By Paula Givens, JD, CFE
It can cost millions of dollars to bring a new pharmaceutical medication to market which is why the price of a new prescription medication often reflects this cost.
These costly research and development processes – that can cause pharmaceuticals to be so expensive – are not typically involved in the manufacture of cannabis medication.
The science of refining cannabis strains and creating new ones is complex and can take years, but neither is this the reason cannabis is “expensive”. Then why is the price of cannabis medication so high?
The answer here is mainly because cannabis business owners have substantial regulatory compliance expenses (that are unique to the cannabis industry). Although still in its infancy, Cannabis is one of the most highly regulated – and taxed – industries in the country right now.
In every state where cannabis is legal there are complex state and municipal laws, rules and regulations that are all costly to comply with. Most operating businesses are not subject to surprise inspection by state and local authorities.
In the cannabis industry, routine visits by the various levels of regulatory agencies are common. Many cannabis businesses employ outside attorneys, accountants, and compliance professionals at a substantial expense to ensure these visits go well.
Starting a business is normally as simple as a quick visit to the Secretary of State website. Starting a cannabis business is not that simple. There are layers of costly governmental regulation in each state where cannabis is legal.
There are both state and municipal application fees and related expenses that can be as high as $250,000 – with no guarantee of being awarded a license. Initial and renewal license fees can be very expensive.
States often require significant performance bonds as a condition of awarding licenses. Illinois, for instance, requires a two million dollar bond for cultivation center licensees. The tax burden on cannabis businesses is substantial.
Cannabis businesses not only pay traditional sales tax, but they also pay state sales and excise taxes unique to the industry. In Colorado, for example, there is an additional 10% retail marijuana tax, a 2.9% special sales tax (that is contributed to Colorado’s Marijuana Cash Fund), and a 15% retail marijuana excise tax, for a total tax of 27.9% just at the state level.
This does not include further taxes imposed by the municipalities in which they operate. In January, 2015, Colorado collected nearly nine million dollars for all marijuana licenses, taxes and fees. There is a substantial federal tax burden borne by the cannabis industry.
Every business in the country can deduct ordinary and necessary business expenses, which includes employee pay, rent, interest, taxes, and insurance. Section 280E of the Internal Revenue Code prohibits any tax deduction or credit if the business consists of trafficking in controlled substances prohibited by Federal law.
Cannabis, or “marihuana” as the federal Controlled Substances Act calls it, is a Schedule I controlled substance and the only expenses that are deductible are cost of goods sold. The effective federal tax rate is between 60 to 90 percent.
Another cost borne uniquely by the cannabis industry is the expense of a simple business checking account. Because cannabis is a federally controlled substance most banks, which are federally regulated, refuse to service businesses that grow, manufacture or dispense it.
Most of the small number of banks that do service cannabis businesses utilize customer due diligence and know your customer compliance programs that are not inexpensive. As such, banks throughout the country are charging from $500 to $5,000 per month for a normal business checking account.
The big credit card companies have yet to jump into the cannabis business, so most cannabis businesses operate on a cash basis, or perhaps debit cards if they are lucky enough to have a bank account for the proceeds of debit transactions to be deposited. Cash is expensive.
Cash only businesses have greater loss due to theft, called shrinkage, than other businesses. There is also additional cost in the transportation and storage of cash, including security expenses. The cost of operating a legitimate cannabis business can be substantial, and many fail.
This is at least part of the reason there still remains a robust black market. Until the cost of regulatory compliance recedes, the retail cost of cannabis will remain high. While this may not help your pocketbook in the short term, at least you know better what your favorite legitimate gardeners are up against when providing your medication.