Minnesota Adult Use Cannabis Industry

On May 30, 2023, Gov. Tim Walz signed into law a bill to make recreational marijuana legal in Minnesota.  While many aspects of the bill will take effect on August 1 of this year, including recreational possession rules and legal seed sales for at-home grow, many of the aspects related to new business opportunities are expected to be implemented at a later date, with the legislation proposing that retail sales for recreational adult use cannabis begin in the first quarter of 2025. 

The legalization of adult use cannabis in the state offers entrepreneurs a great opportunity to access the regulated marijuana market that we expect to grow to a mature size of around $1.2 billion in annual sales, at current prices.  The bill describes 16 licenses in relation to growing, selling, transporting, and testing cannabis and a “green-rush” opportunity for operators in the state.  

While cities and counties will be responsible for licensing and enforcing the new law, they will not be permitted to ban cannabis businesses entirely, an issue in many of the early-adoption states.  With that said, cities are passing or exploring moratoriums on cannabis businesses until the state regulations are more fleshed out and cities have enough time to craft their own rules.  These moratoriums can last until January 1, 2025 under the bill.

Perhaps the most unique issue business planning issue in the cannabis industry rests in the plants status as a banned substance at a federal level despite its legal (yet regulated) status within certain state jurisdictions.  What this means is that most business expenses (excluding COGS) are not deductible for federal income tax purposes, pursuant to Internal Revenue Code (IRC) section 280E.  From a business modelling perspective, tax flows will need to be modelled differently at the state and federal levels.  Furthermore, in calculating the appropriate beta and post-tax earnings multiples to utilize when valuing a subject business, it may be necessary to estimate an effective rate to account for the higher effective level of tax due to the inability of the cannabis business owner to deduct these operating expenses.

Further, the MN law imposes a Cannabis Tax equal to 10% of gross receipts from taxable cannabis products.  This tax will not be imposed on cannabis products sold under the state's existing medical marijuana program.  In addition to the Cannabis Tax, taxable cannabis products are currently subject to both the state general rate sales tax and any applicable local sales taxes based on where the transaction takes place.