According to BDS Analytics, companies that grow, process, or sell cannabis products reported an estimated $12.9 billion in revenue in 2017. From this $12.9 billion in Revenue, up to $4.7 billion was collected in related taxes. If you’re looking to break into the multi-million-dollar marijuana business, here are some tips to stay in the green. Managing an All-Cash Business study.
MARIJUANA AS AN INDUSTRY
As an industry, marijuana, recreational and medical, has sprouted up in the last decade. Medical marijuana became officially legal in Canada in 2001 thanks to the Marijuana for Medical Purposes Regulations. When Uruguay became the first country to legalize recreational cannabis in 2013, the industry began a worldwide expansion.
In 2017, cannabis was the United States’ second most prosperous cash crop, after corn. Although the cannabis industry is booming. It doesn’t come without issue. One big challenge for growers and retailers is that marijuana is an all-cash business. Starting an all-cash business is a daunting task for any entrepreneur. In an industry that is built around only a select few states in the USA that have legalized the product, the challenges are even greater. The marijuana industry presently allows only ten states. Plus the District of Columbia, to sustain legal marijuana businesses.
The national rollout for legalized medical marijuana, on the other hand, has been slightly more successful. Twenty-three states have passed laws to make the buying and selling of medical marijuana legal. Due to the legal limitations, the capital required to begin a dispensary can be a barrier to entry for some entrepreneurs. Many states require at least proof of anywhere from $60,000 to $1 million in cash in order to gain a dispensary license.
As the industry grows and more states legalize cannabis, additional regulations may come into play. But, for now, the rules for buying and selling are different from state to state. For example, in California, medical marijuana can only be purchased in quantities up to eight ounces while recreational users can only buy up to one ounce.
There are also numerous other hoops to jump through once you have a business idea solidified. First, finding banking is difficult. Because banks are federally run and the federal government is not yet onboard with the cannabis trend. It may be difficult to find a bank that will create an account for your business.
An estimated 70 percent of marijuana businesses operate in all-cash ways and have no allegiance to any banking systems. To even pay taxes in California, marijuana companies have to stuff their cash in nondescript bags and carry it all to an undisclosed location. The same happens in Oregon, where the capital city serves as the banking location. The state of California is looking at ways to create a “public” bank for all those who are affected by the lack of banking means, but no other states have followed suit.
Even though federal banking may become more lenient with regards to allowing marijuana-related bank accounts and as more states decide to legalize cannabis. Federal rights still outweigh the states’ rights. Still, as of March 2018, 411 banks and credit unions were operating accounts of businesses related to marijuana, according to the Treasury Department’s Financial Crimes Enforcement Network. This number is up more than 20 percent since Donald Trump became President.
Despite banks becoming more lenient with the accounts that they handle. Those that are found to be dabbling in what the federal government considers a “schedule 1 drug” could be charged with racketeering and money laundering under the Controlled Substances Act. President Obama took a more lackadaisical approach to allow states’ rights to dictate how marijuana was legally distributed. Trump has been steadily cracking down on cannabis and has taken a firm stance against it, even in states that have legalized it.
Even with the current President of the United States firmly against the industry, there are still workarounds for accessible and safe banking practices. For those in Maryland, you’re in luck. Severn Savings Bank, out of Annapolis, deals with marijuana businesses through debit card processing and wire transfers. In California, the Medical Marijuana Regulatory Safety Act is working to build a foundation for medical marijuana companies to receive banking perks. Along with licenses, indoor and outdoor cultivation space, testing and labeling, permits, deliveries to patients, tracking. California Department of Food and Agriculture regulations, and the ability to invest.
In addition to banking concerns, another issue with running an all-cash business is the risk of robbery. Cannabis business owners are susceptible to robbery from outsiders and insiders whom they may trust. Yet another issue is the potential for clients to offer you counterfeit money. A counterfeit pen to check that the money is real can be helpful when starting out.
Since traditional banking is not an option, securing all cash in a safe or nondescript bag is how most large businesses handle their cash. Another challenge of working in an all-cash business is a lack of strict inventory control. Keeping the inventory of every product and dollar that passes over the counter is crucial. Losing control could mean thousands of dollars disappearing. Because inventory is differentiated depending on the state, taxes are naturally less regulated.
Not making the federal government aware of inventory and monetary influx could cause bookkeeping issues down the road. It’s wise to hire a trusted accountant to maintain inventory and cash intake.
MONETARY CONVERSION AND TAXES
To avoid all the danger of running an all-cash cannabis business. An application called Pay wick, akin to PayPal, allows dispensary owners to pay workers and receive payments from customers via a preloaded card. There is a 2.75 percent transaction fee, but the application, available online and in the App Store. Is an easy way to connect businesses and consumers. For those wanting to work with cryptocurrency, a direct monetary link is available through Bitcoin. Possibly an easier way to transfer money.
As profitable as this industry could potentially be for you, it is also important to factor in the taxes that come along with a partially legalized commodity. Alaska leads the United States in cannabis taxes, at $50/oz, and Washington charges 37% sales tax. In California, a tax differential occurs when buying flowers versus leaves. All taxes remain paid to the IRS, sometimes as much as 70 percent, to cut down on the implementation of Code 280E which clusters all marijuana together. Medical marijuana is actually taxed differently than recreational usage. The excise tax or the tax taken out from a sold good, on marijuana is 15 percent in California. But medical cannabis is exempt. In Colorado, the tax on marijuana is 27 percent. Not factoring in a sales tax of 2.9 percent. Medical users pay only the sales tax.
GETTING PEOPLE TO INVEST IN YOUR BUSINESS
To get your start-up off the ground, finding people and other businesses willing to buy into the idea can be a tough sell. Banks are unwilling to give loans to businesses set to focus on marijuana-based product sales. Investment groups have been popping up that are specializing in funding budding marijuana companies. In addition to finding a group that will invest in your idea, tracking down a lawyer who deals with cannabis start-up efforts is crucial to avoid legal issues.