04 May THE TOP 4 LEGAL ISSUES FACING THE NEW JERSEY MARIJUANA INDUSTRY
Marijuana is on the verge of becoming legalized and legitimized in the State of New Jersey.
To what extent is this legalization and legitimization? These are questions that all potential entrepreneurs and investors should be asking when considering entry in to the marijuana industry in New Jersey.
This article will address four legal issues that should be considered when deciding whether to invest in the future of this industry.
(1) MARIJUANA BUSINESSES CONTINUE TO OPERATE BY THE GRACE OF THE FEDERAL GOVERNMENT:
Marijuana businesses that currently operate in other states where the industry is legitimized are in direct contravention and violation of various federal laws. Some of these laws include The Controlled Substance Act, Money Laundering Control Act, and the Racketeer Influenced and Corrupt Organizations Act.
(2) FEDERAL INCOME TAXES ARE HIGHLY UNFAVORABLE IN THE MARIJUANA BUSINESS!
Businesses in this industry are not entitled to deduct ordinary and necessary business expenses.
Under 28 U.S.C. § 208E, “No deduction or credit shall be allowed for any amount paid or uncured during the taxable year in carrying on any trade or business if such trade or business (or activities which compromise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Regularly selling marijuana is considered trafficking of a schedule I substance. This means that various marijuana businesses will not have the ability to deduct employee’ pay, retirement plans, rent expenses, interest paid, and insurance. Nor can these businesses deduct cash or inventory seized, lost or stolen. However, these businesses will have the ability to reduce the income realized by state excise taxes that are paid because it is not considered a deduction, but a reduction in the amount the respective business realized for that taxable year.
(3) OUT WITH THE BAD IN WITH THE GOOD – THE OPPORTUNITIES ARE PLENTY!
There are various opportunities for those interested in getting in to the marijuana market in the State of New Jersey. What are the different types of operations?
Marijuana Cultivation Facility: This is where the actual growing of the marijuana will be done. This particular business will require a Class 1 Marijuana Cultivation Facility License. Regulations will establish how large the grow operation can be and permits an expansion of the operation at renewal but not if the cultivator has been disciplined in the preceding year for a violation of the marijuana law. Operating this particular business will give the cultivator the ability to sell to marijuana producers, to marijuana product manufacturing facilities, and to other marijuana cultivation facilities.
Marijuana Product Manufacturing Facility: A Marijuana Product Manufacturing Facility allows for the purchase of marijuana and manufacturing, preparation, and packaging of products. This business requires a Class 1 Marijuana Product Manufacturing Facility license. Operating a Marijuana Product Manufacturing Facility allows for the sale of items to other marijuana product manufacturing facilities and to marijuana retailers, but not to consumers.
Marijuana Wholesaler: A Marijuana Wholesaler requires a Class 2 marijuana wholesaler license. It is currently unclear whether a wholesaler will be eligible to purchase from a manufacturing or cultivation facility. A Marijuana Wholesaler will sell marijuana items or marijuana paraphernalia for the purpose of resale either to a licensed marijuana wholesaler or to a licensed marijuana retailer.
Marijuana Retailer: A Marijuana Retailer will require a Class 3 Marijuana Retailer License. A Marijuana Retailer can purchase marijuana from marijuana cultivation facilities and marijuana items from marijuana product manufacturing facilities or marijuana wholesalers and can sell to the public. Retailers cannot have any overlapping ownership interest with cultivation facilities, manufacturers, or wholesalers.
Marijuana Testing Facility: A Marijuana Testing Facility receives representative samples of marijuana and marijuana products from Marijuana Cultivation Facilities and Marijuana Product Manufacturing Facilities. These organizations are independent, third party entities that must meet accreditation requirements established by the Division that is licensed to analyze and certify the safety and potency of marijuana items. Similarly, a Marijuana Testing Facility may not have ownership in a retail operation.
Marijuana Transporter: A Marijuana Transporter business will require a Class 4 Marijuana Transporter License. This particular entity will be licensed to transport marijuana through and within the State of New Jersey and to maintain a warehouse.
(4) CHOOSING A CORPORATE FORM IS AN IMPORTANT DECISION FOR YOUR BUSINESS!
The business of getting into business is very important.
The particular corporate form that you elect is crucial and can have various effects on your business. Should your marijuana business be structured as a C-Corp, S-Corp, or LLC? Each corporate form has its benefits. Given the tax consequences of operating such a business, it is crucial that you give this considerable thought and consideration.
I bring experience to assist our clients in navigating the path from the initial formation of a business, through its financing and operational development and expansion, and ultimately to potential exit strategies. Contact me today at (201)-792-3333 to schedule your free consultation!