Can small businesses really cash in on the legal pot boom?

When Washington state legalized recreational marijuana, libertarian James Lathrop saw running a dispensary as something of a political duty. Indeed, Lathrop, the owner of Cannabis City, Seattle's first legal pot shop, is known for declaring "free the weed" just before opening his doors on July 8, 2014.

Lathrop also saw the new industry as an "incredible opportunity," he told The Week. Of course, he wasn't alone. Forbes hailed legal cannabis as 2015's best startup opportunity because, after all, "The U.S. economy doesn't spawn an entirely new industry very often."

It's a fast-growing sector, for sure: When the first two states — Colorado and Washington — legalized recreational weed in 2014, the regulated market (which had only included medicinal pot before) jumped to $2.7 billion in 2014, up from $1.5 billion the year before, according to an Arcview Market Research report. Today, with recreational use now legal in four states plus Washington, D.C., and medical use legal in 23 states and counting, it's easy to see why entrepreneurs are excited to get in on the action.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

But even as legalization continues to spread, and opportunities in the cannabis industry seem widely available, it can actually be tough for small business owners to cash in on the boom. Lathrop said that once he was finally in business, it felt "scary and exhausting more than enjoyable."

Three days after opening, Cannabis City ran out of weed. Due to a lack of licensed growers, the shop went dark for weeks. It wasn't until midway through his third month of operating that Lathrop said he had consistently stocked shelves.

Now, after more than a year of legal weed in Washington, many dispensary owners, including Lathrop, are saying their strong sales are being burned through by heavy state and federal taxes.

The state adjusted its tax laws in July, which stands to help entrepreneurs, but the change is still far from satisfying for some. Dispensary owners can't lessen their taxes by claiming any business-related deductions, due to a provision predating the industry that prohibits deductions from "the illegal trafficking of drugs." Both the Senate and House have bills in committee that would lift the 280E tax rule for legal, state-controlled dispensaries.

The fact that marijuana isn't legal federally poses another roadblock for aspiring entrepreneurs. Most national banks won't serve the marijuana industry for fear of facing repercussions, leaving people to either find state banks willing to open expensive accounts for them, or literally pay taxes with piles of cash.

"Everything in this business is two to three times more expensive," Lathrop said, comparing his costs to what he might expect in another industry.

As knowledge of the cannabis industry grows, entrepreneurs aren't alone in navigating labyrinthian bureaucracy, but help comes at a price. In 2014, a company called MedBox started consulting for dispensaries. They've served more than 100 businesses so far, assisting with tasks like acquiring the necessary licenses, setting up point-of-sale systems, and reviewing legal matters. They're also getting more directly involved on the cultivation side.

The industry will inevitably transform as legality spreads, but it's tough to say exactly how. Vaping is another relatively new industry, but one that's much further down the line than marijuana, in that it's already legal federally and the FDA is weighing tight regulations.

The worry in that sector now, the Los Angeles Times reports, is that if strict stipulations are enforced on production, it would be difficult for small businesses with limited resources to keep competing with e-cigarettes, which are manufactured by tobacco giants. For the marijuana industry, the concern over federal regulation is much further off, but it's still an important possibility to account for when getting into the business.

Still, MedBox president and interim CEO Jeff Goh argued that the challenges in the industry today won't always hold entrepreneurs back, especially if Congress passes measures to ease the financial burden.

"It's going to be much clearer and easier for people to get into this business," Goh said. "Things are going to get better."