We have updates on Hawaii, Acreage, Harvest Health & Recreation, and more…

Hawaii is a medical-only state at the moment, but it’s making some progression in going fully legal. Marijuana was decriminalized earlier this summer, and the new law will take effect on January 11, 2020.

Knowing that legalization is a question of “when” and not “if,” entrepreneurs are opening up cannabis operations on the “Big Island.”

Shane Victorino, a former outfielder for the Philadelphia Phillies, entered into a joint venture with Arcade Biosciences Inc. through his investment group, Legacy Venture Hawaii. Arcade Biosciences cultivates, extracts, and distributes hemp products in Hawaii.

The new partnership will be called Archipelago Ventures. The newly formed company is intending to be a vertically-integrated operation with seed-to-sale capabilities for hemp-derived CBD products. Archipelago is expecting to start selling its products by the end of 2019.

Additionally, Vapen CBD, a Phoenix-based vape company, has partnered with the newly formed Archipelago Ventures. Vapen’s role will be to construct and be the main operator for the extraction facilities in Hawaii.

And Hawaii isn’t the only state that’s been in cannabis news lately.

In fact, there have been some important developments out of Ohio regarding Harvest Health and Acreage Holdings…

Harvest Health and Acreage Face Issues in Ohio

This week, one of our members asked about investigations into Harvest Health and Recreation (CSE: HARV, OTC: HRVSF) and Acreage Holdings (CSE: ACRG, OTC: ACRGF).

Robert F. asks: “I want to know about the state regulatory problems facing Acreage and Harvest in Ohio and Massachusetts, and the impact of these investigations on stock valuations.”

Hi, Robert. Regulatory compliance is on everyone’s mind lately, and with good reason. I don’t know how these particular investigations will turn out, but I don’t think they will have long-term implications for the companies.

For those who aren’t aware, Harvest Health has been accused of misusing Ohio‘s procedures to gain a license. Basically, Harvest claimed 51% of the company was owned by a member of a disadvantaged group to receive a certain license.

The Ohio Department of Commerce looked into it and doesn’t believe that to be true.

If state regulators find Harvest was trying to game the system, it will lose that license, but it’s only one of dozens that the company has.

The Acreage Holdings (CSE: ACRG, OTC: ACRGF) case is also proceeding with a lot of secrecy, but Ohio is basically saying Acreage purchased its licenses from the person who originally won them before a mandatory one-year holding period. In Massachusetts, Acreage faces similar allegations.

As you know, I insist on absolute integrity from the managers of the companies I recommend. I can tell you that in the Harvest case, I have confidence that management was making a good-faith effort to comply with the Ohio regulations. The thing is that the regulations are often not clear, and established cases from other industries often do not apply to the cannabis industry.

So it’s entirely possible that Harvest and Acreage both thought they were complying with the regulations and still lose their cases. If they do, it will be less serious in my mind than a case like CannTrust (TSX: TRST, NYSE: CTST), where someone somewhere definitely knew the company was doing something wrong.

It looks like our readers have had a few questions about cannabis taxes and the banking system…

Are We Paying Federal Tax on Cannabis?

One of the questions we received was about federal banks and cannabis tax revenue.

Raymond M. wants to know: “If the feds haven’t legalized cannabis yet, then where are all the federal taxes that have been paid been going? If federal banks cannot accept cannabis revenue, then how are the feds collecting federal taxes?”

Raymond, this question shines a bright light on just how crazy cannabis regulations are right now and how important it is to fix them.

The first thing you need to know is that there is no current federal tax on cannabis specifically, the way there is on alcohol (about $4 of the price of your favorite bourbon goes straight to Uncle Sam).

But, the second thing you need to know is that the income tax on cannabis producers is insane! Because cannabis is on Schedule I of the Controlled Substances Act, companies may not deduct many ordinary business expenses. They can deduct the cost of actually producing the cannabis but no sales costs, administrative costs, legal costs, or dozens of other expense categories. That means the effective tax rate for cannabis companies can be well over 100% of its “normal” taxable income in some cases.

The third thing to know is that yes, the IRS expects to get paid even by companies which have no bank account. Cannabis companies pay in cash.

They make a special arrangement with their local IRS office, they haul bags of cash down there, and they count it together with IRS employees. The IRS even hired a consultant to help it get better at processing those payments. Cannabis companies make their state tax payments that way, too.

I hope that helps clarify things.

And our next reader wants to know if we even need a banking system for cannabis at all…

Jeff M Wells asks: “We don’t need the BANKING system. Private investment is the key. The banking system puts restrictions on lending. We also do not need Federal involvement in this industry. Federal involvement puts restrictions on the industry as well. Federalizing cannabis puts the industry under federal mandates (i.e. FDA). Do we really want federalization of cannabis?”

I have to disagree with you on the banking part, Jeff, and so does most of the cannabis industry.

It’s true that the banking system puts restrictions on lending, but most other businesses follow those restrictions as well.

The banking system also includes things like credit cards, safe storage of cash, and money transfers.

The question of federalization is more complicated. Most people in the industry wish the federal government would simply legalize cannabis and let the states deal with the regulation, and that’s the direction things seem to be going in.

But for some medical applications, the FDA will certainly get involved. And for some other purposes, it may turn out to be better if the federal government gets involved whole-heartedly than if it simply jumps in when it thinks it is needed.

It will be worth it to get the uncertainty of federal regulation turned into certainty.

Happy Trading,

Greg Miller

Executive Director, National Institute for Cannabis Investors


Comments

7 responses to “New Partnerships Arise”

  1. There is s rumor going around the market that Trump will grant Ten states full legalization from the federal government. This would happen on Sept 1 st .this year . Any truth to this rumor?

  2. I think 75% of federal Govt. is a waste of our time, money and freedom! Having said that some simple universal common sense guidelines by the FEDERAL GOVT. may be welcome. As it would keep 50 FEDERAL GOVT. WANNA BE’S from running helter skelter in 50 different just as silly directions. Having lived the first half of my in New Jersey and the balance thus far in California for a total of 64years I may know some of what i’m saying? Oh did I use FEDERAL GOVT. and COMMON SENSE in the same sentence? In that case “NEVER MIND”! Trying to learn something everyday John Camamis

  3. How can the Federal Government collect taxes on a federally illegal activity? They are laundering money because they are collecting cash from an activity that is illegal. They know where this money comes from and don’t let it go through the regular systems.

  4. How is it legal for the federal government to collect taxes on a federally illegal substance? That is truly insane, and should be fought.

    If the courts decide the government cannot collect taxes from an illegal activity, then it would seem an additional impetus for legalization.

  5. Hello, I’ve been reading about a Federal “legal test run” in which 10 states are going to be the quinea pig for cannabis sales. This is supposedly starting on September 1, 2019. Have you heard of this or have anymore insight on this “test run?”

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