Infrared Cameras and Tax Codes: The Intense Bureaucracy of Bud

security
Mar 04 2016

Infrared Cameras and Tax Codes: The Intense Bureaucracy of Bud

Far from the reckless free-for-all evoked by the enemies of marijuana legalization, Washington State’s legal marijuana market is one of the most tightly regulated industries in America.

In the wake of the passage of Initiative 502—backed by 56% of the state’s voters in November 2012—and its subsequent implementation, a host of tax codes, bank regulations and legal restrictions governing are being put to the test. And well aware of the political consequences of any slip-up, the state government takes it very seriously.

So growing legal weed requires much more than expertise in agriculture. Julian Berlove is the 25-year-old co-owner of Mother Earth Farms, a Washington State-based company that specializes in eco-friendly, outdoor growing. The product may be natural but meeting the state’s stringent standards is technically and financially challenging.

“I am the business side,” he tells The Influence. “I maintain the LLC and do the sales and logistics.” But those logistics have more to do with satisfying the authorities than selling the product.

Washington State requires constant video surveillance of all legal farms—and specific paperwork regulating every individual aspect of that surveillance. “We have 47 infrared cameras and 730 linear feet of fencing,” Berlove explains. “Every inch of it has to be on camera; there can be no blind spots. The cameras run 24/7.”

The state also requires all the video feeds to be recorded and stored. “We need DVRs for all the cameras,” Berlove continues. “We have to keep all the footage for 45 days. At all times the state is allowed to look at whenever they want. We had to give the state a site plan with the security details and the locations of all the cameras; we can’t adjust any of them without refiling things. Each camera has its own paper trail.”

And this intense security set-up cost around $12,000, lending credence to criticisms of the exclusivity of America’s burgeoning marijuana industry.

Licensing in Washington is divided into three categories: producer, processor and retailer. And separation is mandated: Growers are not allowed to sell to individual customers, and retailers are not allowed to grow; however a holder of either a retail or producer license is allowed to process as well. Got it?

“There is no vertical integration,” Berlove says. “You have to pick and choose. Do you want to produce and process, or do you want to sell it?” Most people who have a producer license do also have a processor license, allowing them to prepare marijuana for retail sale—by pre-rolling joints, say, or making edibles. Companies like Mother Earth Farms can’t set up their own retail stores, but they can prepare products for wholesale sales to retailers.

The tax regulations were originally written with this distinction in mind, resulting in a complex three-tiered system that taxed grower, processor and retailer separately. But in July 2015 this was replaced by a system that puts the tax burden squarely on the retailer—and the tax rate imposed on marijuana sales, at 37.5%, is among the highest in the US.

Still, that doesn’t mean that Berlove’s operation is doubling its profits. “Now we have to lower prices in order to accommodate the markup in tax on the retailer,” he explains. And while marijuana is heavily taxed, its continuing status as a Schedule One drug means that the federal government does not allow business deductions that are par for the course in any other industry.

“You cannot take business deductions on any business expense that traffics a controlled substance,” Berlove says. Major expenses are not counted the way they would be with other businesses. “Rent does not get tallied, none of our packaging. The federal government is still in the dark ages. Until it gets reclassified then we have this cash-grab.”

And even after you’ve paid your taxes, keeping your remaining money in the bank comes with its own complicated set of restrictions. Most banks do not do business with growers, and those that do have rules that are unique to the marijuana industry.

“We pay $450 a month just to have an account,” Berlove says. “It’s a smaller bank, FDIC-insured, but there is only a handful of banks allowed to have these accounts. It’s a Washington thing. We have a $2,000 spending allowance per day. If we want to make any kind of large purchase or renew our license, we have to call the bank. Any way they can make money off of you or the transaction, they will.”

While Berlove finds many of these restrictions unhelpful, he entered the business well prepared for them—and the money he’s making means that we shouldn’t shed too many tears on his account. On the whole, he even believes that the state is acting quite rationally.

Of the hefty regulations, he says, “I don’t think it’s right but it’s worth it. All these frustrations and little hurdles add up but it is going to be profitable. It’s a matter of efficiency, so that you don’t spend a lot on your processes or labor and don’t waste your time.”

Marketing is crucial to growers in a fiercely competitive environment: “The factors are quality of the product and the ability to distance yourself from competitors,” says Berlove, whose own company pursues an eco-friendly, high-quality niche. “Outdoor sun-grown, all-natural” is how he pitches his product. The market for concentrates is expanding and Mother Earth Farms is focusing heavily on concentrates that it can market as the natural option.

Legalization has given companies access to a customer base that has been used to purchasing from the black market without specific product information. “All the packaging is pretty stringent,” Berlove says. “You have to list the THC, the CBD. It’s actually great for us because it gives the customers a good sense of what they are buying.” Traditionally, marijuana users will seek out strains with the highest THC percentage, but this is not an automatic indicator of quality or potency.

Mainstreaming recreational marijuana is a shared mission across the industry. “We wanted something that shows we have a weed company but is still businesslike,” says Berlove of his company’s logo design process. “Not fancy, but presentable to a wide variety of people without it looking like it’s made by a bunch of stoners. We want to be taken seriously.”


Patrick Hilsman is an associate editor of The Influence. You can follow him on Twitter: @PatrickHilsman.