Marijuana is a cash crop, but how much cash? The good news for politicians (and sellers) is that pot is profitable. The bad news is the first year of recreational marijuana sales in parts of the U.S. did not bring in as much money as expected. Nevertheless, the inaugural year reaped multi millions in legal marijuana revenues for Colorado and other states; however, there were definitely lessons to be learned as other places roll out reefers for sale.
Using Colorado as an example, since it was the only state to allow recreational pot sales for all of 2014, there is a lot of money involved in the cash only business. By some reports, the combination of medicinal and recreational marijuana sales tallied almost $680 million in that state. According to the government, recreational pot brought in about $44 million in new sales and excise taxes last year. Add tax garnered from sales of medical marijuana, which has been legal there since 2000, and Colorado’s pot business brought in approximately $76 million in taxes to the state.
While 21 states have legalized marijuana for medicinal purposes, Colorado was the first state in the U.S. to regulate marijuana sales and production, and reportedly the first government to do so in the world. Since then Washington, Oregon and Alaska as well as the nation’s capital legalized recreational sales and use. But, Colorado is the only one with a full year’s experience to analyze.
The lessons learned in the Colorado pot business this past year fall into three key areas. They are regulatory issues in setting up shops, tax levels, and uncertainty and issues with federal banking regulations.
Colorado sales officially began on Jan. 1, 2014, but the start was slow. Yes, $1.6 million in sales were tallied the first month, but the number grew to over $5 million a month later in the year. Regulatory issues that prevented several pot shops from opening for months curtailed the initial sales. (Washington state had similar issues when they began opening sales venues midyear.) Presumably, the other states have studied the experience in Colorado and Washington and things will go smoother for them. But, the lesson here is that it takes time to ramp up and introduce what is essentially a new industry.
Taxes are an issue. Cannabis consumers have not been paying taxes on their purchases on the black market. So, since no one wants to volunteer to pay taxes, moving to the legal market requires that purchases must either cost less or be a lot easier to get.
Excise taxes are typically set up as a percentage of value. But, with no legal or reliable accounting information to go by, states have adopted different approaches to taxing the pot crop and sales. Colorado and Washington set vastly different tax rates that are based on percent. However, Oregon and Alaska are setting up taxation by weight, which is similar to tobacco taxes. Additionally, some states tax medical marijuana and others do not, further adding to inequities and confusion for consumers.
Finally, there is the federal banking law issue. Marijuana shops, whether for medicinal purposes or recreational, may be legal in some states, but they are still illegal from the federal government perspective. As a result, banks that adhere to federal rules, “Serve these customers at your own risk,” according to Don Childears, president of the Colorado Banking Association.
According to the feds, a bank or financial institution that knowingly handles accounts or processes transactions for marijuana-related businesses is technically aiding and abetting the distribution of marijuana and engaged in laundering drug money. Regulations require banks to keep an eye out for suspicious (drug-related) activity.
Concerned about the multi millions in cash revenues cash reaped by and sitting around legal marijuana shops, the Justice Department promised to use restraint in going after banks for serving the pot proprietors in states that have legalized usage, but that still require banks to file “suspicious activity reports” (SARs) on any marijuana businesses they serve. As a result, many banks and pot stores do not want their relationship, if they have established one, to be known.
By Dyanne Weiss