3 Major Hurdles the Marijuana Industry May Not Overcome

By Fool.com

Source: Flickr user Mark.

The marijuana industry is absolutely budding across the United States. Since 1996, 23 states having legalized medical marijuana, with four states legalizing the currently illicit drug for recreational adult use since 2012.

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Marijuana's market potential is obviously enormous; but so are its risks. With that in mind, we asked three of our contributors to name what they believe is a major hurdle the marijuana industry could struggle to overcome. Here's what they had to say.

Sean Williams:A new hurdle for the marijuana industry seems to pop up seemingly every couple of months; but one that continues to ring true is the federal tax complications that marijuana businesses will likely continue to face. Although states have been free and clear to establish legal marijuana businesses and regulate the product without the interference of the federal government, federal tax laws still supersede state tax laws. In other words, what the IRS says still goes when it comes to regulating legal marijuana shops.

Based on the ruling of San Francisco's Ninth Circuit Court of Appeals in July in the case ofOlive v. Commissioner, U.S. tax code section 280E was upheld as it pertains to marijuana-based businesses. In plainer English, it simply means that legal marijuana businessescan'tdeduct business expenses when it involves the sale of an illegal drug. Remember, just because select states have legalized marijuana doesn't make it legal on a federal basis.

The federal government still views marijuana as an illicit substance, and because federal tax law supersedes state tax law, marijuana shops are being forced to pay taxes on their gross profits rather than net profits. This burden of taxation threatens the ability of the industry to expand, or in some cases, to even remain profitable.

In order for marijuana businesses to thrive, they'll either need section 280E to be reformed, or they'll need the government to reschedule marijuana to something other than Schedule 1. A Schedule 1 drug is considered highly addictive and not deemed to have any medical benefits. In my personal opinion, neither option appears likely to happen anytime soon.

Source: GW Pharmaceuticals.

George Budwell:The perceived medical benefits of marijuana are perhaps the biggest reason the drug has made major strides toward widespread decriminalization lately. Unfortunately, marijuana's Schedule I status, which deems it as having no accepted medical use and a high potential for abuse, has basically put a stranglehold on any serious research into the drug's potential medical uses -- at least in the U.S.Outside of the U.S., however, some researchers, like those at Britain'sGW Pharmaceuticals, have been slowly unraveling marijuana's clinical profile across a host of conditions such as cancer pain, appetite suppression in HIV patients, and spasticity due to multiple sclerosis.

Unfortunately for advocates of legalized marijuana, two recent peer-reviewed articles inThe Journal of the American Medical Associationcogently argued that the clinical studies to date show little evidence that the drug benefits patients with these, as well as other, disorders. Complicating matters, they also reported that there is a growing concern that marijuana use might increase the risk of testicular cancer.Medical marijuana still has a long way to go before its clinical profile is well understood. But the early evidence isn't overwhelmingly positive. The drug's political foes could therefore be planning on using these initial clinical studies to try and block any attempts to change marijuana's Schedule I status at the Federal level, which would essentially crush the movement to decriminalize marijuana nationwide. Stay tuned.

Source: MyFuture.com via Flickr.

Eric Volkman:A business isn't on solid foundation if it doesn't have access to basic banking services. This is a major problem in the weed industry -- because the key product is illegal at the Federal level, almost no bank will go near businesses that traffic in it. Banks are regulated by a Federal agency, so the risks of transacting with entities that unambiguously break U.S. laws are obvious.

Without a bank underpinning its finances, a dispensary has no choice but to run its finances in cash. This is overwhelmingly inconvenient and resource draining; imagine having to make payroll, settle bills with suppliers, retire the electric bill, pay the rent, etc. etc. etc. constantly and solely in hard currency.

It's also risky, because cash-heavy businesses are juicy targets for criminals. That leads to a knock-on problem -- security, which can get prohibitively expensive in a hurry. One dispensary in Colorado, for example, pays around $100,000 annually for armed guards.

It's hard to imagine any industry managing finances effectively heck, even surviving -- without the aid of a bank. If today's pot business can't connect with this most basic financial institution, it could be difficult tobea business for long.

The article 3 Major Hurdles the Marijuana Industry May Not Overcome originally appeared on Fool.com.

Eric Volkman,George Budwell, andSean Williams have no position in any stocks mentioned in this article.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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