The Costs of Being in The Marijuana Business

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When Colorado and Washington voted to allow recreational marijuana in 2012, supporters and opponents promised lower prices for legal cannabis compared to illegal markets.

But nearly three years after the passage of Amendment 64, Colorado’s retail and street prices are roughly the same.

Pricing has become a larger issue as recreational and medical usage has increased. Marijuana industry experts say that the costs of doing legal business, including the production of higher quality strains, safe but expensive industrial practices and taxes, are roughly the same as those of running a black market business.

“Margins at the dispensaries are razor thin unless you have a vertical operation,” said Jill Lamoureux, Director of Government Relations for CannLabs, a leading provider of cannabis testing services.

Cost Of Doing Business
Taxes are a significant cost of the marijuana business.

In 1982, Congress passed a law to prevent drug traffickers from deducting expenses for their illegal businesses on income taxes. A December 2014 IRS memorandum applied this law to legal growers.

Medical dispensaries and retail stores are allowed to deduct the cost of cultivation and storage of inventory as part of the cost of goods sold. However, other business expenses are not deductible, including rent, advertising, legal fees and security costs. This has effectively increased the total tax rate on marijuana businesses.

“That’s a prime example of how regulation drives operations, and people drive their operations around that line of the tax code — adding to cost of goods sold to account for that,” Lamoureux said.

Lamoureux said that the higher income taxes are passed along to the consumer in the form of higher prices before the sales and excise taxes levied by the state. “These tax rates and sales taxes have the impact of not shifting people from the black and gray markets to the white market,” she said.

Spurred To Improve Quality
One way growers control costs and improve end prices is ensuring the health and safety of crops. “It grows in conditions that are conducive to mold growth, and they were not always totally sanitary in the past,” said Jennifer Frame, Senior Microbiologist at CannLabs. “Growers have stepped up their game and gotten into safe growing practices, like using HEPA filters for the air to avoid mold and cleaner rooms in the grow houses.”

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Colorado is expected to require commercial marijuana growers to test for mold, E. coli and salmonella. Currently, these tests are voluntary.

CannLabs recommends growers and dispensaries test their product now and make changes to ensure they won’t end up with costly positive results once the testing is mandatory. “We offer consulting services where we go out to your grow to make sure what area is the problem,” Frame said. “We will help you out from there on how to clean up to not grow mold and other horrible substances that will make people sick.”

Creating A Good Customer Experience
The marijuana industry has also applied lessons from agriculture and manufacturing to reduce costs. “If they want consistency and reliability in their final product, we can help with that,” Lamoureux said. “It’s general good business practice. It’s what you do when you’re manufacturing — create a good consistent experience for consumers.”

Improving an agricultural product by processing or preparing it in different ways can also boost profitability. For example, a vendor who sells tomatoes may jar them as salsa at a higher price.

The marijuana industry is using a higher percentage of its product in food and consumer products. “Going back to 2008, dispensaries sold 95 percent flower and 5 percent oils and edibles; and now it’s 50-50 with brownies and other products,” Lamoureux said. “The profit potential of putting it into a patch or a vape pen is pretty incredible.”

Lamoureux and other experts expect to see more of this trend as marijuana businesses look for ways to improve customer experiences and win new converts. “I see an evolution of the products,” Lamoureux said.

via The Cannabist

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