The marijuana industry is in a 'catch-22'

marijuana
marijuana

(Reuters)
Federal laws make doing business difficult for marijuana companies.

Last week, the nascent marijuana industry in California scored a huge victory: The Department of Justice dropped its four-year attempt to shut down Harborside Health Center, the largest medical-marijuana dispensary in the country.

But the industry still faces "monumental challenges" to doing business, Aaron Herzberg, an attorney and a partner at California-based Calcann Holding Corporation, a medical-marijuana property and licensing company, told Business Insider.

On one hand, the DOJ's move to drop the case against Harborside may indicate a "shift in attitude" about marijuana from the Obama administration, but "they haven't said so directly," Stanford Law professor Robert MacCoun told Business Insider. "Of course, we don't really know whether policies will shift under the next president."

The chief problem with the marijuana industry boils down to a states' rights issue. While numerous states have legalized marijuana, either for medical or recreational use, the drug remains illegal at the federal level, leaving many companies vulnerable to investigations.

The federal Controlled Substances Act classifies marijuana as a Schedule I drug, defined as a substance or chemical with no accepted medical use and a high potential for abuse. On the other hand though, four states have already legalized recreational marijuana — Colorado, Washington, Alaska, and Oregon— and almost half permit medical marijuana.

"If they say states can do this, the federal government just needs to get out of the way and let states do this," Herzberg said. "But frankly, I don't think it's a priority for too many federal politicians."

The Department of Justice "will continue to exercise its discretion in deciding where and how to enforce the Controlled Substances Act," a DOJ spokesperson told Business Insider.

Harborside Health Center marijuana
Harborside Health Center marijuana

((AP Photo/Jeff Chiu))
Harborside Health Center employee Gerard Barber stands behind medical-marijuana clone plants at Harborside Health Center in Oakland, California.

The legal discrepancies also cause financial roadblocks.

To start, federal law 280E on the Internal Revenue Code prevents both medical and recreational marijuana businesses from certain benefits given to other legal businesses. Because of the law, The Daily Beast reported, marijuana businesses may pay as much as 70% in federal taxes.

Under 280E, any business that engages in the distribution of Schedule I or II controlled substances is barred from tax deductions, like for leasing property or paying salaries, that other legal businesses are allowed to take. The provision was originally set up as a punitive measure against cocaine and heroin dealers, according to Herzberg.


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