Bloomberg Tax spoke with Howard Lee, the CEO of Seattle-based SōRSE Technology, a supplier of CBD products. Lee said the pandemic is changing the outlook on legalization of THC—the active ingredient of cannabis products—not only when it comes to recovering tax revenue, but also when it comes to social justice issues. And outstanding issues from the 2017 Tax Cuts and Jobs Act could stymie innovation within the cannabis industry, Lee said.
Lee has 20 years of experience in the tech and start-up industries and has served as CEO and founder of multiple start-ups. Prior to SōRSE, Howard was the CEO of HyperQuality and co-founder and CEO of Spoken Communications.
Bloomberg Tax: Do you expect the pandemic to change anything about the way your company does business, or the cannabis industry at large?
Lee: I think the industry is going to change pretty radically. I would never have thought THC would be legal in the next 10 years or so. But today, I think it’s five years or less that THC will be legal in the entire U.S. and that is because Covid has impacted tax revenues very significantly, so they’ll have to legalize THC products to gain the federal tax. I think it’s too imperative to generate tax in the unregulated market that is not taxed today. That they need to tax. And so I think that will impact the THC market positively.
Bloomberg Tax: You see this as a positive shift even though it would mean different or higher taxes at the federal and state levels?
Lee: I actually welcome it. To back up first and say there is another trend here, its not just Covid impacting tax revenue, there is a social justice issue. Black people are about four times more likely to be arrested for marijuana possession than white people. I think the war on drugs has been an abject failure and they need to change that.
You ask about tax revenue—the black market has been significantly reduced in states that allow for legalization of cannabis. That is because everyone wants to succeed in following the rules and that is a good thing overall for consumers and for different state governments.
I don’t think people really understand the groundswell of recreational cannabis and how much good impact it can have on state tax revenue.
Bloomberg Tax: Are there any tax rules that you’re watching?
Lee: The loose end obviously is 280E (Section 280E of the U.S. Tax Code). Because it impacts cannabis companies negatively, because you’re double taxed. You can’t write up marketing expenses, you can’t write up administration expenses, and you pay a high federal tax.
If everything is above board, and the federal government allows these little deductions of expenses, we can show what a real profit is and tax the profit.
The other problem is the 2017 tax law impacted banking. We can’t take credit cards. We deal in cash. Washington state has cleaned it up a lot, it’s easier for us to take checks, but it’s still very difficult to be a reasonable business. And it exposes undue burden on safety for drivers and people to carry cash when we deliver products.
Bloomberg Tax: Is there a point in time, or a horizon, when these issues will get more important?
Lee: I think the tipping point is going to come from what they call multistate operators. When they become big enough, but not profitable enough because of 280E issues, they’re coming up on a time of consolidation. You’re going to get to the place where a few companies may dominate markets and that leads to ‘verticalization’ where they own the entire product stream. They own the growth and development of products. That is not a good thing for the entire industry. You want innovation within each area.
And if you let the tipping point go too far to be vertically integrated, you lose a lot of taxing ability and lose a lot of growth and innovation.
Bloomberg Tax: Have you been binge watching anything during the pandemic?
Lee: I’m going to be really nerdy. I’ve been binge watching Endeavour on PBS. I’m waiting on the seventh season. I’ve watched six so far. And on the complete opposite side, I’m waiting for Lucifer to come out with their next season. Neither of which my wife enjoys watching, so I have to watch it in another room.