High Hurdles for Cannabis Business

YOUNGSTOWN, Ohio – To put it bluntly, Cheech and Chong couldn’t cut it in Ohio’s legalized cannabis industry.

Costs run high, regulations are strict, and it takes smarts to make a business work.

“It’s not just somebody randomly growing pot in their basement,” says Eric Grischow, a CPA who is a manager in the Canfield office of HBK CPAs and Consultants and regional director for HBK Cannabis Solutions. “These are state-of-the-art facilities, heavily secured areas, very smart individuals on the chemistry and biology side that are doing these grow operations – very smart marketing people, smart general managers at the dispensary level.”

Cannabis businesses face expenses, hurdles and challenges that businesses in other industries don’t.

“There are a lot of financial challenges because we don’t have the same access to capital,” says Terrell Washington, owner of Leaf Relief, a cannabis dispensary on Market Street in Youngstown.

Terrell Washington, owner of Leaf Relief, operates cannabis dispensaries in Youngstown and in Reynoldsville.

While legal in Ohio, cannabis remains illegal under federal law, so most banks won’t loan money to businesses in the industry.

“I can’t get a business loan to start the business the way that every business owner in the world does, which makes things a whole lot tougher…,” Washington says.

Washington, whose family achieved success in the fast-food industry, says the expenses may be a reason there are few people in the cannabis industry who haven’t been successful in other industries.

The license fee to start the dispensary is in the six-figure range [or “costs about $100,000”] and Washington has to pay $100 to secure a badge for each employee, showing that they’re licensed and employed in the Ohio Division of Cannabis Control.

“You’ve got to make sure your turnover is low, just because of that alone,” he says. “You can spend thousands a year just in licensing everybody in your facility.”

There are many other extra expenses in the industry, including security measures such as ballistic glass, armed security, 24-hour video surveillance and monitoring.

Many financial institutions remain leery about doing business with companies – and even individuals – connected to cannabis.

Washington had been banking at the same financial institution for years when it closed his personal account. When he asked why, bank officials didn’t give a reason.

The industry is highly regulated, says attorney Tom Haren, a partner at the Cleveland law firm Frantz Ward and chair of its cannabis law group. And the illegality under federal law further complicates things.

“Marijuana, for the time being at least, remains a schedule one drug under federal law,” says Haren, who’s also the spokesman for the Ohio Cannabis Coalition, an industry trade association.

There are a few banks, mostly state-chartered, and credit unions, that will work with cannabis businesses, but the fees are high, Haren says.

TAXES

The tax code is different for businesses in the industry too, leading to higher expenses. Cannabis dispensaries can’t expense most of the costs that other businesses can.

Tom Haren, Frantz Ward

Cannabis businesses fall under a section of the Internal Revenue Code “which basically says you cannot take standard business deductions if you are trafficking in a schedule one or schedule two drug,” Haren explains. “What that means is that a cannabis licensee cannot take the same business deductions that any other business can take.”

That includes the cost of employees, rent, equipment, insurance, attorneys and accountants.

Standalone dispensaries are likely paying an 80% effective tax rate, Haren points out. “If you’re a vertically integrated company, maybe you’re down to 60%…”

ATTITUDES EVOLVING

Haren says cannabis is an industry that’s uniquely tied to politics and policy, but people’s attitudes are changing.

“Lately, as people learn more and more about the industry, they become more and more comfortable with it,” he says.

People see the businesses in the community and have friends and family members who work there.

“The employees make good money, they have benefits, they’re good partners in the community,” Haren says. “You know, when a dispensary comes into a community, it actually increases economic development within the area.”

Property values go up because the business owners are investing in the community, he contends. They also generate tax revenue.

“Under the state statute, there’s a 10% tax on the sale of adult-use cannabis products; 36% of that revenue goes right back to the communities where these dispensaries are located,” Haren says. “So, there are net benefits to communities when they move into town.”

ACCOUNTING SPECIALTY

HBK CPAs and Consultants, headquartered in Canfield, has a cannabis division to help businesses traverse some of the challenges.

Eric Grischow, HBK CPAs and Consultants

“Some of the bigger challenges [are] they operate in a federally illegal marketplace,” says Grischow. “Even though they’re state legal and state compliant, there’s still a patchwork of compliance that they have to deal with.”

Only a select few companies in the accounting, banking and insurance industries will deal with the cannabis industry.

“The top four accounting firms in the U.S. won’t touch cannabis,” Grischow says. “Some of the large banks won’t touch cannabis.”

Grischow has heard of situations similar to what Washington encountered when his personal bank account was closed.

“And it’s even happened for the employees who actually work there as well,” he says. “Some people are even having trouble getting loans if they work at a dispensary.”

To deal with those challenges, business owners in the industry should be cognizant of what they’re spending money on, he offers. They should hire an accountant early in the process and know who they’re going to be partnering with in the business.

While everyone has the same tax structure imposed by the IRS, cannabis businesses have a higher effective tax rate because their taxable income is inherently higher, Grischow says.

Some large cannabis operators across the country are challenging the section of the tax code that imposes restrictions not imposed on other industries.

PENNSYLVANIA

HBK has 20 staffers who work exclusively in cannabis with heavy footprints in Ohio, Pennsylvania, New York, New Jersey and Florida, where its offices are.

But it branches out to most states where some type of medical or recreational use is legal. In Pennsylvania, only medical marijuana is legal although there is movement to add recreational use. The commonwealth is in a similar situation as Ohio was before adult use was made legal.

In Michigan, recreational marijuana was legal before it was in Ohio and Ohioans would travel there to buy it.

“With Ohio becoming recreational, it puts pressure on Pennsylvania for the people who live close to the border just to be able to go over the border and purchase marijuana and bring it back over to Pennsylvania,” the CPA says.

The biggest reason is tax revenue. “Ohio has sales tax and also an excise tax of 10% that is on nonmedical,” Grischow says.

The tax revenue is going from Pennsylvania individuals to Ohio the same way it was going from Ohio to Michigan before adult recreational use became legal in the Buckeye State.

“People want their tax revenue,” Grischow points out. “It’s a pretty lucrative way of collecting sales tax and any kind of excise tax.”

HBK’s Cannabis Solutions started in 2017, and Grischow has been working in it since 2020. He’s seen some surprises.

“Thus far, I think it’s the impressive growth of these companies and also how smart the people who are involved are,” he says. “They’re very passionate people. They are very smart people.”

RECREATIONAL SALES

In Ohio marijuana sales and personal use for medicinal purposes became legal in 2017. Last November, Ohio voters approved a measure allowing adult marijuana sales and recreational use.

Recreational marijuana sales started in early August. There are 110 cannabis dispensaries in the state, with four in the Mahoning Valley. Besides Leaf Relief, there’s Green Leaf Therapy in Struthers, Green Leaf Medical of Ohio in Warren and FarmaceuticalRX in East Liverpool.

As of Sept. 28, nonmedical sales in the state topped $87 million, according to the Ohio Department of Commerce’s Division of Cannabis Control.

Moon Rocks, a Riviera Creek product, consists of cannabis buds coated in resin and then coated in ice hash.

But Brian Kessler, chairman of Riviera Creek, a marijuana cultivator and processor based in the city, says while business has been good, it hasn’t been great.

Sales are about double compared to when sales were restricted to medical use.

“Now, the anticipation was that it was going to be four to five times growth, which clearly has not happened yet,” Kessler offers.

That’s largely because of restrictions that remain in place.

“When the dispensaries were turned on to allow for adult use, it wasn’t a fully launched program, because technically, it was an emergency temporary program,” he says.

For example, initially when medical marijuana was legalized in Ohio, it was restricted for vaping only.

Burning the plants wasn’t permitted.

“It either had to be smoked in a vaping system or it had to be a processed oil,” Kessler says. “You could do edibles, or you could also smoke oils.”

When Ohio voters approved adult use in November 2023, the intention of the law was that marijuana restrictions would be similar to those for alcohol, he says. That includes limiting sales to people older than 21, no consumption in public places, and no advertising to children.

“Those laws were supposed to be put in place to allow for adult consumption of marijuana in any ways that they want,” Kessler explains.

MORE WORK

It was supposed to allow adults to roll joints, and buy pre-rolled and other forms of consumption. Advertising was supposed to be permitted as long as it was targeted only to adults. But that hasn’t happened yet. Pre-rolled marijuana cigarettes, which comprise about 30% of business in other states, for example, cannot be sold in Ohio under current restrictions.

“The state has a lot of work to do, and they’ve done a hell of a job,” the Riviera Creek chairman points out, adding that he’s not being critical of the state.

“…To get a whole industry turned on from nothing takes a lot of effort,” he says.

Allowances are happening in stages.

“The state is now rolling out the process of opening up more stores,” Kessler adds.

Close to 200 additional stores are expected to open over the next year. And over the next few months, Ohio is expected to release its final regulations on what’s allowed under adult use.

SUPPLY VS. DEMAND

All of those changes should further expand the market, Kessler says.

“At this moment, the supply is actually overly produced for the market that currently exists,” he says. “Prices have been coming down a lot in the last 60 days and there’s a lot of pressure on the suppliers like us about the fact that we had all anticipated a much larger market being turned on much earlier.”

But those are the challenges of opening a new market, he adds.

Kessler has been involved in 26 states that have legalized marijuana sales and in every one of them, the biggest difference between before and after is that “consumers are allowed to have access to safe, tested, regulated product for the first time.”

Before, the only option was to buy items that could contain pesticides or insecticides or be laced with potentially harmful additives. And the only way to buy it was risky, Kessler says.

“By having these laws in place, now people have a way to get safe product,” he adds.

Conversely, a product called Delta 8 takes advantage of a loophole in the law allowing it to be sold in gas stations and smoke shops, Kessler says. The hemp products contain THC, the active ingredient in cannabis. Hemp isn’t supposed to be intoxicating, he points out.

“Everybody is trying to get those off the market because they are literally dangerous. They can hurt people and they’re being sold to kids,” Kessler says.

As a venture capitalist, he supports start-ups and other entrepreneurs.

“Even though it’s harder for them, it’s been wonderful to see it open up doors for people that didn’t have opportunities and are getting opportunities in the space and to participate in an area that is generating some real revenue streams – tax dollars for the community, income streams for employees,” Kessler says.

NO REGRETS

Even with the expenses and challenges, Washington, the Youngstown dispensary owner, says he doesn’t regret entering the industry.

“It’s not cut-throat,” he says. “There are people I’m competing with, but I can still have a good relationship, and we still want the same things for the most part.”

There are benefits too.

“Especially on the medical side, you know you’re doing something for good,” Washington says. “You know that you’re changing people’s lives.”

As a Crohn’s disease sufferer, Washington knows that from personal experience. He took prescribed medication, but it didn’t always work.

One day years ago, he was having an episode while at a fundraiser at someone’s house. His car was blocked in so couldn’t leave. He’d already gone through more than a day’s dosage of his medication without relief.

Washington had never smoked marijuana, but a friend offered him some. He tried it out of desperation.

“Within 30 minutes I was good to rejoin the event,” he says.

Pictured at top: Daniel Kessler holds a strand of cannabis hanging in the drying room at Riviera Creek in Youngstown.