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The Many Ways Cannabis Businesses Suffer From Schedule 1 Drug Classification

Roger Malespin photo/istock.com/IanMcD

The legalization movement is experiencing a surge that supporters would not have dared thought was possible only a few years back. We have prominent lawmakers on both sides of the aisle passing legislation in favor, the medical benefits of cannabis based products have gotten mainstream recognition, and the reefer madness era stigma of marijuana has almost fully disappeared from the American consciousness. But there are still great obstacles in the path to victory - specifically, the federal classification of cannabis as a schedule 1 drug. This statute is essentially the wellspring from which most of the obstacles flow, and is the main source of problems for the booming but technically illegal cannabis business market.

First and foremost is the fact that cannabis businesses do not have access to banks because of the schedule 1 classification. Basically, because cannabis is on par with heroin in the eyes of the law, banks who work with business revenue from cannabis can be charged with money laundering. So cannabis businesses are stuck working with cash exclusively, which is inefficient and causes great difficulty with tax collection as well. Businesses that openly work in cash only are also likelier targets for robbery.

Secondly, cannabis businesses are bound by US tax code 280E, which means they are unable to take normal tax deductions from their gross income. Cannabis businesses are paying taxes on their gross profit instead of net profit. These businesses often pay tax rates that are 70% or higher. As John Davis, owner of the Northwest Patient Resource Center in Seattle, WA states, “I’m taxed on nearly double the amount that my business actually makes.” 

Which brings us to the third problem - nearly every single cannabis business is losing money. A combination of factors that includes a lack of access to banking services, an inability to take tax deductions, and the fact that the industry is new and lacks long term experience makes them uncertain options for investors at best. Even the largest publicly traded cannabis business, GW Pharmaceuticals, will not be profitable for many years to come. 

These problems and more all are keeping the cannabis industry fragmented. While it is a good thing for small businesses to succeed, if there are no big businesses around, investors are less likely to risk losing money in the industry. Investment requires consolidation, and so long as the vast majority of cannabis businesses are small startups, the industry will probably continue to struggle with finding viable investors for serious growth. 

These are just some of the problems facing cannabis businesses in the current landscape. It’s important for anyone thinking about entering the cannabis industry or for those looking to invest to understand the ins and outs of the tax system, and how to minimize risks and maximize advantages where you can. The landscape is still new and developing, but it is certain that until the federal schedule 1 drug standing changes, the major problems the industry faces will persist indefinitely.