Federal Regulation – Biggest Problems And Best Solutions
Although the number of states and countries legalizing medical or recreational marijuana continues to increase dramatically, the United States government has stubbornly persisted in maintaining its antiquated views by labeling marijuana as a Schedule I narcotic. This position has caused numerous problems and uncertainties for cannabis companies in this country and will continue to do so until the US sheds its old-fashioned views.
The biggest problems facing marijuana businesses as a result of restrictive federal laws include some of the following:
Problem – Tax Restrictions
Because cannabis is currently regulated as an illegal controlled substance, many of the business deductions typically available for most industries are not, in fact, eligible deductions for many cannabis companies under IRC Section 280E which prevents deductions for illegal activities. As a result, effective tax rates can range from 75% to 95% of net income.
Solution – Restructured Cost of Goods and Tax Planning
In light of the potential for significant and excessive tax liability, it’s essential to structure a tax plan that maximizes the cost of obtaining or manufacturing products which remains the most effective deduction and is the best method of reducing overall tax exposure if done correctly. You can also outsource non-deductible expenses which may then be considered a cost of procuring goods and therefore deductible as well as other strategies designed to accomplish the same goals. KOLA’s team of financial and accounting professionals will work with you to assess your business operations and develop the most effective tax strategy while maintaining full compliance with state and federal laws. Kola Partners Consulting Services.
Problem – Patent and Trademark Restrictions
The United States patent office is an agency of the federal government and consequently does not recognize US patent or trademarks for cannabis companies. This lack of federal protection creates a significant risk for marijuana businesses who cannot protect their company names, logo or proprietary manufacturing techniques or methods.
Solution – State Registration and Creative Federal Applications
There are two methods of attacking this problem. The first tactic is to register your trademark, service mark and any other eligible intellectual property rights under your applicable state laws. Although these rights will not necessarily protect you nationwide, it will help to establish your common law rights which offer protection for whoever is the first in time to use the intellectual property.
The second method is creating a unique name or logo that does not explicitly reference the cannabis industry and may pass muster with the US patent office if structured and filed properly. If you need help determining what your intellectual property options may be, KOLA PARTNERS stands ready to provide whatever assistance your company needs. Kola Partners Consulting Services.
Problem – Interstate Transportation Restrictions
As a result of current federal restrictions, cannabis and cannabis-derived products cannot be transported across state lines. This limitation dramatically restricts your company’s growth and the ability to create a nationwide recognizable brand for your product.
Solution – Brand Expansion
Brand expansion, which is also known as co-branding is the best method to expand your company’s market while gaining an additional source of revenue. As detailed in our brand expansion section, Kola Partners Brand Expansion Services, a product manufacturer in one state enters into a licensing and royalty agreement with a manufacturer in another state in an arrangement that is similar to franchising.
By finding a qualified partner to produce your product, your business will develop additional revenue from upfront licensing and royalty fees from product sales without significant expenditure of capital resources. When you are ready to expand, KOLA will help you analyze the brand-ability of your product, locate and conduct a due diligence review of potential partners and help with licensing agreements and partnership oversight.
Problem – Limited Access to Financial Services
As discussed in more detail in our blog covering banking solutions for cannabis companies, Kola Partners Capital & Financing Services, less than 30% of marijuana businesses have access to reliable banking options. The result of this limitation has been dangerous reliance on cash transactions and storage concerns or use of high-risk merchant accounts which are often located overseas and have limited accountability or transparency.
Solution – Follow DOJ and FinCEN Guidelines
Better known as “follow the yellow brick road!” A roadmap has already been established by the Department of Justice which has laid out a specific process that will lead you to success at the Emerald City, also known as your local bank.
As you’ll read in our related blog, Kola Partners Capital & Financing Services, the FinCEN system expressly authorized banks to service marijuana-related businesses if they comply with the DOJ guidelines. Although it will be a lot of work initially for your company and the monthly banking fees can be quite high, it’s a small price to pay for the peace of mind of having secure and reliable banking options for your hard-earned money.
Problem – Advertising Restrictions
As much due to perception as specific legal restrictions, most major media outlets from newspapers to television and radio stations refuse to publish cannabis-related advertising. Surprisingly, this restriction even extends to most major social media forums including Google and Facebook.
Solution – Get Creative!
As with most successful advertising, you’ll need to be creative. Initially, see if you can develop a marketing plan that doesn’t directly refer to marijuana that might just pass the sniff test for major media outlets. This will be easier to accomplish for ancillary companies who provide products or services to the cannabis industry than it will be for plant-touching companies which face a difficult hurdle in that regard.
If you can’t legally mask the nature of your business, there are a number of advertising options through cannabis industry trade publications and websites which will give you exposure to customers interested in your products. You can also sponsor seminars and educational events, attend and host booths at conferences and trade shows, and submit articles or other materials to the various websites and publications as a means of additional publicity for your company or unique type of services. Another option is to implement loyalty and reward programs to help retain existing customers and generate new customers through referrals and other incentives. Kola Partners Consulting Services.
In addition, each state has different advertising restrictions so if your company is thinking about product expansion be sure to fully understand the advertising and regulatory scheme for each state you’re interested in. KOLA can assist with identifying the best states for your product expansion, locating qualified partners in those states and fully implementing your product expansion plans when you’re ready to grow.