You may have recently seen our 2022 Policy Review, and now we're on to 2023 and what we're hoping to see.
The cannabis industry is ever-evolving. As laws, regulations, and attitudes toward cannabis shift, the industry is constantly adapting. With that in mind, Indiva Advisors is looking to the future. We have ambitious policy goals for 2023 that we believe will shape the industry and transform the way businesses and consumers interact with cannabis products.
Our policy goals look to create a more equitable and productive cannabis industry, one that is open to all who want to participate. We believe it is necessary for the health of the industry to remove barriers to entry, expand access to capital, and create legal and regulatory frameworks that enable the growth of the industry.
By bringing attention to these policy goals, which we believe can and should be implemented in the near future, Indiva Advisor wants to ensure that cannabis businesses and consumers are able to navigate the industry with ease.
The Need For 280e Reform
The cannabis industry, while functionally fully legal in some states, continues to face ongoing challenges due to the federal government's classification of marijuana as a Schedule I drug. One major issue faced by legal cannabis businesses is the inability to take standard tax deductions due to Section 280E of the Internal Revenue Code and the complexity of innovating business models that law and the IRS can’t keep up with.
Section 280E, which was put in place in the 1980s to prevent drug traffickers from writing off their illegal activities as business expenses, states that any business that traffics in Schedule I or II controlled substances is not allowed to deduct any expenses related to the sale of those substances. This includes expenses such as rent, employee salaries and benefits, and things like marketing costs.
The result is that legal cannabis businesses operating in compliance with state laws, are effectively being taxed at much higher rates than other businesses. This puts them at a significant disadvantage and makes it even more difficult for them to compete with the illicit market.
Furthermore, 280E also makes it difficult for these businesses to access basic banking services and credit, as financial institutions are hesitant to work with companies that may be in violation of federal law. Additional financial regulatory requirements mean increased costs to the banks for even providing services so operators will also pay additional costs for the privilege. This makes it difficult for cannabis businesses to expand and create jobs.
Reforming 280E would level the playing field for legal cannabis businesses and allow them to fully participate in the economy. This would not only benefit the businesses themselves, but also the communities in which they operate by creating jobs and generating tax revenue.
In addition, reform of 280E would also help in the fight against the illicit market by making it easier for legal cannabis businesses to compete with illegal dealers. This would also help in reducing drug-related crime in these areas and improve public safety.
One way we’d like to see the law reformed is through "lookback" provisions, which would allow businesses to take deductions or credits based on their 280E expenses in previous years when they were participating in legal state markets, but paying an additional Federal penalty. Another item we’d like to see is the implementation of additional business credits for "good citizenship," such as providing health insurance or other benefits to employees, or participating in trade associations. These credits can offset some of the lost deductions and lower the effective tax rate for these businesses. California recently instituted a similar scheme to support equity in the cannabis market and we would like to see that expanded to a national program.
If these credits were implemented as “High Road” grant payments at 1.5 or 2x, businesses that meet certain criteria (such as providing health insurance or other benefits to employees) could be eligible to receive payments from the state in addition to the tax credits, incentivizing and supporting the creation of well-paying jobs in small, stable companies. The intention for many in shifting cannabis to a regulated market was the economic boom it could create; rewarding good behavior from small farms will go much farther to healing our economy and 280E reform could be a valuable pathway in that fight.
The Need For Support From The SBA
The legal cannabis industry has the potential to be a major economic driver, creating jobs and boosting economic growth. However, in order for this to happen, it is important that policy reform is implemented in a way that promotes equity, small-scale investment, and support for legacy operators.
One important aspect of this is ensuring that Small Business Administration (SBA) support is available to those in the industry. This can include providing loans and other forms of financing to small business owners, as well as offering business training and other resources to help them succeed. Additionally, support for legacy operators – those who have been involved in the cannabis industry prior to legalization – is crucial in order to ensure a smooth transition to a legal market and to prevent these individuals from being left behind. This is also a chance for the SBA to clean up a spotty equity record, and bring support for entrepreneurship to communities starved of technical support and resources.
Another important aspect of policy reform is creating small scale investment opportunities. This can include things like crowdfunding and other alternative forms of financing, which can help to lower the barriers to entry for small business owners and make it easier for them to get started in the industry. Additionally, by promoting small-scale investment, the industry can be less dominated by large corporations and more inclusive of a diverse group of entrepreneurs. Mainvest and a handful of others have demonstrated willingness to support this kind of capital raise although its important to keep your accountant in the loop!
Another important component of policy reform is ensuring that equity is a top priority. This means taking steps to ensure that individuals from marginalized communities are able to participate in the industry and benefit from its economic opportunities. This can include things like providing funding and other resources to help these individuals start and grow their businesses, as well as implementing policies that promote diversity and inclusion within the industry.
Indiva Advisors believes that policy reform is essential in order to ensure that the legal cannabis industry is a success. By promoting equity, small-scale investment, and support for legacy operators, policymakers can help to create a more inclusive and sustainable industry that benefits all involved. SBA support, business training, and other types of support can help ensure that the industry is a success and that it can grow and thrive in the years to come.
The Need For An Interstate Medical Supply Chain
Another aspect of cannabis policy reform that must be considered is the need to improve access to high-quality and affordable cannabis for patients who need it. One key aspect of this is establishing an interstate medical supply chain for cannabis.
Currently, it is difficult for many states with medical markets to establish a robust and reliable supply chain to support medical consumers. As a result, patients in states with more immature markets and less transparent supply chains have to rely on a limited selection of products, which can be more expensive and of lower quality than what is available in other states.
An interstate medical supply chain would allow states to share resources and collaborate on regulation, which would lead to a more efficient and effective system for producing, distributing, and regulating cannabis. This would create a more competitive market, which would lead to lower prices and higher-quality products for patients.
Additionally, an interstate medical supply chain would allow for greater research and development of new cannabis products and treatments, which would be beneficial for patients with different medical conditions. By creating a larger market, researchers will have more resources to invest in R&D, which will lead to the development of more effective and safe treatments.
Another important aspect of cannabis policy reform is ensuring that patients have access to a wide range of products that meet their specific needs. For example, some patients may require products with high levels of CBD, while others may need products with high levels of THC. An interstate medical supply chain would allow for a greater variety of products to be produced, which would be beneficial for patients with different medical conditions.
Better Protections For Small-Business Cash-Flow And AR Payments
Another key aspect of cannabis policy reform is the need for better protections for small-business cash-flow and Accounts Receivable (AR) payments. Small businesses in the cannabis industry often face significant challenges when it comes to cash-flow and AR payments. Because cannabis is still illegal at the federal level, many banks and financial institutions are hesitant to provide services to businesses in the cannabis industry. This can make it difficult for small businesses to access the capital they need to grow and thrive. Additionally, many small businesses in the cannabis industry struggle to get paid on time for the products and services they provide, which can make it difficult for them to meet their financial obligations.
One solution to this problem is to establish more robust protections for small-business cash-flow and AR payments. This could include things like providing small businesses with access to alternative forms of financing, such as crowdfunding and peer-to-peer lending, as well as implementing regulations that require businesses to pay their invoices on time. Additionally, policies could be put in place to protect small businesses from payment disputes, such as by requiring that businesses provide detailed invoices and by establishing a dispute resolution process.
Another important aspect of cannabis policy reform is to create a more favorable environment for small businesses in the cannabis industry. This could include implementing regulations that promote competition and prevent large corporations from dominating the market, as well as providing small businesses with access to resources and training programs that can help them succeed. Additionally, policies could be put in place to ensure that small businesses are able to participate in government procurement programs and other opportunities that can help them grow and thrive.
High Hopes For 2023
The need for cannabis policy reform is driven by the need to better protect small businesses, medical patients, legacy operators, and those harmed disproportionately by the war on drugs. While legislation may be tough at the federal level in our current political environment, the states and industry organizations can continue to apply pressure by advocating for change and promoting policies that will move the needle on the issues discussed above.