Washington State Rec Shop Plans to Close, Blames State for Its Troubles

By John Schroyer

A recreational marijuana shop in Washington State is going out of business just a few months after opening its doors, and the owner is pointing her finger at the state.

Stonehenge Cannabis, a rec shop that opened in the tiny town of Lyle, Washington, last September, said that it plans to close following a decision on Feb. 11 by the state Liquor Control Board (LCB) to prohibit the practice of “bundling.”

The term refers to packaging paraphernalia or a non-cannabis product with small amounts of rec marijuana, so that the sale can be utilized as a tax deduction under the IRS tax code’s 280E section, which is loathed by many cannabis businesses.

Stonehenge and plenty of other cannabis businesses base their federal taxes on “cost of goods sold,” as a way to get around not being able to take standard tax deductions granted to other industries. That’s where bundling comes in.

Bundling was the only way Stonehenge was able to stay afloat after opening in September amid a shortage of supply and sky-high marijuana prices, said owner Elizabeth Hallock. Although business conditions have stabilized for rec stores, high taxes are hammering many shops.

Hallock said she simply can’t keep her store afloat without reducing that tax burden.

“Before we started bundling in November, we had $5,000 in gross revenue and we wound up with a loss of $1,000 after taxes,” Hallock said. “In January, I think we had a $200 profit.”

Hallock plans to sell whatever inventory she has left in the store, and then close up and re-open in Oregon after that state begins accepting business license applications. She expects to close in another week or two.

Hallock, who is also an attorney, has tried suing the LCB over the bundling prohibition. She has a court hearing scheduled for Friday but doesn’t expect to win.

The bottom line is that the state made it too expensive to do business in Washington, Hallock said, leveling several accusations at the LCB, which oversees the state’s rec industry.

“Even the big stores are going to go under because of this no bundling rule,” Hallock predicted. “We want to be the first people out, because we realized that all along, the LCB wanted to kill (recreational marijuana).”

LCB Communications Director Brian Smith said Hallock is way off base.

“Consider that we created the system that exists today. It doesn’t make any sense that we would try to put anyone out of business,” Smith said. He added that the liquor board adjusts rules occasionally as the industry develops, and also works closely with business owners to be as fair and even-handed as possible.

On the bundling rule, Smith said, there were a number of retailers who were abiding by the rules and were upset that there were others trying to “game the system.”

“When the voters enacted I-502, they enacted taxation at three levels. The idea is not to get around those taxes by charging someone $20 for a lighter and $2 for a gram of marijuana,” Smith said.

Seattle attorney Ryan Agnew said Stonehenge’s problems likely stem from other factors.

“These are the exact same people who created accusations of price-fixing against producers that were unfounded,” Agnew pointed out. “Given (Stonehenge’s) remote location, it’s not a surprise that they’re struggling, but they should be able to transfer their location for a profit and go do business somewhere else.”

Agnew also defended the LCB’s bundling rule, and said it was a loophole that was being abused by a handful of retailers.

“If the only way they were making a profit was by selling $20 lighters, then they were doing something wrong,” Agnew said.

Agnew further contradicted Hallock’s prediction that even the larger rec shops in the state will have a hard time without bundling, and said that with most shops, the profit margins may be razor-thin, but they’re still there. He said he doesn’t know of any other retailers that are on their way out of business, or are even in real financial trouble.

“If anything, you’re going to see more retailers come online (in 2015),” Agnew said. He said the businesses that are more likely to have problems are the cultivators and processors, since there’s been a developing problem of oversupply in Washington State.

Pete O’Neil, a managing member of Cannabis & Co. (C&C), also defended the LCB as doing everything it can to support the industry. Though O’Neil’s company doesn’t yet have a rec shop, it eventually hopes to eventually open three, the state maximum.

“When you launch a brand-new industry, there are always hiccups,” O’Neil said. “Fifty percent of startups fail. It’s going to be like any other industry. I don’t think you can blame failures on the LCB. They’ve done everything they can.”

John Schroyer can be reached at [email protected]

30 comments on “Washington State Rec Shop Plans to Close, Blames State for Its Troubles
  1. Numb Nuts on

    cry me a river folks !
    the cream of the crop will surface.
    this is America, the strong will persevere.

    the fault is on the producers and processors that sold poor products for the shelf.
    hydro chem-pot with a poor cure will always fail

    i’ve seen better weed come out of mexico.

    the one’s who do it right will prevail.

    America’s free market shows volume here.

    you can not compare a bottle of mad dog 20/20
    to a fine bottle of wine.

    those who suck will fail. no fault on the LCB or the state.
    the fault lie’s in the producers that made a poor product and the retailers that brought a poor product to market.

    poor farming practices leads to failure

    just ask the wheat & potato farmers, ask an orchard farmer they will tell you sad stories.

    Reply
  2. winston on

    I must agree with numb nuts. Poor products leads to poor sales. And Agnew is probably correct also.
    Location location location.

    Reply
  3. L W on

    The recreational law was bad to begin with. Having a 25% markup state tax for the growers, another 25% tax for distributors AND another %25 tax at the retail level is the BIGGEST problem!! IT’s not the medical dispensaries, nor is it the growers that are hindering a better outcome for state pot sales! The growers are under the strict hand of the LCB. You should read what growers are forced to do under the current law. (The Dept of Health and the Dept of Revenue, & ACLU are the authors of the recreational law.)

    Reply
  4. Seth Tyrssen on

    Wellll, maybe. But a 25% tax is insane. If the state gets too greedy, they’ll shoot themselves in the foot. Sounds like they’re well on the way to making outlaw growing and selling more worthwhile.

    Reply
  5. Brandon Pollock on

    Over time, it is to be expected that more and more poor operators / poor business plans will fail in the industry. Merely having a license is not a guaranteed success.

    In regards to the bundling practice, it sounds simply a way to avoid paying taxes – certainly not a smart or long term effective way to attempt to hold *any* business afloat, let alone a highly regulated one.

    Reply
  6. L Wayne on

    I wanted to mention that with 25% taxes, at each of 3 levels, comes out to a 75% mark up, before someone even walks into a rec store! That doesn’t include regular area sales tax either. You add stores trying to make a profit on top of the state’s unfair taxation, and you soon have a product most people can not afford. And they wonder why people are still going to Joe down the block to get their weed.

    Reply
  7. Merrit Styjn on

    you can never out pace the BM with anchor like overhead plus 25%. add in the fact BM networks beat legal to the market by decades. MME licensees failure doesn’t surprise me in the least. I would bet on full scale failure rather than full scale success for a wide margin. I fully expect to see widespread if not catastrophic failure amongst MMEs in WA. You would wonder if the real money (read judicial prosecution, Legal industry, asset seizure etc.) wasn’t heavy on the BM side given the consideration legal MMEs received in WA.

    Reply
  8. Doc Deadhead on

    Not a great idea putting the very folks funding prohibition in charge of regulating cannabis.

    The LCB wants pot to go away and liquor to prevail. All the new reports coming out are pro pot and anti alcohol.

    This is top down thinking, the LCB figures with enough regulation the industry will fail, however, the industry is going more legal every day so all they are really doing is pushing us back under ground just as it’s going legal.

    Bye, Bye, tax money!

    Like watching a child play around the mud puddle, wait long enough and they will get wet!

    Haters will ruin it for the haters if we give them enough time, “lack of education shall ruin a nation”

    Reply
  9. L Wayne on

    Hey Doc, I really like what you wrote. I totally agree. LCB and their backers want this to fail. Look how they, which includes some of our legislators, are trying their hardest to dismantle the medical marijuana! They are also trying to say that the medical is undermining the rec business,so lets get rid of the medical. Unless they put a reasonable tax on rec and medical, the state will lose out on millions of dollars. To leon that wrote, why don’t we all grow our own. Medical patients can grow legally, but most of us don’t have the room to grow, let alone know how to grow the special strains, along with…do I really want my house to constantly smell of wet dirt & weed? No way. Any way, the state gov needs to get a grip on this. The rest of the nation is!!

    Reply
  10. Steven North on

    Sometimes you take on the WRONG FIGHT. Pot just happens to be your chosen product to sell. The LCB has passed Emergency Rules to stop the practice of bundling. OK. But, the general rules of business Still apply. NO need to close your doors, just think outside of the Mylar Baggy. It can be done and at a profit. This industry has both State and Federal regulations. When looking at your after Federal tax obligations, what is your bottom line profit. The solution is just too simple.
    When seeking advise, find someone who is already familiar with with industry and well versed in tax.
    We are seeing a shakeout in the industry. Have to be creative to stay after the others fold up shop. Again, this is just too simple.
    Back to reading my text book, Business Policy and Economics, from 1993. (The business models used for examples addresses this specific issue).

    Reply
  11. bcoh on

    well as a future Canadian licensed producer….i see the problem as twofold…..seperating production wholesale and retail is going to be a big issue as everyone wants to make a lot of money…the american dream…..the government being no exception…as anyone in business knows vertical integration is beneficial for business…
    …..having produced mj for 40 years myself and watched all the various transitions take place there is bound to be a thinning of the ranks based on quality and consistency of product…the thing that makes the mj business in the us easily profitable is the ability to make and sell byproducts….another major issue is the transition from high end indoor production to farming which is where this will go…..and those that get stuck in the present methods of production will fail due to hi overhead….this is a industry that must quickly adapt to new parameters and those that do not lead the way will not be in the race very long..

    Reply
  12. Merrit on

    yeah letting the LCB run this industry is a terribad Idea.

    its not production thats messed up its the onerous taxation of the produce. If I can buy a oz of MGM from the guy down the street for $7 a gram but I have to pay $10 +25% plus any other tax they see fit to impose, at a dispensary, how are the $10+ houses ever going to survive?

    Is there anything WA got right?

    outdoor pot is full of bugs and or pest spray. in a few years it will be full of pollen. indoor is the only way to keep the produce clean enough for ingestion. bcoh, I’ll have mine with out bugs please.

    Reply
  13. Ryan Agnew on

    25% at each tier isn’t the same thing as 75% markup. Also, most producers are also processors, so the rate is closer to 25-25. In a reversal from supply-shortages last July, wholesale prices have declined 50-60%. Now would be a great time to be in retail.

    Furthermore, the legislature is currently debating i502 tax reform, with an eye toward revenue-neutrality (i.e. A new rate and type that would return approximately the revenue as the three tier excise rate is projected to return; most likely by lowering the overall rate and expanding the base).

    One plan will remove 25% at each tier in favor of a 30% retail excise tax + local taxes, with instructions to review the rate after two years. (I hope the final version is a sales tax and not an excise tax).

    Tax reform and revenue sharing with local jurisdictions will add much needed stimulus to the market, even if a MMJ/RMJ merge isn’t passed this year.

    Reply
  14. Jahpharmer on

    Something about the 3-tier tax structure I don’t understand:
    as a grower down here in NorCal when I harvest I have a crew of manicurers who “process” my buds, in-house, before they go to the dispensary. Typically manicurers get paid $200/pound. By Washington state law, then, would I have to pay 25% tax on top of the $ I pay per pound to be trimmed? And, on what basis do I pay the other 25% tax, the tax on growing (producing) my buds to start with?
    Then, what about whole-plant CBD oil? Here the whole plant is hung up, dried, then ground-up, then processed to extract its oil…no manicuring. There’s no processors doing this, just “me”…so do I charge myself a 25% tax twice?
    Finally, how about small growers who themselves grow, and process their products by themselves. Do they have to charge themselves a tax for growing and then another tax for manicuring?

    Reply
  15. Pam on

    This article has the most comments I’ve seen yet.

    Kleinmans BOTEC advice to the LCB was wrong. Mark Kleinman should be sued for facilitating a faulty policy that favors corporations. Bad advice from a bad player. He has no love for the product and has spewed repeatedly, in talks he is paid for, that the industry will fail due to the pothead players involved.

    The structure of 502 was designed for corporations who have millions to spend/loose on R&D. Investing corporations can’t perform R&D in the illegal medical marijuana market. Why successful dispensaries like Harborside are not starting up in Washington state as they are in Mass & DC. And as the above comments state, the WA regulated pot market is not for the weak business minded.

    Reply
  16. scott giannotti on

    Anytime you have tobacco and alcohol regulating your cannabis program you might as well have Monsanto regulating your organic foods haha

    Health Commissions should be running these projects only. Tobacco and Alcohol regulations are a disgrace.

    Reply
  17. liz hallock on

    Ryan,
    We do not just throw $20 lighters in the bag with low quality weed. We sell the highest quality products, and have always been transparent with our loyal customers. Our growers cannot survive unless we buy at $5/g, already bm retail price. The Board calculated an elasticity ofde

    Reply
  18. Ryan Agnew on

    @Jahpharmer

    #1. Love your name.

    #2. The excise tax applies to the consideration you receive for product sold to a processor. If you’re a producer and processor, you will pay 25% of the consideration paid by a retailer for your product.

    Unfortunately, Washington won’t let you capitalize the cost of production or transportation. So you’re being taxed on the markup, not the value of the raw flower or concentrate per gram.

    Washington’s business and occupation tax, local taxes, and federal taxes (including payroll), plus exemptions and write-offs (where available), are separate from the excise tax.*

    *not legal advice and I’m not an accountant.

    LCB adopted rules as directed by the initiative. Amendments and adjustments are constantly being made. While they have made some mistakes with the discretion granted to them, try not to think of the agency as the Illuminati or prohibitionist overlords. Bureaucrats in a new economy, plain and simple.

    Reply
  19. liz hallock on

    Elasticity of demand of -.83%. And in line with OFM and BOTEC, the sweet spot is $12/g. We charge $13.50 per gram. We cannot buy at $5 and sell at that price with 280-e. Botec was paid $800k but did not factor 280e into its analysis at all. How do they miss the biggest industry challenge and tell voters in the voters pamphlet $12/g. We grossed$20k this month and lose $4k with 280e.Half of retailers use bundling, the only ones who don’t didn’t hire an accountant. Even more disturbing is hidden in the new rule LCB sets price! All stores in a region must charge “true value” as determined by the LCB. Ruthann Kurose is on the Board of the tribal advisory council and Senator Rivers, the LCB’s lap dog, has a bill in to allowy tribes to sell pot to 502 stores tax free. It sounds like you don’t actuall

    Reply
  20. liz hallock on

    Like you don’t actually have any retail clients as you seem to misunderstand the difficulties we face, but if you have producer clients, they should be very worried this sea of oversupply is about obecome a lot, lot worse. Your producers will not be able to compete with tax free grow and retailers in East and Central WA will get destroyed. Always follow the money trail. It is creepily close to House of Cards. The tribes make massive campaign contributions, and I would like to see some of Rivers funding, especially since she wants to kill medical. Guess I will chk out pdc.org.
    Liz

    Reply
  21. liz hallock on

    PS. For outdoor weed its less than $7/g at our store. Come support us, we are actually in murdock. And we are big dr. Who fans so chk out our police call…Booth and dalek on duty 😉

    Reply
  22. Steven North on

    Liz, let the LCB set the price. They will become ‘partners’ in this industry. Their share, excise tax or whatever they decide will be a direct distribution of Net Gross Profits. 50% you 50% them. Great for Federal Tax. Let the mushroom folks write it up.

    This is the same involvement tried before. Gov. Gregoire, vetoed the specific lines that put the State in the pot business before.

    Reply
  23. massvocals on

    The same thing will happen here is massachusetts because 4900 or less patients can not sustain the income needed for a yearly license at 50,000
    massvocals asked you all state by state that you join us and we start a creationist concept here , [email protected] Cannabis is liberty and freedom , we must take back our right to control our serpent government then make it servant again

    Reply
  24. massvocals on

    first of the the law mongrels ignoring the people allowing bad law to exists for greed and employment. These issue are the problem we need still to join in [email protected] to attack this in every direction removing the thugs and the funding , we must become free , Cannabis is liberty and freedom Cannabis must be free enter– prize the prize id liberty form the government, law enforcement , taxes , our property rights and liberty have been stolen there is nothing professional about that Those prohibitionist thugs must be removed sent to very jails for correction

    Reply
  25. YabbaDabba on

    @liz hallock

    So, what happened to your accusations of price fixing by growers? Nowhere?

    I expected better from a Princeton grad.

    Honestly, you are in the middle of
    nowhere. Did you expect anything
    different?

    Reply

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