Fed legalization could be double-edged sword for Colo. cannabis biz

Matt Whittaker

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Proponents of marijuana legalization carry a 51-foot inflatable joint near the White House in 2016.ep_jhu/Flickr

By Matt Whittaker / NewsBreak Denver

(Across Colorado) Federal cannabis legalization could end up being a double-edged sword for Colorado marijuana businesses depending on how Washington structures regulations for an industry that added more than $2 billion to state coffers since legal recreational sales began in 2014.

Late last week, the U.S. House of Representatives voted to legalize marijuana nationally. The bill would remove the drug from the list of narcotics containing heroin and LSD, expunge nonviolent federal marijuana convictions and add a federal sales tax for marijuana.

Friday's action marked the second time the measure, called the Marijuana Opportunity Reinvestment and Expungement Act, passed the chamber. But like in 2020, when the Senate didn't take the bill up for a vote, this year's version may not pass the upper chamber, which has another marijuana bill in the works.

Eventually, though, Colorado marijuana insiders think the drug will become legal nationally, giving cannabis businesses broader access to the banking system and potentially paving the way for marijuana exports from the Centennial State. But the benefits will come with new regulations and tax rules.

"The industry here views federal legalization as inevitable," said Truman Bradley, executive director with the Wheat Ridge-based Marijuana Industry Group. "Legalization is a double-edged sword."

Risk of over-regulation

Taxation is a crucial issue in the federal legalization debate, Bradley said.

State-legal marijuana companies are subject to section 280E of the nation's tax code, which bars companies that traffic in schedule one and two controlled substances from using most tax deductions and can result in those businesses paying 80 percent to 100 percent in federal tax rates.

The bill that just passed the house would include a 5 percent sales tax for marijuana. But a draft of the competing Cannabis Administrative and Opportunity Act, which may be officially introduced in the Senate this month, suggests it could add a 25 percent tax. Either of those taxes would be on top of state and local taxes.

Rachel Gillette, a Denver-based cannabis-focused lawyer with Holland & Hart, worries federal legalization could result in regulations from Washington that get in the way of a growing industry in Colorado, particularly with the threat of over-taxation that could steer customers into the black market for cannabis.

"There is a risk of over-regulation," she says. 

Export potential

Interstate commerce rules are another essential component of the federal legalization discussion, Bradley said.

With Colorado's central location on the major east-west Interstate 70 corridor, the state could become a major national distribution center, with Colorado companies' sales growing if they are allowed to export cannabis to other states where it is harder to grow outside, such as in the Northeast, Bradley said. 

"If we could transport across state lines that would be huge for us," said Andrew Bowden, CEO of Item 9 Labs Corp., an Arizona-based cannabis producer and dispensary franchisor that is expanding in Colorado.

Financial industry access

Overall, Bowden expects federal legalization will be a net positive for the industry, especially regarding bank account access and the ability to accept credit cards.

With marijuana illegal at the federal level where banking laws are set, financial institutions doing business with the industry risk being charged with money laundering or aiding and abetting a federal crime. While there is a loophole allowing marijuana banking if the lender files specific paperwork with each transaction, that requirement is so onerous that most banks simply stay away.

Without access to the debit card system, dispensaries and grow operations in Denver and elsewhere in the nation have to do business in cash, leaving them especially vulnerable to burglaries and robberies.

"If you have individuals carrying hundreds of thousands of dollars in a car, that's unsafe," Bowden says.

Other benefits seen

While federal legalization may result in more stringent safety testing requirements, which will impact businesses differently depending on how much more they have to spend, it also will boost sales by decreasing the stigma around the plant, he said.

According to Gillette, federal legalization would also benefit "those who have been disproportionately affected by the drug war, or those individuals who have faced the collateral damage of a marijuana arrest."

Despite the increased public acceptance of marijuana use, law enforcement made more than 6 million marijuana arrests from 2010 to 2018, with most of them being only for possession, according to a 2020 report by the American Civil Liberties Union. Meanwhile, black people were more than three times as likely to be arrested for marijuana possession than white people, even though the two groups use the drug at similar rates.

In December, Gov. Jared Polis signed an executive order granting more than 1,300 pardons for convictions of possessing two ounces or less of marijuana. 

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Matt Whittaker writes about natural resources industries, including oil and gas, mining, renewable energy, agriculture and cannabis. He's been based in the Denver metro area since 2013. You can follow him on Twitter @mattswhittaker.

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