The Blunt Truth About Running a Cannabis Business
Federal law still plays into marijuana entrepreneurship in Washington
on June 2, 2017
Updated on May 20, 2022
Since Washington and Colorado legalized the recreational use of marijuana in 2012, six other states have joined and it led to more than $257 million in sales for Washington in 2015. But while it’s increasingly becoming decriminalized under state laws, marijuana remains a Schedule I drug (alongside heroin) in the Controlled Substances Act of federal law. This has several implications for growers, processors and retailers, according to the Washington attorneys who advise them. A federal agent could theoretically pursue all of them.
“This is federally illegal, and nothing we do or say is going to change that, and if you can’t embrace that risk—if you can’t sleep at night because of it—do not do this,” says Hilary Bricken, an attorney at Harris Bricken who helps entrepreneurs in Washington, California and Florida navigate the cannabis industry. She has spoken on the topic at a TEDx Talk and even writes a regular column about marijuana policy and regulation. “It’s very difficult to make money as an actual cannabis cultivator/distributor/retailer/manufacturer.”
Setting Up Shop in the Marijuana Industry
Much of what Bricken does is help clients through the arduous process of getting approved locally and by the state. All told, expect it to take between 12 and 24 months before opening your doors, she says. “There’s so much red tape, I’ve seen people be bankrupted by this process. If you think you’ll set up overnight, nothing could be further from the truth.”
Your operational plan must be exhaustive, and everyone involved in the business, plus their spouses, must be vetted by the FBI (and others). When localities weigh in on where to allow cannabis businesses, often the options are few, Bricken says, “so when they do find a property, they have to pay out the nose for it—because it’s commensurate with the risk; that’s just a cost of doing business.”
And then you might have a landlord-tenant issue. “Just yesterday a client emailed us saying, ‘My bank got a hold of me. They know I have a cannabis tenant. They basically told me I have to get them out or they’re going to foreclose on our mortgage,’” Bricken says. “That’s happened a couple of times because it’s federally illegal and the bank doesn’t want to mess with that.”
Adult Use: A Budding Industry Matures
Anne van Leynseele is the founding attorney at 7 Point Law, with offices in Seattle, Portland and, soon, Los Angeles, and came to cannabis law from healthcare and business management, knowledge bases that help with complex regulations and lean bottom lines. Both she and Bricken are helping Washington clients expand into Oregon and California. “Washington state is the most highly regulated, so we joke that if you can make it here, you’re going to be fine anywhere else,” van Leynseele says.
“Like most industries, we’re maturing. We’re past the startup phase,” she adds. As such, issues with investor agreements, licensing and compliance have given way to employee claims, partnership disputes, and tax and trademark issues. States currently allow trademark registrations, but with expansion into other states, there’s often conflicting names that are trademarked in one state but not another.
The U.S. Patent and Trademark Office “has remained steadfast in its position that it will not issue trademarks for cannabis-based goods,” Bricken says. “So strain names, product lines or dispensaries are not going to get that protection.”
van Leynseele’s firm is likewise now helping seek state and federal research licenses for its clients in an effort to learn more about cannabis and relax the stigma surrounding it. The belief is that cannabis research is vital to making changes at the federal level.
A Taxing Situation
van Leynseele estimates the industry hits 23 different areas of law, but the biggest headaches for businesses often come in the financial sector. Some businesses struggle to get bank accounts because accepting deposits can constitute money laundering under the Bank Secrecy Act. This means some marijuana businesses are forced to deal exclusively in cash.
“It’s a bit of a dance,” says Bricken. Washington has robust enough regulations to enable banking. Oregon, Alaska, Illinois, New York and Florida all heavily regulate as well, she adds.
Cannabis businesses are also barred from federal tax deductions. “This means they can only take cost of goods sold. That hits retailers hardest because drug trafficking is 90 percent of what they do. And of course, the IRS has been aggressive with audits,” Bricken says.
“When I give talks on this, I always ask, ‘Why did Al Capone go to jail?’ It wasn’t for rum-running, it was tax evasion. Sometimes the taxman is worse than the law man or the DOJ. It means you have to be reporting and doing it correctly, which means you have to work with good tax attorneys and CPAs.”
A Lot of Unknowns in Legal Cannabis
Many cannabis businesses are lean in their profits, Bricken says, so many seek to vertically integrate by cultivating, manufacturing and selling it all on their own. “It takes tremendously hard work to run one of these things, so the person who thinks they’re going to get rich quick is going to get a very sobering talk.”
van Leynseele has a few choice business tips for her clients:
- Communicate with your partners early and often—including worst-case scenarios.
- Choose your investors wisely.
- Don’t overcapitalize and be frugal about your resources. “Forty percent, set it aside for taxes; 10 percent, set it aside for emergencies; because something may come up. One of my clients had to move their entire farm to the tune of $350,000, but because they listened to me and did these things, it wasn’t the end of their business.”
- Connect with a well-informed cannabis law firm from day one to keep your business on solid legal footing. “The worst thing is to get in trouble, because that gets expensive.”
“We make sure you’re doing this right, we minimize your risk, and we keep you informed on changes in the industry. We have our ear to the ground,” van Leynseele says. She recalls a recent provisional change in Washington that was set to go live at 9 a.m. the next day. “I started making calls to clients at 4 a.m. saying, ‘Send this email now.’ Fifteen sent it in time. In a difficult and ever-changing landscape, we try to give our clients a little competitive edge to stay ahead.”
Businesses licensed by Washington State Liquor and Cannabis Board have been mostly in the clear from the feds, Bricken says, but that’s no guarantee. Washington’s situation with medical marijuana a few years ago should serve as a good reminder. “It remained unregulated because Initiative 502 only addressed use for adults 21 and up, and medical was running roughshod on the side—unregulated, untaxed, no government oversight—so the feds were very active there,” she says.
Political views may shift and the feds may crack down further.
“A lot of people think the federal government is impotent and they don’t care—that ‘this is a free-for-all and the feds won’t pursue us’—but nothing could be further from the truth. The threat is real, and it needs to be discussed because everything could change with the stroke of a pen,” Bricken says. “It’s not high on the priority list with the DOJ, but it doesn’t mean they won’t rear their head. That’s the tension: They can come in at any time, and these states cannot stop them.”