As individual states continue on the trajectory of marijuana legalization, most recently Oregon, the discrepancy between federal and State law grows wider and wider. That gap, wide as it is, has just met a very interesting roadblock that could force Congress's hand on federal marijuana legalization. A lawsuit, filed back in June, sought to sue the State of Colorado in federal court over its cannabis sales tax using a clever 5th Amendment argument. That is, paying a marijuana sales tax amounts to self-incrimination, because it admits to purchasing a substance banned by federal law.
As of August 23rd, the Colorado pot tax has been upheld in court, but the battle will continue, possibly all the way to the Supreme Court, and it puts the Feds in a real catch-22. On the one hand, if the Supreme Court upholds Colorado's marijuana sales tax, that is implicitly giving federal sanction to marijuana sales in Colorado, and from there, any other state that wishes to legalize it. Any defendant could theoretically use a Supreme Court ruling upholding a cannabis sales tax as a defense against the crime of possession. On the other hand, if the Supreme Court were to rule against the tax on the grounds that it violates the 5th Amendment, Congress would be under tremendous pressure to legalize marijuana on the federal level in order for states to be able to tax it. A ruling against the tax would apply to both recreation and medical States, because marijuana is a Schedule I drug, illegal on a federal level for any purpose.
In the middle, of course, are the marijuana dispensaries and pot stocks (OTCPK:PHOT) (OTCQB:CANN) (CANV) (NASDAQ:GWPH). For them, it's a win-win, hands down. If the lawsuit is rejected in the end and the marijuana sales tax in Colorado upheld in federal court (whether it gets to the Supreme Court in the end or not), then the Colorado cannabis market is that much safer from federal harassment. If the taxes are legal, then the plant has legal sanction by the judiciary. If, on the other hand, the tax is struck down, then cannabusiness will absolutely boom, as there will be no taxes dragging it down, creating a huge windfall for these companies. In order to reinstate marijuana taxes, Congress may be pressured to legalize the plant once and for all.
The implications for cannabusiness proper are fairly straightforward and positive. For some of its satellite companies, it's a little more complicated. Back in July, I explained the business model of Blue Line Protection Group (OTCPK:BLPG), a new firm which specializes in security and banking services for the legal marijuana industry, mainly in Colorado, but also with clients in Nevada and Washington as well. I see Blue Line as a less risky play than any other cannabis microcap, because Blue Line depends on the health of the cannabis industry as a whole, rather than on the success of any one specific company. How would Blue Line be affected by either outcome of this lawsuit?
Since July, Blue Line has been making significant strides towards expanding its business. Last week (August 20th), the company signed a contract with Medicine Man, Colorado's largest marijuana dispensary, bringing its client base there up to 53. Also in August, it announced plans to launch a B2B commerce website to facilitate the cannabis industry in Colorado. The latter move I don't see as contributing all that much directly to the company, but this being a trust and networking business, it will be crucial to Blue Line establishing new connections in that cannabis industry by facilitating the B2B side. Trust plays an enormous role here, as millions of dollars in cash are being entrusted for transport. If it succeeds with one dispensary, word will spread fast to others, especially considering the B2B role.
As for how either outcome of this lawsuit may affect Blue Line, I believe either outcome would be positive for it as well. If Colorado's marijuana taxes are upheld, then this can only benefit the company, because it specializes in armored cash transports, facilitated banking services, and armed security, all of which would remain necessary if the taxes are upheld. The only change would be that, with the judiciary upholding the taxes and therefore the sale of marijuana, the federal government would not be as much of a threat to Blue Line clients as it now is, being that the Feds can invade and confiscate any goods at any time, given the current legal status of cannabis. Banking services would still be impossible to get for the cannabis industry, necessitating the Blue Line services of cash transport and proxy banking.
However, in the event that the lawsuit is ultimately successful and marijuana taxes are struck down on the grounds of the 5th Amendment, what would result is an enormous boom period for the cannabis industry, especially in Colorado and Washington, as those would be the only two places where one could get marijuana, recreationally, totally tax-free. The catch would be how long this boom period lasts. With the Feds caught between a rock and a hard place, they would be forced to decide whether to crack down in full and shut down the fledgling cannabis industry in Colorado, Washington, and all other states where medical marijuana is legal, or go in the other direction and legalize it so it can be taxed, or perhaps try some legislative trick to preserve the status quo.
Until the point when the Feds make a decision in the event the taxes are declared unconstitutional, cannabis and its associated companies would be under a tax-free boom. If Congress then declares an all-out war on cannabis, obviously, that will be the end of any public pot stock, not least of all Blue Line. The real complicated question is what happens to Blue Line if marijuana is fully legalized?
Long term, I don't believe full legalization would be good for the company, because there would then be very little need for most of its services. Banking would be straightforward, the price of cannabis would fall to the floor as the supply would skyrocket, and security would be much less necessary. Armored cash transports would be superfluous.
However, full legalization in the event that Colorado's pot taxes are struck down is the least likely of all possible outcomes, in my opinion. First, one federal court in Colorado has already upheld the taxes. Second, the federal courts know the implications of striking down marijuana taxes on 5th Amendment grounds, and I don't think they will give Congress such a challenge. Third, even if they do, I doubt Congress would respond with full legalization. They would likely find a legislative way around the whole problem, while maintaining federal pot prohibition. This is exactly what happened when the original Marihuana Tax Act of 1937 was overturned in 1969 by the Supreme Court in Leary vs. United States for precisely 5th Amendment reasons. Congress just found a new way to criminalize the substance.
The Cash Picture
In the meantime, how is Blue Line looking financially? Revenues came in at $237K for its first full quarter of operation, with a net loss of one penny per share. Its balance sheet is thin but healthy for a start-up, with $446K in liquid assets and only $18K in debt. Absolute loss was $1.6M, but it hasn't affected the balance sheet, because both professional and executive fees and salaries are paid in stock (page 18) and will be for the foreseeable future. While this will have a cumulative dilutive effect over time, it will keep its finances in relatively good shape as it traverses the development stage. It is difficult to assess a cash clock for Blue Line precisely because its out-of-pocket expenses are so small. The biggest risk for Blue Line, though, is not the cumulative dilution, but that there simply may not be enough money in cannabis security for the company to sustain itself. That factor we simply don't know yet.
The real test, I believe, will be in two quarters from now, when its recently opened operations in Nevada and Washington become accretive to earnings. At that point, Blue Line will have its operations up and running in 3 states, and we will begin to get a fuller picture of what its earnings potential looks like. That, and Q2 of 2015 will incorporate within it the booming month of April, which this year raked in a total of $22M in Colorado (see second link in first paragraph), 4/20 being the international cannabis holiday.
With the Feds further out of the picture with a federal court upholding marijuana taxes in Colorado, cannabis companies are now that much safer from government harassment. For Blue Line Protection Group in particular, the question is what will happen by mid-year 2015. With more and more states calling for recreational legalization, most recently in Oregon, the prospects for Blue Line getting more clients will continue to improve. Bottom line, if we see losses staying under control while its client base grows, that will be the key to eventual profitability and capital growth.
Disclosure: The author is long BLPG.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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