A surprising new economic report suggests that everything in the marijuana industry is not as rosy as it would appear. Despite billions of dollars in collective sales annually, most marijuana businesses are not profitable. I don’t know about you, but that surprises me. So what’s going on?
Marijuana businesses of all types, in both recreational and medical markets, face tremendous headwinds rooted in taxation, regulation, and market saturation. The previously mentioned report indicates optimism among marijuana business owners related to potential federal rescheduling, but there is no guarantee that moving marijuana to Schedule III would be enough to solve the systemic problems the industry now faces.
Rescheduling and the Federal Tax Issue
One problem that would be immediately resolved through rescheduling is the federal tax problem. As long as marijuana remains on Schedule I of the Controlled Substances Act (CSA), marijuana businesses are prohibited from deducting business expenses for tax purposes. That means they pay income tax on all their revenues rather than just profits.
Some simple math reveals just how economically devastating this is. Imagine a marijuana dispensary operating on a 40% margin. That means for every $100 the dispensary takes in its profit is $40. Businesses in nearly every other industry would only pay federal income taxes on the $40. But marijuana businesses pay taxes on the full $100.
The operators of Utahmarijuana.org say that rescheduling would immediately change that. A Utah medical cannabis pharmacy now struggling to keep its doors open would instantly have access to more revenue by way of a lower tax bill. That revenue could be put back into the business.
The State Regulation Problem
The previously mentioned economic report shows that just 27% of all marijuana businesses are profitable. In addition, 41% say they are breaking even while 32% report losing money. Federal taxation is not the only problem for businesses in the latter two categories. State regulations are another major concern.
Regulations always have a price tag attached to them. For starters, marijuana business operators must register and obtain a license. Both cost money. Growers and processors must pay to have their products tested in accordance with state regulations. Retailers have their own regulations to account for. All along the way, there are costs.
It is true that business operators can pass their costs on to customers. They do. But there is a limit. That limit is tied directly to the third problem marijuana businesses face: market saturation.
Businesses Have to Compete
Businesses in any industry need to compete for limited market share. Competition is the backbone of a capitalist economy. In the marijuana industry however, legitimate business owners are facing market saturation on two fronts: other legitimate businesses and their black market counterparts.
Competition forces business owners to maintain the lowest possible prices. In the most heavily saturated markets, legitimate business owners have a challenging time competing against black market operators. They cannot pass on all the costs of doing business because their prices would be much too high. So they sacrifice profit in order to make sales.
The Prospect of Legalization
Advocates suggest that federal legalization can solve the economic woes the marijuana industry now faces. They are probably right. But at what cost? If marijuana is ever legalized, corporate interests will rush in and take over. They are already poised to do just that.
The best way to approach legalization is to treat marijuana like alcohol. Using an identical regulatory model would allow the industry to flourish without getting out of hand. Unfortunately, small time operators would be hurt. But that is the reality of legal marijuana.
