The business of Missouri cannabis

When Missourians approved the production, distribution and use of medical marijuana last year, they unwittingly triggered a lengthy list of business, economic and legal questions, according to a pair of cannabis industry experts who spoke last week on the Southeast Missouri State University campus.

Adam Prest, an accountant with Anders CPAs+Advisors in St. Louis and Kyle Westbrook, an attorney with the St. Louis law firm of HeplerBroom,LLC, led an hourlong presentation Thursday on the “business of cannabis in Missouri” during the inaugural Southeast Entrepreneurship & Economic Development Summit (SEEDS), sponsored by the Harrison College of Business and Computing.

Marijuana grows in August at an indoor cannabis farm in Gardena, Calif.By Richard Vogel ~ Associated Press file

In introducing his co-presenter, Prest said Westbrook’s law firm “has been doing cannabis for some time now,” which elicited snickers from the audience of about 200 college students, faculty members and the general public.

Throughout their presentation, Prest and Westbrook pointed out how conflicts between state and federal marijuana (cannabis) laws have resulted in an array of challenges ranging from banking and tax implications to employment law.

“Cannabis is still illegal at the federal level,” noted Priest who leads the “cannabis team” at Anders. Marijuana was added to “Schedule I” of the Controlled Substances Act in 1970, Prest said, classifying it among the most dangerous drugs, such as heroin and LSD.

“The reason they put it on this list is because it has a high potential for abuse, according to the government,” he said, adding, from the federal government’s perspective, marijuana is not accepted as a form of medical treatment.

Regardless, 33 states, including Missouri, have approved the use of medically prescribed marijuana and 11 of those, including Illinois, allow or soon will allow recreational use.

Growth potential

Experts say the impact of the cannabis industry in the U.S. will be huge.

“A lot of people are still skeptical about how big the market really is and how big it can be,” Prest said, “but by the end of 2018, sales of legal cannabis in the United States surpassed the sales of Goldfish crackers, the Fortnite video game and e-cigarettes combined. By the end of this year, sales are expected to pass Taco Bell’s revenues. By the end of next year, it’s expected to pass the revenue of the NFL, and by 2021 it’s expected to pass the revenue of all online food delivery services.”

Based on the number of applications for medical marijuana-related licenses in Missouri, a lot of people and businesses want to be part of the cannabis industry in the Show Me State. Over a two-week period in August, the Missouri Department of Health & Senior Services (DHSS) received approximately 2,100 applications for one of 350 marijuana business licenses. More than 1,100 of those applications were for medical marijuana dispensary licenses, of which only 192 — or 24 per congressional district — will be granted.

“It’s a very competitive process in Missouri,” Prest said, adding many applicants have invested hundreds of thousands of dollars in the application process. “The application fee itself was fairly insignificant. There’s also the cost of an application writer, consultants, CPAs and attorneys. It’s a very, very expensive process.”

DHSS has received 18 applications for proposed dispensaries in Cape Girardeau and another five in Jackson. The Cape Girardeau applications include four for locations on Kingshighway, three in Doctors’ Park, three on William Street with the remainder of the application locations on Broadway, Main Street, Siemers Drive, South Plaza Way, Golden Street, Sheridan Drive and Rust Avenue.

“Not all of them will be approved, but there will definitely be a few in Cape Girardeau,” Westbrook said. “Basically, it’s going to be pretty wild. You’re going to be seeing these dispensaries popping up on your streets.”

But even after they do, they won’t be doing much business for several months, he said. “They are not going to issue licenses until December or January 2020, and when they do, the cultivators are going to have to go out and grow their product because they can’t bring it in from out of state because it’s federally illegal to do so under the Controlled Substances Act, so it’s probably going to take six months after the growing process starts for a dispensary to be in business.”

With regard to prescribing medical marijuana, Westbrook pointed out that as of now, “there are a very limited number of doctors that are getting into it. They’re hesitant because it is still federally illegal.” There is currently one clinic in Cape Girardeau, Missouri Green Doctors in the Marquette Tower, staffed by one physician one day a week, that is certifying qualified patients for medical marijuana cards.

“As of August, there were almost 10,000 qualified patients who have been approved statewide for medical marijuana cards,” Westbrook said, adding the state expects that number to grow to about 50,000 by early 2020.

Financial obstacles

Even after dispensaries and other marijuana-related businesses are licensed and open, Prest said they’ll face plenty of business obstacles.

“Everybody thinks you can come in and get one of these licenses and it’s going to be a cash cow,” he said. “But I can point to a bunch of reasons why they’re not, especially in the early years, and taxes are a big reason why they’re not. Taxes will eat into any profit you might have, especially in the early years.”

Prest explained because marijuana is illegal at the federal level, there are certain tax laws that adversely affect the cannabis industry. “Specifically, IRS Code Section 280, enacted in 1982, basically says no deduction or credit shall be allowed for businesses trafficking in controlled substances,” he said and explained while most businesses can take advantage of various business-related expenses, such as rent or the cost of goods sold, businesses dealing in marijuana cannot.

Prest added many, if not most, banks won’t deal with cannabis businesses. “Only a few banks have come out and said they will work with legitimate cannabis businesses, so right now it’s very difficult to open a banking or checking account and even if you do, it’s expensive and no banks will lend to cannabis businesses.”

In addition, he said landlords who lease property to a medical marijuana business are also at risk. “Let’s say you own a strip center that rents to a cannabis dispensary,” Prest said. “That’s fine, unless you have a note on the property. If the bank finds out, more than likely they’ll call your note because they don’t want to have anything to do with the cannabis industry.”

One banker who happened to be in the symposium audience, Montgomery Bank regional president and executive president James Limbaugh, discounted the idea of foreclosing on properties that lease to medical marijuana operations. “I would suggest to you that the way most banks now in Missouri are handling this is that the likelihood of a bank foreclosing on a property that houses XYZ Dispensary is unlikely,” he said, adding the banking industry should take a “common-sense approach” to financial issues related to medical marijuana.

Prest said there could be some relief on the horizon in the form of the Safe Banking Act, which was approved last week by the U.S. House of Representatives. “Basically, what the act does is prohibit federal banks from denying depository accounts for legitimate cannabis companies,” he said. “Whether or not it gets through the Senate is another story. The Senate is controlled by Republicans and at this point they’re not showing a whole lot of interest in passing any sort of marijuana legislation.”

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