Licensed cannabis shops would make more money than Starbucks per store but for the high taxes they pay.
A recent Arcview Market Report suggests that if it weren’t for the inordinately high taxes that cannabis businesses must pay, they would be more profitable than Starbucks. Entitled “Cannabis Retail: The $23 Billion Opportunity,” the report is based on data collected and analyzed from BDS Analytics’s GreenEdge Point of Sale system.
According to the Arcview’s report, retail cannabis stores would operate around a 12% after-tax profit margin if they were treated as other businesses in the eyes of the IRS. This high of a profit margin is in line with other specialty retail stores, including Starbucks.
However, right now, the biggest obstacle in the way of profitability for dispensaries is federal tax law. Specifically, IRS Code Section 280E is the biggest threat to a cannabis store’s profit margins. Since cannabis remains listed as a Schedule I drug under the Controlled Substances Act, that complicates things when the time comes to pay taxes.
Section 280E prohibits any business that is related to the “trafficking of Schedule I or II substances” from deducting most ordinary business expenses; the only thing these businesses are allowed to deduct on their taxes is the cost of goods sold. Since cannabis remains categorized under Schedule I, that means that even in states where marijuana has been “legalized”, all licensed cannabis businesses are subject to this rule.
This means that retail cannabis stores cannot deduct the usual business expenses like other similar businesses in other, less-controversial industries may. Every cannabis transaction or payment made at a licensed dispensary is subject to federal tax.
Retail Cannabis Markets Robust, but could Flourish Further with Federal Tax Reform
In Colorado and Washington state, where the recreational cannabis market is most mature and developed, dispensaries have an average per-store revenue of $2 million a year. Halfway through 2017 in Colorado alone, the legal marijuana market topped $750 million in sales; sales are up 25% compared to the first half of 2016.
Colorado’s Department of Revenue reported that this year, $531 million worth of the overall sales were attributable to the recreational market. The other approximately $220 million came from the medical marijuana industry. Since June, the state of Colorado generated $116 million in tax revenue and licensing fees as well.
In Colorado, in fact, the number of retail cannabis stores far outnumber Starbucks locations. While there are currently 392 number of Starbucks storefronts operating in Colorado, there are 491 licensed dispensaries at this time.
As such, cannabis sales are now regularly exceeding $100 million total each month. The taxes that the state collects from marijuana sales go toward funding the following:
- Schools
- Roads
- Hospitals
- Medicaid
- College scholarships
- Ending homelessness
And the federal government wants its piece of the pie.
Until Section 280E is repealed or reworded, cannabis businesses selling marijuana must be sure to only deduct their cost of goods sold when it comes to tax time. Some medical marijuana operations have begun structuring their actual dispensary and their patient counseling and support services under two separate corporations. This allows them to make normal business deductions under the corporation not dealing directly with and Schedule I controlled substance.
Recreational stores can do something similar if they want to sell goods besides cannabis, like apparel or smoking accessories. If you structure things under separate corporate entities, then the apparel and paraphernalia corporation wouldn’t be subject to the strict rules under Section 280E.
The Future of Cannabis Profitability Is Up To Congress
Time will only tell if the federal government will begin to fall in line with the rest of the country when it comes to cannabis. A good first step would be to reform the tax code to allow retail cannabis businesses to operate at their fullest potential. That way they could see profitability comparative to stores like Starbucks even as they begin to outpace them in the number of stores.
To stay up-to-date on changes in the legal cannabis industry such as tax reform, check out our Cannabis Industry Updates page.
