As in the topic. It seems to me that a
large company would be trying to break into this market to replace declining tobacco sales - and take advantage of their nationwide distribution chain.
They have. I can remember back when I was in high school, there was always the rumor that Phillip Morris was ready to go with a brand called Marlboro Purple. The reason being that shifting from growing tobacco, processing it and making cigarettes with it over to growing marijuana, processing it and making joints/cigarettes with it is easy. They wouldn’t need to do a whole lot of retooling and could be up and running eons before a startup company.
Now, that’s all rumor and Phillip Morris will deny it all the way to the grave, ya know, since it was illegal. However, now that it’s beginning to become more accepted and legalized, they’re jumping in.
The states can legalize it all they want, the problem is that it’s still prohibited by federal law, and all those grow operations and dispensaries could be shut down at any time.
Also remember even though cigarette sales may be down there is now a huge market for vaping and Philip Morris or Altria as they are now known bought a huge 35% stake in Juul for instance.
Some of it is political. The tobacco industry is pretty conservative and supporting marijuana, a known favorite of hippies and jazz musicians, would be anathema to shareholders and executives. So, they can’t invest in cannabis early on and have to fight it since it was seen as a threat to tobacco sales.
What do you think the big tobacco companies know that the thousands of cannabis investors don’t? It seems pretty clear by now that this is here to stay.
Bolding in the quote by Tripler
This. It’s not across-the-board Federally legalized yet, but when it is, they would jump on board. It’s currently too risky, especially when agencies like the ATF are keeping close, watchful, regulatory eyes on the major tobacco companies to make sure all of their other operations are above board. Until that time that marijuana is Federally legallized, the ATF and DEA would continue their close partnership.
Tripler
The tobaccom companies have damn sure been performing their market studies in preparation.
There are major tax issues with large corporations getting into drug trades that are illegal on the federal level. Federal tax law is very heavily biased against single entity supply chains because the only deduction allowable in calculating taxable income in the trafficking of illegal drugs is cost of goods sold, and that’s because it’s not treated as an expense but as a reduction in gross profit. The only way to ensure favorable tax treatment is to have the people selling the product to retailers be a separate entity to the one that process the product, which should be a separate entity from the one that grows the product, which should be a separate entity from the one that sells the supplies necessary to grow the product. If there’s a separate entity selling the seeds or whatever, the last entity doesn’t do anything illegal at all and can take all expenses. Every other entity can reasonably allocate most of its expenses to the cost of the products it sells on. However, even in those cases, you can only take the literal cost of the goods being sold and not any normally allocable expenses that you would typically be “required” to capitalize as part of inventory, because those expenses have to be otherwise deductible. Thus, while you can take anyone’s wages as cost of goods sold if they personally provided labor that directly impacted the growing or transportation, associated costs with maintaining the facility to grow, pack, or ship the plants are not able to be considered costs of inventory for drug traffickers, even though they would be for other manufacturers. If you search for “marijuana cost of goods sold” you’ll hopefully see just how complex the situation is and what kind of hoops you have to jump through.
It helps a lot to be a one-man operation or a partnership where all the workers are owners so that no management or administrative expenses would be taken other than the sole proprietor’s profit or the partnership’s distributive shares of profit, as those amounts are not deductible anyway and reported as profit on each of the partners’ returns, rather than have salaries paid that aren’t deductible and have the entity pay a large amount of tax. Larger corporations simply cannot do this. You basically are required to have pass-through entities with no one taking a salary from a corporation or you’re going to be paying most of your profit back over to the government in tax. Small entities are also less likely to be audited and can use careful consideration of how aggressive to claim cost of goods sold without fear of triggering an audit.
Federal illegality also makes moving any of the money involved through a bank impossible.
Try running e.g. Phillip Morris using bales of Benjamins and you’ll see the problem.
While it’s cash-only at the point of sale, it’s just regular business everywhere else. Checks, credit cards, purchase orders, wire transfers are normal at all but the last level of moving money around.
My understanding from the local operations is that any institution much larger than a local credit union won’t work with them. While the retail outlets have point of sale options for taking credit cards, the grow operations are still a mostly cash business.
Thanks to all for responding. Ignorance fought.
They know that they can’t open a single bank account as soon as they enter the cannabis business, and they don’t want to deal with the legal and financial quagmire of trafficking in federally-illegal substances.
That’s generally not true at all. The second any federally regulated bank or financial institution finds out you’re in the weed business, they will close your account. Growers and distributors need to have elaborate systems in place for dealing with massive amounts of cash, and documenting transactions to prove they aren’t criminals. They have to run their own payroll, handing out envelopes of cash, because they can’t even get an outsourced HR service, because they can’t get a reliable bank account from which to wire payroll funds.
Tobacco companies will continue getting into dope and CBD the same way they’ve entered the vaping market, and similar to how big drug companies have acquired interests in supplement sales - buying interests in smaller outfits or purchasing them outright.
It’ll be fun to see what happens with the paranoia over GMO pot, if it results in fabulous “killer” strains of weed.
I’ve been telling people for years now that the best long-term investment play for cannabis is the large tobacco companies. It’s been pretty clear that they’re waiting for a large, stable federal playing field to commit real dollars into it. Once - five years? - it’s federally legalized you’ll see them move with shocking swiftness.
Yes, there are smaller firms that are in it now. Aurora and some others. But once Altria and such really get into it they’ll be able to put marijuana cigarettes into every convenience store in the country in a way that will force all the currently popular firms to either fold or agreed to be acquired.
Even if Congress passes a law removing MJ from Schedule I, there will still be a bunch of state laws preventing this. Even in states that have legalized it, they won’t be able to put them in convenience stores without modifications to existing state laws. There’s various restrictions on the stores that can sell it. For example, Washington state says:
That hasn’t been my experience. My employer has done business with perhaps hundreds of entities in the cannabis industry. They’re no different than any other lab, store or factory. There’s no sneaking around, wink-winking or phony names. The extraction plants are full factories that have forklifts, dock levelers, barcode scanners tied into fancy logistics management systems and they often must invest in hugely expensive equipment rated for explosive environments (due to flammable solvents). The testing labs have millions of dollars of analysis instruments like liquid and gas chromatography mass spectrum analyzers, microscopes, polymerase chain reaction equipment, moisture analyzers. The grow houses have acres of grow lamps and irrigation lines. The retail stores have customized packaging printed, internet and electric bills, contracts with security/alarm cproviders. You can’t pop into Home Depot with a duffle bag of cash and pick up any of this stuff.
Watch the lab tour video shown here:
csalabs.com/our-science/
I’m not talking about sneaking around or using phony names, I’m talking about the very real logistical challenges of running a business without access to the mainstream financial system.
The legal cannabis industry has experienced immense growth in recent years, as an increasing number of states opt to decriminalize or legalize cannabis. But due to federal regulation, banks are largely unwilling to work with cannabis companies, leaving them underbanked. Companies with banking access still face challenges revolving around payments, as brand name card networks won’t work with them.
…
Some agile small banks and credit unions are willing to take the risk to work with the cannabis industry, but a vast majority of financial institutions are unwilling to enter the space. Large financial institutions in particular have too much at stake to risk getting involved, as federally regulated financial institutions could be penalized for working with cannabis companies due to the Controlled Substance Act.
…
Cannabis companies with bank accounts face their own hurdles: “these accounts cost more than a traditional business account and require more due diligence to obtain because of the risk and added compliance processes that banks have to take on in managing these accounts,” explained Joshua Radbod, Co-Founder and CEO of The Avantpay Conference.
Until federal legislation is fixed, the vast majority of financial institutions in the US will have nothing to do with cannabis sales or distribution, and for good reason.
On March 9, a German businessman named Ruben Weigand was arrested at Los Angeles International Airport, during a layover on his way to Costa Rica. In an indictment unsealed later that week, federal prosecutors in Manhattan charged Mr. Weigand with a single count of conspiracy to commit bank fraud, stemming from an alleged scheme to trick banks into processing more than $100 million in marijuana sales.
The case doesn’t appear to be focused on the drugs themselves—the underlying sales seem to have been legal under state laws. Rather, prosecutors appear aimed at the alleged banking transactions and what they described in one court hearing as a multinational “criminal network” at work in the international financial system, according to court filings and people familiar with the case.
Still, the prosecution could have profound consequences for the U.S. medical and recreational marijuana industries, which operate in a legal gray zone on the outskirts of the mainstream banking system.
…
While the purchase and sale of marijuana for personal use has been decriminalized in many U.S. states, it remains illegal on the federal level and most U.S. banks aren’t willing to process payments related to its sale. Cannabis businesses instead rely on cash, or use workarounds, including private mobile-payment processors.
IOW, without the financial system on board, big companies are not going anywhere near this space.
I can personally refute this line from the first paragraph of that article: Companies with banking access still face challenges revolving around payments, as brand name card networks won’t work with them. Company credit cards (Visa, MC) and the normal checks and wire transfers are routinely issued to cannabis companies to buy things. Yes, cards can’t be used at point of sale for the goods sold to the end users but cards and banks are used for all of the typical expenses any other fully legitimate business may face. I talk to these folks, we sell them stuff or services, and there are no envelopes of cash involved. If the biggest banks aren’t in, there are no significant encumbrances to finding alternatives.
Why do people assume a big tobacco company would automatically do well growing, harvesting, curing, packaging, and selling cannabis? Tobacco is grown outdoors in huge fields. The leaves are harvested, dried, and cured, then processed into cigarette or bulk forms.
Cannabis for the current market is more commonly grown indoors where light, temperature, humidity, and insects are easier to control.The plant is much more delicate than the tobacco plant. Much of the active ingredient is located on the leaf surface withing fragile trichomes.
As a medical marijuana user, I’ve seen a grower produce plant material that was just a bit off (poorly manicured) and after pictures hit Reddit they couldn’t give their product away.