California Pot Shops Facing Extinction Event

[Alpha8472]

Pot shops now have to pay excise taxes instead of the distributors. These shops are not doing well and many do not have enough money to pay the taxes. Banks won't lend to these shops, so the shops could have to close on a large scale.

https://www.sfgate.com/cannabis/article ... 104578.php

[storewanderer]

The problem with this industry was many people got licenses to operate these stores who had little to no prior retail business experience. People with the right political connections got licenses to operate shops. They pooled together investors, primarily high net worth individuals with the right political connections, to get these licenses to operate shops. They expected unreal returns FAST. They thought since they were selling pot they could take unreal mark ups on the stuff, and due to the novelty it would have endless demand, but due to poor expense controls, poor inventory controls (the stuff has a shelf life), increased competition, and labor issues, they still can't make money despite what seems to be booming business and unreal mark ups on the product.

I'd love to see the payouts made to the "investors" from shop opening to present date, behind these shops that now can't pay excise taxes.

Now to make it even more challenging for independent shops, more and more Indian tribes are getting involved in this business and they only remit some tax back and get to keep some of the tax collected themselves. Plus they do not have the overhead/high cost structure/debt a lot of these independent operators have as they can often repurpose existing space within their facilities to sell this product.

What will happen with these shops that were run too poorly to pay the excise taxes is other operators who are better at retail will take them over and get things straightened out. This isn't much different from when a business fails due to failing to remit payroll taxes withheld to IRS, for example, or failing to pay unemployement payments and a business fails. Poorly performing/poorly run businesses close all the time, and in the pot industry, there are a lot of those poorly run businesses due to how the industry has been built to this point. It will straighten out and eventually this will be a profitable business for the stronger operators.

[Romr123]

The other interesting twist which I just found out is that cannabis/marijuana businesses are not able to use the Federal Bankruptcy laws (chapter 7/11) to work themselves out of bankruptcy...they have to go into receivership instead.

[veteran+]

Yet they keep on opening these shops in my area with much fanfare.

Some days (probably close to weekend) have lines with security out side the loaction.

[mjhale]

The other interesting twist which I just found out is that cannabis/marijuana businesses are not able to use the Federal Bankruptcy laws (chapter 7/11) to work themselves out of bankruptcy...they have to go into receivership instead.

I'm assuming this is because marijuana is still illegal at the federal level? Probably the same reason why the banks won't loan to them. Federally chartered banks aren't going to make loans to a known illegal business. Are there any state charter banks left and could they lend if marijuana was legal in that given state?

[storewanderer]

Yet they keep on opening these shops in my area with much fanfare.

Some days (probably close to weekend) have lines with security out side the loaction.

Probably the same "investors" who invested in shops that can't pay their bills are also investing in these new shops (different ownership percentages of course, so they can all appear as legally separate entities).

Many shops will get involved with a specific grower to supply the shops (again the growers are backed by various wealthy investors with the political connections they needed to get the licenses).

Tons of old money in these pot businesses. Around Nevada, various "names" you see on various buildings around town or with charitable trusts, quietly invested in the pot businesses when they started up.

[storewanderer]

The other interesting twist which I just found out is that cannabis/marijuana businesses are not able to use the Federal Bankruptcy laws (chapter 7/11) to work themselves out of bankruptcy...they have to go into receivership instead.

I'm assuming this is because marijuana is still illegal at the federal level? Probably the same reason why the banks won't loan to them. Federally chartered banks aren't going to make loans to a known illegal business. Are there any state charter banks left and could they lend if marijuana was legal in that given state?

Yes, that is why they cannot go file a typical Federal bankruptcy. Basically if they can't pay their bills they will just need to shut down. There is pretty heavy regulation involving inventory, inventory control, etc. so they could just sell their inventory off to some competing shop or destroy it and then shut down. Then the same group of investors goes and forms a new LLC and opens a new pot shop and wants 30% annual returns on their investment and the cycle happens all over again as long as suppliers and landlords will allow it.

State licensing agencies should look at investors who were involved in pot businesses that failed to remit taxes, etc. before they can get a new license again but all you have to do is get different "Management" and have slightly different mix of investors/mix of ownership percentages to make the new entity look like a totally unrelated thing to the entity that didn't remit amounts due to the Federal government. This should not be allowed. One of the key reasons people voted to legalize Pot in many states beyond wanting legal access to buy/use pot and police quit wasting their time prosecuting people for carrying a leaf in their pocket was so that money collected from taxes would help fund education, etc.

At the end of the day the states that didn't legalize this may end up looking like the smart ones. However, the causes that are funded by the tax proceeds from this business would say otherwise.

[Romr123]

The other interesting twist which I just found out is that cannabis/marijuana businesses are not able to use the Federal Bankruptcy laws (chapter 7/11) to work themselves out of bankruptcy...they have to go into receivership instead.

I'm assuming this is because marijuana is still illegal at the federal level? Probably the same reason why the banks won't loan to them. Federally chartered banks aren't going to make loans to a known illegal business. Are there any state charter banks left and could they lend if marijuana was legal in that given state?

There certainly are state banks out there, along with credit unions.

[rwsandiego]

The other interesting twist which I just found out is that cannabis/marijuana businesses are not able to use the Federal Bankruptcy laws (chapter 7/11) to work themselves out of bankruptcy...they have to go into receivership instead.

I'm assuming this is because marijuana is still illegal at the federal level? Probably the same reason why the banks won't loan to them. Federally chartered banks aren't going to make loans to a known illegal business. Are there any state charter banks left and could they lend if marijuana was legal in that given state?

There certainly are state banks out there, along with credit unions.

All financial institutions, including state-chartered banks and credit unions, are required to comply with federal baking laws, The ones that apply here are the Bank Secrecy Act/Anti-Money Laundering Act (BSA/AML), Racketeer Influenced Corrupt Organizations Act (RICO), and the USAPATRIOT Act. At the heart of financial institutions' reluctance to bank cannabis businesses is the unwillingness to facilitate money laundering. Although cannabis has been legalized at the state level, it is still illegal at the federal level, which is why accepting cannabis businesses' deposits could be perceived as money laundering.

A small handful of banks and credit unions have started banking cannabis-related businesses. They have assessed the risks and determined they have a way of ensuring that only legal businesses are using their services. Doing so requires intense scrutiny of the clients and very strict BSA/AML and compliance practices.

[storewanderer]

A small handful of banks and credit unions have started banking cannabis-related businesses. They have assessed the risks and determined they have a way of ensuring that only legal businesses are using their services. Doing so requires intense scrutiny of the clients and very strict BSA/AML and compliance practices.

Also the fees these banks charge to service the cannabis-related businesses are very, very high. The risk is high so the profit has to be high too. The amount of compliance time is very costly.

Another dirty issue is many malpractice insurance policies for various professional service providers (legal, accounting, etc.) do not extend the malpractice insurance to any jobs worked on for cannabis clients.

Given at this point we have had multiple shifts in political power and it is still not legalized federally, I think this is a topic they want to use as an issue every 4 years when the major Federal elections come around rather than make a solution that works and move on.

It doesn't have to be legal in every state but it doesn't have to be in this gray area on, for instance, banking, either, where major banks as a rule won't service the industry.