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Aug 10, 2017

Why is the medical marijuana business a legal industry with illegality problems?

Featuring Mitzi Hollenbeck

As seen in the Boston Business Journal

On Nov. 6, 2012, the Massachusetts Medical Marijuana Initiative, known as “‘Question 3,”‘ legalized the use of medical marijuana in the state of Massachusetts by a 63.3 percent vote of the citizens. On Nov. 8, 2016, Massachusetts legalized recreational use marijuana by a 53.7 percent vote. As of May 26, 2017, only 11 of the 218 applicants who have been working towards opening a medical marijuana dispensary have been approved to sell, nine of whom have been able to open their doors.
 
Why are these businesses taking so long to open?

Social media campaigns and billboards line the streets of Massachusetts, highlighting the benefits of marijuana. The New England Cannabis Convention is in its third year of exhibition in Massachusetts. The biggest barrier to entry in this industry is the many layers of bureaucracy, which are not only affecting growth in the local cannabis industry, but have also impeded opportunity for growth in ancillary industries.
 
According to Colliers International, the greater Boston market viewpoint for commercial real estate has a suburban commercial vacancy rate of 18.3 percent, which is up 0.7 percent from Q4 2017. Vacancy rates around Route 495 are upwards of 22.4 percent.
 
According to Massachusetts law, medical marijuana for retail sale must be grown inside under strict security regulations. Old mill and loft buildings that once served little purpose are now ripe to be repurposed for the new industry.
 
However, as federal law still makes the possession and use of marijuana illegal, federal mortgage and banking regulations prevent marijuana businesses from operating out of mortgaged buildings.
 
Additionally, due to the regulations imposed by the Financial Crimes Enforcement Network (FinCEN) and other federal anti-money laundering rules, it is increasingly difficult for companies to find a bank willing to have a depository relationship with the cannabis industry.
 
In the event that a cannabis company finds a suitable building in a friendly location, landlords are charging premiums of up to four times the current market rate.
 
Local control is also a large barrier to entry for these businesses. Though municipalities have designated medical marijuana zones, the real battle is with the attitude of the municipality’s leadership towards legalization.
 
Jurisdictions willing to issue letters of non-opposition spend months negotiating incentive payments from the businesses wishing to operate within their city or town limits. In some instances, local ordinances have changed their rules governing the cannabis industry, leaving businesses that have already been approved and have invested in the area having to start over in a new community.

Internal Revenue Code Section 280E is a lesser-known impediment to the proliferation of marijuana businesses in the U.S. Initial capital funding is required as, despite showing a paper loss in the first year or two of operations, Section 280E disallows tax deductions for expenditures in connection with trafficking an illegal substance.
 
Businesses who enter into this industry are limited in their tax deductions to their cost of goods sold and are prevented from deducting their selling, general, and administrative costs. Once these businesses are up and running, effective tax rates can be as high as 75 percent.
 
In the infancy stages of these companies, they may be paying out-of-pocket federal and state tax payments despite actually losing money for the year.
 
Hiring competent advisors in this industry is imperative but it is not without risk to those professionals. The Massachusetts Board of Public Accountancy and the Board of Bar Overseers both issued position statements regarding practicing accounting and law services, respectively, with regard to the marijuana industry.
The uncertainty of the interaction between federal and state laws makes this a practice area that is difficult to navigate for accounting professionals.
 
Overall, in Massachusetts we are still in the infancy stages in regard to the business impact of legalizing marijuana. It is not often that a new industry enters our marketplace; and certainly not one with so many legislative nuances.
 
It has taken years to approve only 5 percent of the total applicants for medical marijuana. The impact of this industry is something that only time can tell, but we will be staying on top of the trends and updates as Massachusetts legislature hashes out the regulation of the cannabis industry.