Update on marijuana regulation – #15
Only a few articles I’ve noticed recently on the state legal sales of recreational marijuana. In case you are just noticing my articles on the topic, my interest is to watch the natural experiment of whether overbearing, heavy-handed regulations strangle a brand new industry.
1/15 – KOMO news – Too much pot: Growers struggle with glut of legal weed – This is essentially a story on implementation issues in Washington state. Initially there was a shortage of state-legal marijuana, now there is a glut. Since last summer, growers have harvested 31,000 pounds (I have no idea how that count is determined).
Article says many users are staying with the lower taxed medical marijuana.
In Washington there are 270 licensed growers providing 85 licensed stores. The huge volume of regulatory hoops to jump through for retail stores is slowing the opening of new outlets while there are minimal restrictions on growers. In Colorado, the article says growers must prove a demand for their product before getting licensed.
Prices, per the article, are running $23 to $25 per gram
an ounce, which is twice the price of so-called medicinal marijuana.
In Colorado there is more demand than supply and in Washington more supply than demand, according to the article. The state laws only provide protection for sales in the state under the state’s regulation. That, combined with the federal ban on interstate transport, makes it exquisitely dangerous to move marijuana from Washington (excess supply) to Colorado (excess demand). Were freedom to come into play, growers would fill up a truck and hit the road for Colorado.
Overall, this article reflects the implementation struggles more than the crushing effect of regulation. Several factors will smooth out the supply and demand:
- more stores soon to come on line (another 100 in next few months)
- general stabilization of the industry
- adjusting to the heavy supply right after the harvest which will need to held and sold during the year (harvest is in the fall and article suggests there is one crop a year, although I have no idea what that means; there is only one apple harvest a year but apples are in the produce section year round)
When the supply chain settles down we will have a clearer picture of the disruption caused by regulation.
1/24 – Forbes – IRS Further Limits Deductions For State-Legal Marijuana Facilities – This is a bit off-track from the issue of overbearing regulation, but still interesting.
For a business that is illegal, only the cost of goods sold (COGS) is deductible for federal tax purposes. That means rent, general, selling, administrative, and depreciation costs (G&A) are not deductible. This creates huge tax liabilities on small profits.
To work around this, state-legal-federally-illegal recreational and so-called medical marijuana sellers are aggressively calculating the inventoriable portion of their G&A cost into inventory. Thus the otherwise nondeductible G&A is rolling into the COGS calculation.
Last week, the IRS issued a Chief Counsel Memorandum (short version: internal position paper) pointing out that a combination of several laws means that costs that would otherwise be nondeductible may not be rolled into inventory and then turned into a deduction when calculating COGS.
Yet another attack from the federal-illegal side of this state-legal experiment.
1/26 – Breitbart – Legal Marijuana Sales Grow 74 Percent in 2014 – A combination legalization advocacy and investment firm (how ’bout that for a creative business model?) asserts that legal sales of marijuana grew 74% in 2014, from $1.5B to $2.7B. Sales in Colorado were $805M. Investors are moving into the market
2/4 – NBC News – A Marijuana First: Pot Vending Machines Dispense Weeds – A vending machine dispensing marijuana buds is available in so-called medical marijuana dispensaries in Seattle. Swipe your medical marijuana card (or just your driver’s license, if the article is technically correct in its statements), pay with cash (or bitcoins), and you are on your way. Since there is no clerk involved, presumably you could borrow your buddy’s card or license.