Random Thoughts on Medical Marijuana in Ohio

October 16, 2017

Some random thoughts as Ohio begins to roll out its medical cannabis program…

Number of Retail Locations

Ohio has authorized very few retail locations so far. Here are the 4 most populous counties in Ohio (as of 2015), with the number of dispensaries that are authorized for each:

Cuyahoga County (Cleveland) – Pop. 1.256 million – 5 dispensaries
Franklin County (Columbus) – Pop. 1.252 million – 5 dispensaries
Montgomery County (Dayton) – Pop. 532,258 – 3 dispensaries
Hamilton County (Cincinnati) – Pop. 807,598 – 3 dispensaries

Contrast this with the approximately 150 retail dispensaries in Denver alone, as of December 2016. That’s twice as many cannabis dispensaries than Starbucks locations. Ohio clearly needs to get comfortable with operating a medical cannabis program, but after a couple of years of tax revenue rolling in, look for Ohio to expand the number of retail licenses dramatically.

Relationship of Cannabis to Opioid Epidemic

Another interesting point – there are a number of studies that show that in states where medical cannabis is legal, there are fewer reported opiate deaths, and no deaths related to marijuana overdoses. In addition, opiate-related hospitalizations are down 23%, on average. See this link.

Ohio is one of the states hit hardest by the opioid epidemic. Between 2015 and 2016, overdose deaths rose 33%, with approximately 4000 deaths in 2016. See this link. So maybe the use of medical cannabis in Ohio will help to alleviate the opioid crisis, producing benefits for the state beyond the increased tax revenues.

Tax Treatment of Cannabis Businesses

One thing that companies involved in medical cannabis (and recreational, too) need to be aware of is the impact of federal tax law. Normally, a business can deduct its ordinary business expenses from revenues, thereby reducing its taxable income. Under Section 280E of the Internal Revenue Code, however, cannabis businesses cannot deduct expenses from their revenue, even if they are legal under state law, except for those expenses considered cost of goods sold. This tax treatment has a greater adverse impact on dispensaries than on cultivation or manufacturing/processing. That’s because more of the expenses for a cultivation or manufacturing/processing business can be characterized as cost of goods sold, while in a dispensary, only the cannabis inventory is considered cost of goods sold.

In states that have had legal cannabis for a longer period of time, some dispensaries have set up related companies that are able to claim some of the expenses that would otherwise be lost. For example, a dispensary cannot deduct the wages of its workers as a business expense. It may set up a separate drug abuse counseling business, operating under the same roof, however. If the retail employees are also working in the drug counseling business, a dispensary may be able to allocate more of their pay to the counseling business, allowing those wages to be a deductible expense. For example, a worker could get minimum wage for operating the cash register at the dispensary, and 2 or 3 times that for counseling. It must be a legitimate business, however, and financial records need to be scrupulously accurate, because the likelihood of an audit is quite high (no pun intended).

It is crucial, therefore, for a cannabis business to have good accounting/tax advice and strategic planning from the start, and from advisors with experience with the legal cannabis industry.

Licensing Costs

The cost to obtain and maintain a license to operate a medical cannabis business in Ohio is relatively high. For example, a Level 1 cultivator must pay a $20,000 application fee, and an initial license fee of $180,000. The annual license renewal fee is $200,000. A processor pays an application fee of $10,000, and $90,000 for a certificate of operation. The annual renewal fee is $100,000. If you want to operate a dispensary, your application fee is $5,000, and then there is a biennial certificate of operation fee of $70,000. Then you have the other costs of starting and operating your business – leasing or purchasing a suitable location, installing security systems, ventilation, etc. Bottom line is, starting a cannabis business isn’t something you can bootstrap, unless you already happen to be quite wealthy.

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