CANNAINVESTOR Magazine November / December 2016 - Page 118

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A Crowded, But Still Growing Industry

It’s clear that Colorado has too many marijuana businesses. As of November 1st, as reported by the state’s Marijuana Enforcement Division, Colorado’s medical marijuana industry consisted of 528 dispensaries, 790 cultivation facilities, 248 infused product manufacturers, and 14 testing facilities, a total of 1580 medical marijuana businesses.

The state also reported 454 retail stores, 613 cultivation facilities, 231 product manufacturers, and 14 testing facilities, a total of 1312 recreational marijuana businesses.

When one adds the number of Colorado’s medical and recreational marijuana businesses together it totals almost 2900 businesses, certainly too many for a state with a relatively small population of 5.4 million people. These 2900 marijuana businesses include some that have both medical and recreational licenses, and integrated operations, with growing, processing and retail sales owned by the same group.

This large number of marijuana businesses has significantly contributed to the competitive challenges of operating profitably. It is truly a matter of the “survival of the fittest” or who has the deepest pockets.

An unknown in each of the new recreational marijuana states is the number of marijuana businesses that ultimately will become licensed. Will the states end up with too many marijuana businesses, or will the state regulations severely limit the number of licensees and as a result the level of competition? These are factors that both entrepreneurs and investors should consider when looking at opportunities in the state-licensed marijuana industry.

Taxation Issues

Adding to the challenges facing marijuana businesses in Colorado are Internal Revenue Services (IRS) regulations, specifically Code Section 280E. While 280E has become an industry buzzword, there is frequent confusion about how it is applied. 280E was passed by Congress in 1982 in response to a case where the Tax Court ruled that a taxpayer could deduct business expenses related to the sales of amphetamine, cocaine, and marijuana.

280E is a single, but long sentence of the Internal Revenue Code, “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.”

Because marijuana is a Schedule I controlled substance under the Controlled Substances Act, the IRS has taken the position that marijuana dispensaries and retail stores can not deduct their “ordinary and necessary” business expenses. Only the cost of goods sold may be deducted. Salaries, rent, utilities and other expenses such as security or advertising may not be deducted.