March 24th, 2011 – CHICAGO — It has been called a lot of things over the years: grass, Mary Jane, wacky weed. Now, researchers are suggesting a new moniker for marijuana: alternative investment.

A report out this week on the U.S. medical marijuana market estimates the unconventional business already generates $1.7 billion in economic activity a year. But that market could grow fivefold in short order, researchers say, as the list of states that legalize pot for treating a variety of illnesses grows and as more patients try it — and switch.

The study, conducted by See Change Strategy for the American Cannabis Research Institute and Deal Flow Media, a financial research firm specializing in unusual assets, says that of the nearly 25 million Americans who are potentially eligible to use medical marijuana based on their diagnoses, fewer than 800,000 currently do.

That makes the nascent market a potentially attractive one for investors looking for an alternative to the more traditional investment alternatives like art, antiques, wine or coins, one with an upside potential that makes China’s current growth rate look anemic.

The opportunities, the authors say, aren’t confined to cultivation and distribution — the riskier parts of the business.

Many perfectly legal products and services, from software and security to hydroponic infrastructure to marketing, communications and consulting, will offer money-making opportunities in the coming years.

But the authors, who surveyed 300 medical marijuana industry insiders, point out that the fast-growing market faces a daunting number of hurdles. These include inadequate access to legal capital, unfavorable tax status, a lack of experienced executives, downward pricing pressure and a complex — and contradictory web — of state and federal rules. All this makes investing in marijuana a risky proposition.

There’s also the very real potential for conflict with the criminal gangs that control the much larger $18 billion a year illegal U.S. marijuana market. These conflicts with criminal gangs tend to get settled outside the judicial system.

Still, the study says the U.S. medical pot market could be nearly half the size of the illegal market — about $8.9 billion — in just five years.

“That’s assuming there are no obstacles,” said Ted Rose, the editor of the study. “I’m not weighing in on whether that’s likely or not. But that $1.7 billion is the real money that’s being made this year.”

To put that in perspective, Lipitor, Pfizer Inc’s cholesterol-reducing drug and the world’s best-selling pharmaceutical, had U.S. sales of $5.33 billion in 2010.

More than a dozen U.S. states and the District of Columbia have legalized the use of marijuana to help patients with chronic illnesses, including cancer, AIDS and multiple sclerosis.

The survey found that 34 percent of the medical marijuana businesses said regulatory compliance — not customer demand or securing supply — was the top challenge they faced. Another 24 percent said financing was the industry’s most pressing need.

But because the possession and distribution of marijuana remain illegal under federal law, the report’s authors point out that the market is rife with risk, including “the ever-present risk of being shut down or experiencing a property seizure without notice.” Source.

SACRAMENTO, Calif SACRAMENTO, Calif. – As one of California’s pioneering marijuana dispensaries, the Berkeley Patients Group served thousands of medical marijuana users and handled tens of millions of dollars in pot transactions a year.

But until 2007, the dispensary didn’t charge customers sales taxes nor did it pay them to the state, contending that marijuana as medicine wasn’t taxable.

California tax officials, strapped for cash, disagreed and now the state Board of Equalization is ordering the Berkeley facility to pay $6.4 million in back taxes and interest on $51 million in pot sales between 2004 and 2007.

The case is illuminating efforts by the state – plus Sacramento and other cities – to collect revenues from California’s burgeoning medical cannabis industry.

Since last October, the state tax board has completed audits on 32 other marijuana dispensaries, demanding $4.5 million in sales taxes and interest.

In September, the board ordered another Berkeley medical marijuana outlet, Community Flavor, to pay $600,000 in taxes and interest on $4.9 million in marijuana and $670,000 in pot cookie sales the dispensary argued were exempt from taxes between 2005 and 2008.

“It is our intent to identify where there could be a problem and then aggressively go in and enforce the law,” said BOE Chairman Jerome Horton. “You will see a lot more investigations to assist them in complying with law.”

The BOE estimates it takes in $57 million to $105 million in sales taxes from dispensaries ringing up to $1.3 billion in annual pot transactions.

The industry’s ultimate tax value to the state or local communities is hard to calculate. The BOE, in a concession to dispensaries worried about federal prosecution, requires them to obtain state sales permits but doesn’t mandate they disclose what they sell.

BOE member Betty Yee said the growing California dispensary trade may someday generate $400 million in state sales taxes. George Mull, attorney for the California Cannabis Association, says dispensaries could produce $140 million if they all paid the standard 8.25 percent sales tax.

The Berkeley Patients Group and medical marijuana advocates complain tax authorities are targeting them after only belatedly explaining the rules.

In 2005, in the case of a San Francisco dispensary, the Hemp Center, the BOE declared that medical marijuana was “tangible personal property” subject to taxation.

But Kris Hermes, a spokesman for Americans for Safe Access, a marijuana patient advocacy group, said the state didn’t begin informing dispensaries of its sales tax rules until 2007 – and then went after them for back taxes.

“These facilities shouldn’t have to pay from before they were notified,” Hermes said. “But the BOE is saying they should pay a tax for as long as they existed. That is punishing them unnecessarily.”

California marijuana dispensaries must operate as nonprofits. And Elisabeth Jewel, a lobbyist for the Berkeley Patients Group, said it doesn’t have the money to pay its 2004 to 2007 tax bills.

She said the center, which employs 76 people, and offers free patient services, such as counseling and AIDS testing, paid $1.5 million in state sales taxes last year. It is seeking a reduced settlement for 2004-2007.

“We’re going to try to negotiate this down to an amount that the Berkeley Patients Group can afford while staying in business,” she said.

Yee said she urged the dispensary to try to settle its tax debt through a state “offer in compromise” program that may allow businesses to negotiate a smaller tax payment based on ability to pay. “We’re not interested in shutting them down,” she said.

But the BOE is searching for medical marijuana outlets that may owe taxes. Horton said the agency knows of only 300 dispensaries with proper state sales permits, while more than 800 are registered with cities and counties.

Mull, the cannabis association lawyer, said many dispensaries didn’t register with state tax authorities or pay taxes for years out of fear of triggering raids under federal laws against marijuana.

He said the state should consider “some type of amnesty” on back taxes to bring unregistered outlets onto California tax rolls.

California’s largest dispensary, Harborside Health Center in Oakland, which pays more than $2 million in yearly state sales taxes, recently confirmed it is being audited by the Internal Revenue Service.

Meanwhile, dispensaries are about to get new taxes – and scrutiny – on the local levels. Nearly a dozen California cities have approved local medical marijuana taxes.

Oakland is expecting to take in $1.4 million in pot taxes this year after boosting its local medical pot tax from 1.8 percent to 5 percent. Los Angeles voters Tuesday approved a 5 percent tax. And Sacramento is due to begin collecting July 1 on a voter-approved 4 percent tax on local medical marijuana sales.

“We’re making them a legitimate business,” said Sacramento City Council member Sandy Sheedy. “And by doing that, you pay taxes.”