Cannabis Business in Colorado

The Colorado cannabis market generated significant retail sales for the Fiscal Year 2022-2023:

• The Colorado Colorado Medical Marijuana Registry grew to nearly 815 thousand registered patients in 2023,
• The state collected a total of $2.6 billion in tax revenue from 2014 to 2023, according to the Colorado Department of Revenue,
• Total sales from medical and recreational cannabis reached $1.5 billion in 2023,
• More than 1 thousand dispensaries operated across Colorado in 2024.

Types of Cannabis Businesses in Colorado

In Colorado, cannabis businesses can be categorized into two primary types:

1. Cannabis-Touching (plant-touching) businesses
2. Cannabis-Adjacent (non-plant-touching/support) businesses

Understanding which type of business you are dealing with is important, as each comes with its own set of rules, laws, and challenges.

Understanding Cannabis-Touching Businesses in Colorado

Cannabis-touching businesses in Colorado are those directly engaged in the cultivation, processing, distribution, or sale of cannabis products. These businesses maintain a direct connection to the cannabis products they handle. In Colorado, businesses must adhere to a vertical integration requirement, meaning they are licensed to operate as both growers and wholesalers. The state has implemented a partnership with Metrc to enforce seed-to-sale tracking, ensuring that plants are barcoded and monitored throughout the entire process, from cultivation to the final sale.

Here are some additional examples of plant-touching cannabis businesses and what they do:

• Cultivators: Cultivators are responsible for growing cannabis plants, either indoors or outdoors. They may specialize in various strains and engage in breeding programs to develop new types of cannabis. Cultivators must comply with state regulations regarding the methods and conditions of cultivation to ensure quality and compliance.
• Processors: Processors transform raw cannabis into various products such as oils, edibles, concentrates, and topicals. This involves extraction techniques, refinement, and sometimes the creation of new product forms. Processors must adhere to stringent state regulations to ensure product safety and consistency.
• Testers: Testing laboratories play a crucial role in ensuring that cannabis products are safe and free from contaminants like mold and pesticides. These labs conduct rigorous testing to verify the purity and potency of cannabis before it reaches dispensaries.
• Dispensaries and Retail Stores: Dispensaries and retail stores are the points of sale where cannabis products are sold directly to consumers. These establishments must follow state regulations concerning sales, including verifying customer age and adhering to purchase limits. Dispensaries are also responsible for maintaining compliance with various state tracking and reporting systems.
• Distributors and Supply Chain: Distributors handle the logistics of moving cannabis products from producers to retailers. This includes managing the supply chain, ensuring secure transportation, and complying with state tracking systems to maintain transparency and accountability throughout the distribution process.
• Accelerator Cultivators: These cultivators are social equity licensees authorized to engage in retail marijuana cultivation activities. They can propagate, cultivate, harvest, process, cure, package, store, and label retail marijuana. Accelerator cultivators may operate on the premises of an accelerator-endorsed cultivation facility or a separate location owned by the accelerator-endorsed licensee.
• Accelerator Manufacturers: Accelerator manufacturers are social equity licensees eligible to participate in the accelerator program. They are involved in the production, processing, preparation, and packaging of marijuana products. Accelerator manufacturers can distribute retail marijuana concentrates and products on the premises of an accelerator-endorsed manufacturing licensee.
• Marijuana Hospitality and Sales Businesses: These businesses operate licensed premises where marijuana can be sold and consumed by adults 21 years and older. They obtain their marijuana from state-licensed retail marijuana cultivation facilities, retail marijuana stores, and licensed marijuana product manufacturers. Patrons can only consume marijuana products sold at the establishment and cannot bring outside products for consumption.
• Marijuana Hospitality Businesses: These establishments allow on-site consumption of marijuana by adults 21 years and older. They may operate from a permanent location or a mobile facility that can travel on public roads. Unlike marijuana hospitality and sales businesses, marijuana hospitality businesses are not permitted to sell marijuana.

Understanding Non-Plant Touching Cannabis Businesses in Colorado

Non-plant touching cannabis businesses, also known as cannabis-adjacent, ancillary, or support businesses, play a crucial role in the cannabis industry without directly handling the plant. These businesses provide essential services and infrastructure, supporting the industry in various ways. Here are some examples:

• Consulting and Management Services: These firms assist cannabis businesses with compliance, licensing, operations, and market strategy. They help streamline processes, ensure regulatory adherence, and develop effective strategies to stay competitive.
• Technology, Software, and Equipment: Modern cannabis businesses rely heavily on technology. Tools like seed-to-sale tracking systems, consumer apps, Point-of-Sale systems, eCommerce platforms, and security solutions are vital for compliance, operational efficiency, and customer service enhancement.
• Marketing and Branding: Due to stringent advertising restrictions, specialized marketing and branding services are necessary for cannabis businesses. These services help promote products within the legal framework, ensuring regulatory compliance while effectively reaching the target audience.
• Insurance Services: Comprehensive insurance coverage is essential for protecting cannabis businesses, their staff, and products. Insurance agents with cannabis industry expertise provide coverage for various production stages, business operations, and liability.
• Accounting Services: The cannabis industry faces unique financial and regulatory challenges. Specialized accounting services help businesses navigate these challenges by ensuring compliance with Section 280E of the IRS Code, which limits tax deductions to the cost of goods sold. These services also ensure precise tracking and financial recording from seed to sale.
• Banking and Payment Processing Solutions: Cannabis businesses often face challenges accessing traditional financial services due to federal restrictions. Specialized banking services, loans, and payment processing solutions are critical for smooth operations and compliance with state regulations.
• Legal Services and Regulatory Compliance: Lawyers and legal firms specializing in cannabis laws are essential for navigating the complex and ever-changing regulations at state and federal levels. They ensure businesses remain compliant and avoid potential legal issues.
• Packaging and Labeling: Compliance with strict packaging regulations is crucial for cannabis products. Companies specializing in packaging solutions ensure products meet requirements for child-resistant, opaque, and clearly labeled packaging, protecting both consumers and businesses.
• Data Analytics: Data analytics supports cannabis businesses by optimizing operations, ensuring regulatory compliance, and improving financial management. Analyzing consumer behavior, supply chains, and product quality helps businesses make informed decisions and adapt to market trends.
• Advocacy Organizations: These groups represent the cannabis industry at the state level, working to influence policy, provide industry insights, and advocate for regulatory changes that support industry growth and sustainability.
• Marijuana Hospitality and Sales Businesses: These licensed establishments allow the sale and on-site consumption of cannabis by adults 21 years and older. They source their products from state-licensed retail cultivation facilities, retail stores, and product manufacturers, ensuring compliance with state regulations.
• Marijuana Hospitality Businesses: These establishments permit on-site consumption of cannabis by adults 21 years and older, either in a permanent location or a mobile facility. Unlike hospitality and sales businesses, they do not sell cannabis products.

Distinguishing Between Plant-Touching and Non-Plant Touching Businesses

The distinctions between cannabis plant-touching and cannabis-adjacent businesses significantly affect compliance, regulatory scrutiny, insurance coverage, and financial operations. Here are the key differences:

STATE LAWS:

• Cannabis-Touching Businesses: These businesses in the State of Colorado require specific state licenses and must comply with strict regulations, including security measures and product testing. They also face significant banking restrictions due to federal laws.
• Cannabis-Adjacent Businesses: These businesses generally need only standard business licenses, encounter fewer regulatory hurdles, and have better access to banking and financial services.

ACCOUNTING:

• Cannabis-Touching Businesses: These businesses in the State of Colorado are subject to Section 280E of the IRS Code, which prevents them from deducting typical business expenses, resulting in higher taxes. They also face complex inventory management requirements and strict compliance regulations.
• Cannabis-Adjacent Businesses: These businesses can claim standard business deductions on their taxes and use more straightforward accounting practices. They do not face the stringent compliance required for cannabis inventory tracking, making their financial operations less burdensome.

BANKING:

• Cannabis-Touching Businesses: These businesses face significant banking restrictions due to federal regulations, often operating in cash and relying on a limited number of banks willing to accept the legal risks. This results in high compliance requirements and challenges in financial management.
• Cannabis-Adjacent Businesses: These entities enjoy broader access to financial services, including traditional banking accounts, loans, and credit lines, due to their indirect involvement with cannabis. This facilitates simpler financial operations and growth opportunities.