Despite all appearances, dispensaries are being bled dry and it's affecting everyone.
This past April, on the culture's beloved 4/20 holiday, Colorado dispensary LivWell Enlightened Health experienced the highest single-day sales in the history of the company. It beat its second best day — last year's 4/20 — by eight percent, serving nearly 5,000 customers across all 14 of its locations on that day alone. Their sales spike enabled them to donate $5,000 to the The Fitch Foundation, an organization that helps veterans achieve active lifestyles through specialized sports.
But apart from that donation, LivWell saw almost no profit.
In fact, despite the seemingly high revenue they're bringing in, the marijuana industry is struggling to profit. All across the country, and particularly in Colorado, dispensaries are being financially crippled by unfair and overzealous taxation.
The largest and most important tax dispensaries face is the controversial IRS regulation 280E. According to the code, which is part of the Controlled Substances Act, marijuana dispensaries must pay a mind boggling 70 percent of their taxable income to the government. This is because they are forbidden by law from deducting the same ordinary businesses expenses like employee salaries, property leases, utility costs and employee health insurance program that every other industry in this country is permitted to deduct, simply because their income is associated with the sale of a Schedule I substance.
By contrast, every other business in the United States only has to pay 30 percent of their taxable income to the government.
It doesn't take a rocket scientist to figure out that there's a monumental bias in how the marijuana industry is taxed. Dispensaries all over the country are paying an average of 40 percent more tax than non-cannabis businesses, simply because there's an unfortunate discrepancy in our legislation and the public's positive opinion of marijuana.
LivWell owner and CEO John Lord is currently leading the charge to bring awareness to this injustice.
“There is a continued misconception that the marijuana industry breeds instant riches,” he told us. “But it's simply not true. We're heavily regulated and taxed more than double other commercial businesses. Most legal cannabis companies experience an effective tax rate of between 70 and 90 percent. It's just insane."
As it goes, dispensaries already have to pay an exorbitant amount of tax to both federal and state governments, especially if they're operating on the recreational market. In Colorado, there's a 15 percent excise tax, a 10 percent sales tax, and untold licensing and compliance fees to ensure they're up to snuff with state laws and local rules. Pile on IRS code 280E to that, and it's easy to see why many dispensaries are having difficulty staying afloat in current climate of overzealous taxation.
The inforgraphic below breaks down how much the marijuana industry pays in taxes relative to other industries:
IRS 280E was originally instated so that known drug dealers couldn't expense things like Ferraris, private jets and mansions. However today, its restrictions are being interpreted solely to curtail profit from the marijuana industry. Currently, cannabis businesses are the only ones being affected by this rule.
"They're treating us with drug dealer regulation, which means that we cannot deduct anything from the sales like a normal business would. If I was selling any other retail product, like cell phones or retail, I'd be effectively taxed at around 30 percent," he said. Yeah … we can see how that would seem a little unfair.
However, when we asked Lord what he thought the purpose of 280E is, what the government gets out of it, he was actually rather forgiving.
"The point of it is just that regulation is still catching up with the real world situation," he said. So, it's not as if the government is actively trying to overtax the cannabis industry, just that they've neglected to get rid of antiquated legislation. Well, that, and since they're overtaxing weed businesses by 40 percent (see chart above), they're gaining 40 percent more revenue. Not exactly an incentive to go running to the law-amending chamber or wherever tax law is birthed in all its gooey placental slime …
Ironically though, even if 280E disappeared overnight and dispensaries could start to profit, there'd be nowhere safe to put the revenue.
Dispensaries nationwide still aren't even allowed to participate in banking as the Federal Reserve does not support industries that deal with federally illegal substances. Yet, without access to banking, dispensaries have less of an incentive to accurately report their income. Banking leads to traceability, which creates more accountability on the part of businesses to pay their share of taxes. But without the ability to bank, a cash environment in which companies can easily fly under the radar without reporting their true sales gets created. It drives people away from being honest, and directly into the black market that legal marijuana was meant to delete.
Catch 22, much?
What, then needs to change? How can dispensaries free themselves of 280E's biased and unfair constraints?
"Deregulation," Lord said, flatly. "Getting marijuana taken off the scheduled substances list once and for all."
But until that rather drastic change happens, Lord would at least like to see the IRS reinterpret the meaning of 280E to be more fair to his industry.
"They have taken the strictest form of interpretation," he said. "As you know, most regulation, it's up for interpretation and they've decided to take an extremely strict stance upon that interpretation. Even though it is state legal, they're choosing to say, 'Well, no. You guys are engaging in the sale of illegal drugs and therefore, you come under this 280E identification.'"
Lord also believes the only way to get the IRS to loosen up their interpretation is public education of how the marijuana industry is taxed.
"Basically, the general public sector think that we all became millionaires by Tuesday. It's far from the case. The public needs to understand where the money's going and the reasons that we're petitioning federal government to change," he told us.
And that makes sense. After all, the more the public understands where weed taxes go, the more they're likely to understand why legal weed is priced the (expensive) way it is. In that way, 280E has a direct effect on the consumer as well as the business; the less taxes weed shops have to pay to the federal government, the cheaper dispensaries can sell their products for.
Perhaps the hardest pill to swallow here though, is that many dispensaries are completely unaware 280E even exists, particularly small mom-and-pop shops who can't afford legal help and must handle their taxes on their own. Lord told us he's seen many small dispensaries shut down after they're busted for IRS tax evasion, for failing to pay a high price tag they even didn't know existed.
So, the 280E issue isn't unique to LivWell, or any one dispensary for that matter. It's not even unique to the marijuana industry per se; its effects trickle down to the consumer, and arguably, even the black market. It's a systematic legislative flaw that negatively affects pretty much everyone who touches the legal weed system in tandem, and that's frankly kinda shitty.
If you want cheaper weed, or more broadly, if you feel that cannabis businesses shouldn't be unfairly singled out for excessive taxation, check out that National Cannabis Industry Alliance link above. In the meantime, just keep budgeting half your paycheck for legal joints … or start a multimillion dollar untaxed illegal grow in your living room and wait for the cops to show up. Whatever!
Photo cred: LivWell Enlightened Health