.” The ten states that weren’t growing included large, mature markets like Colorado, California, Oregon, and Washington.
Oregon: Regional Bias or a Harbinger of Things to Come?
The report admits there was a “strong regional bias, as Oregon-based respondents made up nearly 90% of the total.” That means that out of the 224 responses received, just 24 were from operators outside of Oregon. As any longtime observer of cannabis markets will note, Oregon’s cannabis economy has been struggling for over half a decade, to the point where many cannabis cultivators jumped into the hemp market. As Beau lives in Oregon, he is no stranger to the struggles of their local cannabis industry and made many attempts to control for the regional bias in the responses they received by triangulating the data – using more than one data point.
“I do a lot of expert witness testimony and have been doing individual state-level research,’ said Beau, which is why he knows “Michigan is mirroring Oregon, with too much capacity, too much supply, and a strong illicit market.” Beyond his research, Beau followed up on the survey by “calling business leaders.” All of the data from states less represented in the survey “indicated that Oregon was a harbinger of things to come.”
Plans for Next Year’s Survey
Their first two years, Whitney created an annual report, but they are trying “to go from an annual to a quarterly survey.” As a result, Beau said they “will likely trim down the number of questions.”
The reason why there was such a strong representation of Oregon-based operators is that Oregon’s cannabis regulators sent the survey out directly to their licensees. Other than Oregon, the only two states where they had such strong regulator participation were Washington and, surprisingly, South Dakota. Next year will be a different story. Beau now has stronger relations with the Michigan regulators, expects more support from Colorado regulators, and has better relationships with business leaders in Florida; all states that were notable omissions in this year’s data. Beau also mentioned that “the Cannabis Regulators Association (CANNRA) sees a lot more value in this data and supports me more than they did previously,” and their support could help expand his available pool of data significantly.
Necessary Reforms to Save the Industry
The key factors limiting growth are IRS tax code 280E, “a lack of access to banking, a limited demand market because supply and demand are all in one state, and the influence of the illicit market.” Whitney’s survey data and Beau’s personal research have revealed some policy reforms that could save the cannabis industry. Beau’s top policy solutions are safe banking, which “lowers the cost of capital,” 280E reform, which would relieve “up to 70% taxes in some cases,” and opening up interstate commerce to deal with imbalances of supply and demand. Beau did an analysis of 280E taxes earlier this year and found that “the cannabis industry paid $1.8 billion more in taxes than if they had been treated like any other business.”
Beau put in practical terms, “There is a threshold for economic viability that must be met to account for product acquisition, labor, and federal taxes.” He pegged that threshold at around $2.5 million a year currently, but with 280E reform that threshold goes down to $1.5 million, which greatly raises the chance for success. “280E is doing exactly what it was supposed to do when it was designed 40 years ago,” said Beau, which is to make it impossible to run a business profiting from the sale of federally illegal drugs. Beau cautions that “while it sounds doom and gloom,” and he doesn’t anticipate growth until the Federal Reserve cuts interest rates, the businesses that survive “will thrive in 2025 when growth takes off again.”
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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