Operating a Cannabis Business: The Problems You Will Face. Part 2 of 2

Starting and running a cannabis business can be difficult in any state for many reasons. Certain of the same issues tend to come up again and again for our cannabis lawyers in all of the states in which we have licensed attorneys (Alaska, Arizona, California, District of Columbia, Florida, Illinois, Nevada, New York, Oregon, and Washington). Part one of this series focused on the issues cannabis businesses face when seeking to raise capital, in providing consumer protection, in their marketing and advertising, and in their regulatory compliance. In part two of this series, we’re going to discuss the additional issues (and recurring themes) our cannabis clients face in operating their businesses:

Real Estate. Finding a suitable and state-and-local-law-compliant location for a marijuana business can be difficult. Add in the need to find a willing landlord, and the task can sometimes seem impossible. Most states, cities, and counties limit where marijuana businesses can physically operate.For instance, it is not uncommon for a state or city to require cannabis businesses be at least 1,000 feet away from schools and parks. Why? Because federal criminal law sentencing guidelines tack on extra time at sentencing for cultivating, processing, and distributing marijuana within 1,000 feet of the same. Zoning laws can also significantly restrict location options and typically vary greatly from local government to local government.

Operating a Marijuana BusinessIt can also be difficult to find commercial landlords willing to lease space to a cannabis business because of the risk of federal asset forfeiture of the building. Because cannabis remains illegal under federal law, landlords can face arrest for violating the federal Controlled Substances Act or, more realistically, losing their property via a civil asset forfeiture.  For more on cannabis leaseholds and why they’re unique and need to be handled with great care, check out Why Your Marijuana Leasehold is Key.

Oppressive Federal Taxes. In 1982, Congress enacted Section 280E of the Tax Code to punish traffickers of illegal controlled substances. This provision disallows all deductions or credits for business expenses related to trafficking of most illegal drugs, including cannabis. In 2007, the US tax court ruled that Section 280E applies to cannabis businesses even where the business activities are legal under state law, and 280E has hurt the finances of state-legal cannabis businesses ever since. There are no signs that the IRS is going to change its attitude about marijuana and 280e anytime soon.

Steep Barriers to Intellectual Property Protection for Marijuana. The United States Patent and Trademark Office (USPTO) typically will not register cannabis product trademarks due to the federal illegality of marijuana (although products related to a marijuana business, such as the logo for a vapor pen, may receive protection from the USPTO). Many state governments will register trademarks for cannabis products, but they do not offer the same protections as the federal system which are far greater. For example, state registrations only provide protection within an individual state and only when you can prove use in commerce first. Additionally, the lack of access to federal trademarks makes it difficult to determine whether another company has already registered a trademark for a given product, which increases a company’s chances of inadvertent infringement. In addition to searching the federal registry, cannabis businesses should also search the registry of individual states to make sure they’re not infringing on existing, protected marks. For more information on cannabis trademarks and on how to protect your cannabis brand, check out How to Protect Your Cannabis Brand Part One, Part Two, and Part Three.

Lack of Access to Bankruptcy Relief. When businesses go (or are near to going) under, they often file for bankruptcy in a federal court to re-organize the business and to liquidate assets to satisfy their creditors. Bankruptcy ultimately allows debtors to keep their necessary assets and property for day-to-day operations, and it also involves an asset distribution plan that keeps creditors from suing the business and, most importantly, that keeps the business alive. To date, however, federal courts have generally refused to allow cannabis businesses to proceed with bankruptcy filings due to cannabis’s illegal status under federal law.  Bankruptcy is in the exclusive jurisdiction of federal courts, and though state receivership process can offer some relief to debtors, they do not offer the full slate of benefits that federal bankruptcy provides. This lack of federal bankruptcy protection is another reason why lenders and creditors hesitate to lend to the marijuana industry.

There is an implicit gamble that anyone who invests time and money into a cannabis business makes — the bet that financial returns will more than outweigh the costs of these myriad challenges. And for many, that bet is paying off. Though the issues outlined in this post and in Part I of this series lists a whole host of challenges cannabis businesses must face, these challenges also serve to reduce potential competition. Not all businesspeople are willing to forge ahead given the tax, banking, IP, and other difficulties that plague the industry. But for anyone that does jump in, it’s vital to have a plan to deal with all of these potential pitfalls.