Colorado Harvest Co. Sells Aurora License to Starbuds After 280E Audit

There will be a new dispensary at 14655 East Arapahoe Road in Aurora this spring, but it won't be opened by the company that held the license for over two years. Colorado Harvest Company received a retail dispensary license from the City of Aurora in 2015, one of only 24 available citywide, but had to sell it in 2017 to another familiar dispensary chain: Starbuds.

The location would've been Colorado Harvest's fourth in the metro area and its second in Aurora, but now it will be the eleventh store under the Starbuds umbrella.

Selling the spot was a bitter pill to swallow for Colorado Harvest CEO Tim Cullen, who says the company only parted ways with the license and property because of an audit from the IRS under a tax code that forces some pot business owners to pay tax rates of up to 70 and 80 percent on earnings.

Federal tax code 280E, a term that cannabis business owners can't wait to stop hearing, was written in 1982 to stop drug dealers from buying expensive possessions with cash and writing them off, but now it's wreaking havoc on the coffers of legal pot businesses. Cullen says a 280E audit of Colorado Harvest's earnings in the taxable year of 2013 to 2014 cost the company nearly $1 million, forcing him to decide which assets to part with.

"We were going to have to part with something, and it was easier to sell a piece of dirt than stores that were up and running," he explains. "There are no more Aurora licenses, so I felt like we had to sell a golden goose. I feel like people in general and the legislature don't have a good understanding of how bad this is."

Aurora capped its dispensary licenses at 24, and Denver currently has a moratorium on any new pot shops, so Colorado Harvest is maintaining its three stores as it looks for opportunities in the metro area and beyond. "The Denver market is as saturated as it's ever been. I think everyone's kind of stuck holding the cards they were dealt, and that's where we are right now," Cullen says.

The Arapahoe dispensary will be the second Starbuds in Aurora and the company's third new store since June 2017, with other locations recently opening in Commerce City and Niwot. Co-owner Brian Ruden was excited at the opportunity to expand the company's footprint in Aurora, but sympathizes with Cullen's situation. "I always thought that was a spectacular location," he says. "We noticed it hadn't been moving forward, so I contacted Tim, and he told me what was going on. We wanted to do something together and make it a Starbuds."

Ruden says his past dealings with Organa Brands, which Cullen co-owns, and its subsidiary company, O.PenVape, had already created a relationship of respect between the two. The new Starbuds should be open in March, according to Ruden; there are plans to make it the brand's flagship location. But for the sale to happen, he and Cullen had to gain approval from the Marijuana Enforcement Division and Aurora officials.

"The City of Aurora had fully vetted me and Tim when issuing our original licenses to us, and I had a very good track record," Ruden says.

Although looking forward to the new store, Ruden says it's unfortunate that it became available the way it did. He calls 280E "very difficult" for anyone with a licensed pot business. "It's being weaponized against the legal marijuana industry. We're a legal business, we're paying expenses — yet we can't claim them," he explains.

Because traditional banks refuse to work with cannabis companies out of fear of federal drug charges, companies such as Colorado Harvest have a much harder time securing funding, both for expansion and cash flow, according to Ruden: "Starbuds has been self-funded, but if we didn't have the constraints of not being able to borrow money or the IRS's 280E, we'd be growing faster."

Some Colorado legislators are beginning to hear the industry's plea. Representative Jared Polis introduced an amendment to the Republican-backed tax-reform bill on November 14 that would have exempted state-licensed cannabis businesses from 280E, but it failed to make it to the House floor, losing on a 3-8 vote. Colorado senators Cory Gardner and Michael Bennet have lent their support to the Small Business Tax Equity Act of 2017, a Senate bill that would essentially do the same. The bill was introduced in March and referred to the Senate Finance Committee, where it currently awaits consideration.

The owners of Palisade dispensary Colorado Alternative Health Care sued the IRS in November, claiming their income was illegally taxed twice because of 280E; that case is ongoing. Earlier in 2017, a U.S. Tax Court judge sided with the IRS against the former owners of Denver dispensary Total Health Concepts, which sued the federal agency over its 280E application. However, 280E was not even addressed in the decision, because Total Health Concepts failed to produce any business records or supporting documents of its deductions, according to Judge Kathleen Kerrigan.

Cullen thinks that the industry's best chances at fixing 280E lie on Capitol Hill. "Even the largest cannabis companies in Colorado are still pretty small companies in the grand scheme of things," he says. "It becomes impossible to fund these lawsuits. You'd have to pay an excess of a million in legal fees to fight this for the number of years this would take."