U.S.
Brennan Linsley/AP

Legal marijuana, a multibillion-dollar industry, still faces legal hurdles

‘Fastest-growing industry in America’ employs many, but tax laws and access to banks remain obstacles

BOULDER, Colo. — Handblown glass pipes and bongs are displayed in antique cabinets at the Farm, a marijuana dispensary in one of two states that have legalized the drug.

The walls feature paintings by local artists. There are vaporizers, electronic cigarettes, rolling papers and more. That’s just in the front of the store.

In the back room, “budtenders” are selling gluten-free edibles, lollipops, salves and, of course, marijuana.

Jan Cole’s company grows and harvests its own marijuana strains, but the Farm depends on vendors to provide many of the products sold at the store. The business employs 103 people.

Behind the scenes, there are accountants, lawyers, janitors, Internet providers, soil companies, testing laboratories and more.

The cannabis industry isn’t just pot shops and warehouse grows. It’s an industry that could reach $2.57 billion in value this year, according to the Arcview Group, a San Francisco investment and research firm that focuses on the cannabis business.

The National Cannabis Industry Association has more than 500 members and will hold the first National Cannabis Business Summit in Denver for more than 800 people in late June.

“Sixty percent growth, so it’s the fastest-growing industry in America,” said Michael Correia, a federal lobbyist for the association. “This is all while it’s illegal federally. Can you imagine what would happen if it were legal federally?”

Billion-dollar business

A couple of blocks from the Colorado Capitol, a historic, two-story brick house is home to Vicente Sederberg, billed as “the marijuana law firm.”

The National Cannabis Industry Association headquarters is in a carriage house behind the law firm. Founded in late 2010, the association has members in 22 states — including equipment manufactures, lawyers, accountants, laboratories, security firms, business consultants and investment companies.

“A year ago, we had about 150 members. Now we’re up to 500,” said Taylor West, deputy director of the organization. “Half of those members are either dispensaries or cultivation operations, and the other half are ancillary businesses of various types.”

The Arcview report predicts 14 more states will join Colorado and Washington in legalizing adult use in the next five years. Already, 21 states and the District of Columbia allow medical marijuana, with Minnesota and potentially New York set to join the list.

In five years, the market value of the business could reach $10.2 billion, Arcview predicts. With that, some say, comes employment.

“One of our members had a job fair in Denver a couple of months ago, and they had 1,500 people show up,” Correia said. “There’s a tremendous amount of potential for creating jobs.”

Laboratories that test products are among the fastest growing segments of the industry — and they can add legitimacy to a formerly illegal trade.

“It’s good for the industry, because another benefit for a legal industry is a certain confidence in the product you’re receiving and a certain amount of consistency,” West said.

In fact, this is one industry that welcomes regulation. Cole and her employees wear green lanyards that identify them as Marijuana Enforcement Division licensees and hold photo identification badges.

“We want testing. We want clear definitions of what we have to do,” Cole said.

Roadblocks remain

Cannabis may be a growing industry, but it has distinct growing pains.

Those pains revolve around marijuana’s still being a Schedule I drug under the Controlled Substances Act, with medical and recreational marijuana businesses not being treated as legitimate under federal law.

“Our big issues basically relate to access to financial services and lack of access to financial services and the tax issue,” Correia said. “Some of them have an effective tax rate of 50, 60 or 70-plus percent.”

Cole estimates the Farm pays 50 percent of net revenue in federal taxes because a 1982 law prohibits businesses such as hers from claiming typical business deductions.

“It’s difficult,” she said. “It’s really hard to run a company and be profitable. Everybody thinks that we’re rolling in it. I have 103 families that we’re supporting.”

Even the conservative Americans for Tax Reform supports repealing the tax law originally aimed at drug traffickers to allow cannabis businesses that are legal under state law to deduct business expenses.

Then there’s the banking issue. Virtually all banks refuse to deal with dispensaries and grow facilities.

“Some people have been able to set up workarounds where they may have a bank account in their personal name or they’ve been able to set up some type of holding company,” West said. “Most of those situations are temporary at best. Usually at some point, because they’re depositing huge amounts of cash, the bank flags it.”

Working only with cash makes it difficult to pay traditional expenses such as payroll, utilities and taxes, West said. And it requires some heavy-duty security at the stores to protect all that cash.

“I worry about them being a target, for the safety of people being around or near” the businesses, said Denver Chamber of Commerce president and CEO Kelly Brough.

Colorado lawmakers approved a bill to create a cooperative financial system for the cannabis industry in May. But the state still will have to convince the U.S. Federal Reserve to allow the co-ops to accept credit cards and checks.

Correia and West hope their D.C. efforts help solve these problems.

“People are realizing that the federal government is not going to be able to deny the existence of this industry for very much longer,” West said. “We are starting to see some new people come around.”

Going legit

While cannabis-related companies want to be recognized and treated like other businesses, there’s also a nonconformist streak in the industry.

“Nobody in this industry really likes corporate America nor want to be corporate America,” said Cole. “We want to keep it colorful.”

West agreed, saying part of the difference is that the cannabis industry grew out of a policy movement, a relatively unusual route.

“What we are trying to do is build an industry that doesn’t look like other industries,” she said. “We want to make sure that we’re growing a responsible, professional industry that isn’t exploitative.”

Part of that is playing by the rules, including not marketing to people under 21 and a commitment to medical patients, she said. “This is an industry that’s going to develop state by state,” West said. “You’re going to see people develop loyalties and familiarity with brands that are local.”

In Colorado some of those brands are reaching out to others in the community, including a series of fundraising concerts with the Colorado Symphony Orchestra. The Farm is one of the sponsors of the Classically Cannabis invitation-only series, held at a private venue where edibles will be available. Cole hopes the events will introduce a younger audience to the symphony and illustrate the industry’s good will.

Brough said a few cannabis businesses are among the Denver Chamber of Commerce’s 3,000 members. And Tony Gagliardi, Colorado director for the National Federation of Independent Business, said such businesses started joining his group when medical dispensaries became prevalent in 2009.

“My dealings with those who brought the first medical dispensaries — I was very impressed,” Gagliardi said. “They wanted to run a good business. They were sincere and no nonsense.”

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