The numbers are finally out from Colorado's Department of Revenue for calendar year 2015, and marijuana sales (both recreational and medicinal) came in at $996,184,788, a 42% increase from the previous year's $699 million in cumulative sales.
With Colorado generating more than $100 million in marijuana sales in August alone for the first month ever, there had been speculation that sales for the budding industry would top the $1 billion mark in 2015, but it appears we'll have to wait to 2016 for Colorado's marijuana industry to officially hit the billion-dollar mark.
Nonetheless, this is quite the achievement for Colorado, which only began selling marijuana recreationally just over two years ago. The Denver Post points out that the real surge in sales came on the recreational side of the equation. Following nearly $386 million in medical marijuana sales in 2014, medicinal marijuana sales jumped by only 5.8% in 2015 to $408.4 million. Recreational sales, though, rose from $313.2 million in 2014 to a whopping $587.8 million in 2015, an 87.7% increase. This also included a record $62.9 million worth of recreational marijuana sold in December.
As noted by The Huffington Post, the nearly $1 billion in sales also led to $135 million in taxes and licensing revenue being raised, of which at least $35 million has been earmarked for schools within the state. The education system, law enforcement, and drug programs seem to be the biggest financial beneficiaries of the tax revenue being generated from retail marijuana in the early going.
Other states want in
The revenue being successfully generated by Colorado highlights the primary reason why certain states are tinkering with the idea of legalizing marijuana at the state level. Although marijuana's legalization isn't going to fill large budget gaps, the tax revenue being raised is focused solely on those using the product and involved within the industry, and it's helping out a very costly education system in select states.
Coming up in November, Nevada has already collected enough signatures to get a marijuana initiative in front of its residents. California and Ohio are also expected to collect enough signatures to get a recreational (or in Ohio's case, a recreational and medicinal) initiative in front of voters. Legislators in Vermont has been so pleased with the performance of the marijuana industry in states like Colorado that they're tinkering with the idea of bypassing a ballot initiative altogether and just using the legislative process to legalize recreational marijuana.
In short, the marijuana legalization movement appears unstoppable in Colorado and around the country -- or so it seems.
Colorado's success masks major issues
While it's hard to ignore the initial successes of Colorado, Washington, and even to some degree Oregon in the early going (Oregon only began selling recreational marijuana legally in October), these successes only mask the many challenges that constrain growth within the marijuana industry.
The state of Colorado offers numerous examples of these challenges. To begin with, even though voters approved legal marijuana in November 2012, nearly three-quarters of Colorado's jurisdictions still ban the substance. Drug enforcement of marijuana, even when it's decriminalized, can be a nightmare scenario that creates a Swiss cheese pattern of legal and illegal jurisdictions throughout the state.
Another concern is the use of marijuana edibles. Although packaging regulations are toughening in Colorado, edibles still present a unique challenge for regulators. It's not too tough to regulate a green plant or buds, but when the drug is infused into food it can be potentially tricky to track. Regulators worry about edible marijuana products falling into the hands of minors, and they're also often concerned about the consistency of THC content (THC is the psychoactive component of marijuana) from one batch of product to the next.
Another major issue we've seen unfold is that banks are mostly unwilling to work with marijuana-based businesses. In the few states where recreational marijuana has been legalized, work-arounds have been put in place for financial institutions to do business with marijuana shops, but most banks don't want to deal with the hassle of the work-arounds, or the potential legal implications of assisting a business that markets a substance still considered illegal by the federal government. This leaves most marijuana businesses to deal mostly in cash, which presents major security concerns.
Financially, marijuana businesses are also drawing the short straw. Even though the federal government views the marijuana plant as illegal, it still requires businesses that sell marijuana products to pay federal income taxes. Yet, according to U.S. tax code 280E, these same businesses are not allowed to take normalized business deductions, such as rent, because they're selling a federally illegal substance. The end result is marijuana businesses are being overtaxed.
An even bigger issue at play
Of course, there's the granddaddy of all dilemmas that the marijuana industry still has to contend with: the inaction of the federal government regarding the issue. As long as there are no changes made to the scheduling of marijuana on Capitol Hill, then marijuana-based businesses will likely continue to deal with the same inherent disadvantages they've coped with over the past couple of years.
Why won't Congress move on marijuana? Look no further than its safety. From its long-term psychological impact on the brain to what it might do to consumers when they're behind the wheel of a vehicle, legislators on Capitol Hill worry about making too rash of a judgment call on marijuana before substantive long-term data is at their disposal.
So what's next for the marijuana industry? In 2016 it could be looking at its best year yet in terms of state-level expansion, but with President Obama signaling that marijuana isn't on his agenda in 2016, you can probably chalk up another year of inaction at the federal level.
The reality is that there is no timetable on when, or if, lawmakers will ever seriously take up marijuana legislation in Washington, D.C. While that may not stop marijuana from expanding to new states, it most definitely puts hurdles in place that dramatically slows the industry's growth prospects. I believe this gives investors all the more reason to steer clear of this industry for the time being.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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