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 johns@mjbizmedia.com