Top Five Drags on the Cannabis Industry

There’s no question that cannabis remains a rocky, emerging industry even though entire countries and more than 30 U.S. states now have cannabis legalization or “medicalization”. The reasons why though stem from a variety of sources–federal prohibition, the patchwork quilt of regulations from state to state, the array of personalities coming into the industry from black and gray markets, the bad behavior and fraud that abounds with the constant changes in state and local cannabis laws, etc., etc.. While there’s a lot of room for improvement that hinges on studying the market and its consumers, I’m going to identify the type five drags on cannabis as an emerging market. Unfortunately, most of these are here to stay thanks to the Department of Justice (DOJ) and the Controlled Substances Act (CSA).

1. Irresponsible Federal Government.

At least half of the reason cannabis is so unpredictable as an industry is due to our federal government sticking its head in the sand over cannabis legalization. Instead of taking the reigns and listening to the people to create a federal regulatory framework for uniform oversight and control, the Feds have let the horse out of the barn where states are 100% controlling cannabis law and policy reform which, in the end, is probably a positive thing since states are better positioned anyway to know the needs and demands of their constituent citizens and can better navigate specific local health impact issues. Still, the fact that states have to pay attention every time a new U.S. attorney general (this time, William Barr) takes the helm at the DOJ to ensure that their cannabis licensing regimes remain in tact is not only annoying, but also a waste of time and resources in that states continually pivot to ensure that the DOJ is kept at bay in this area. This enforcement friction ultimately trickles down to cannabis businesses and the bottom line is affected accordingly. Further, with agencies like the Food and Drug Administration, the Environmental Protection Agency, and the Federal Trade Commission (FTC) just turning a blind eye to statewide cannabis legalization, consumer protection has undoubtedly taken a hit when it comes to cannabis.

2.  Volatile Access to Banking.

Lack of access to banking in the industry is the current norm, and it ultimately helps keep cannabis in the shadows and out of reach of full legitimacy and transparency. Even though in 2014 FinCEN issued guidelines to financial institutions for banking in the industry (despite open violations of the Bank Secrecy Act and anti-money laundering laws), the participation under those guidelines by banks and credit unions has been slow-going at best. The good news is that these guidelines still exist despite then-acting Attorney General Jeff Sessions rescinding all other DOJ cannabis guidance. Ultimately, the guidelines are a band-aid until we can get in place federal legislation addressing the lack of access to cannabis banking (for more on that, see here).

3.  Oppressive Federal Taxation. 

The second biggest drag on the industry that keeps it in its murky, emerging state is IRS rules, and those aren’t changing anytime soon. IRC Section 280E prevents cannabis businesses from deducting expenses from their income, except for those considered a Cost of Goods Sold (COGS).  As a consequence, cannabis businesses are required to determine what expenses are included in COGS and, therefore, what expenses are deductible.  To date, very little guidance has been made available from the IRS to help taxpayers make this determination. And all court cases on the topic (with the exception of C.H.A.M.P.) have not been helpful to cannabis businesses. It’s also very clear that the IRS isn’t interested in cutting back on 280E assessments and audits unless and until a change is made to the federal CSA regarding the current scheduling of cannabis.

4.  Constant Changes to “Robust Regulations” by States.

Cannabis will forever be a regulated commodity and that means that the rules around it will change indefinitely. The reason why “constant changes” makes the drag list is because these early days of licensing in various states breeds a lot of uncertainty among regulators as industry issues crop up, so the frequency of these changes in the first few years of licensing help to render and keep cannabis an emerging market. Prohibited products lists, as one of the many regulatory issues in play, are a very good example of constant regulatory change as states decide what products they’ll allow in their marketplaces. In addition, many states opt to err on the side of really robust regulation (mainly to satisfy the rescinded 2013 Cole Memo), which tends to spill into over-regulation in certain contexts such as advertising, marketing, quality assurance testing, and packaging and labeling.

5.  Scammers.

Fraudsters also help to keep cannabis in the wild, wild west. And the bad behavior spans a range of areas in cannabis from scamming investors to bank fraud to lying about entitlements from regulators. With the lack of federal oversight and enforcement, and with states paying attention mainly to just licensing and regulation of actual cannabis businesses, no one is really keeping an eye on the myriad of cannabis charlatans. What will it take to remove these people from the chain? More enforcement activity from state attorneys general and, hopefully one day, from the FTC (which remains a sleeping giant, for better or worse). For more on industry red flags in this area, see here.