Search Results for "280e"

Oregon Farmers Accuse Chalice Brands of Unpaid Bills

1/10/2023

Four Oregon cannabis farmers are accusing Chalice Brands, a publicly traded Canadian cannabis company, of failing to pay for flower, pre-rolls, edibles, and other products placed in its Oregon dispensaries, Willamette Week reports. According to the growers and invoices shared with WW, the unpaid bills by Chalice add up to well over $100,000.

Marianne Cursetjee, the owner of Alibi Cannabis, told WW that Chalice owes her farm $5,350 for flower and pre-rolls it purchased in July.

“Chalice is financing its business on the backs of small farmers. People are too afraid of saying things out loud because we have no power to collect anything outstanding. I really, truly feel that Chalice is a house of cards.” — Cursetjee to WW

Chalice was founded in 2014 by William Simpson, who sold the company to Canadian-based and publicly traded cannabis company Golden Leaf in 2017. Lee served as the company’s CEO for a time. Chalice is headquartered in Toronto, Ontario but most of its operations are still run out of its Portland office, the report says. Chalice purchases products from more than 20 Oregon cannabis farms and product makers for its dispensaries. The company also owns some of its own brands and product lines. From 2019 to 2021, Chalice acquired a number of dispensaries, a California-based CBD makeup brand, and launched new product lines.

A Medford-based manufacturer told WW that it is owed $48,000 from Chalice dating back to October 2021, while a Corvallis-based wholesaler and producer is owed about $70,000 dating back to March 2022, according to invoices outlined by WW. Vincent Deschamps, owner of 54 Green Acres, estimates he’s owed more than $50,000 by Chalice. In October, Bend-based producer Kush Originals sued Chalice over $51,330 in unpaid bills. Chalice never responded to the lawsuit and Kush requested a default judgment in the case.

In a January 5 statement to WW, Chalice Brands Executive Board Liaison Faviola Bishop said that “Taking aim at anyone in the industry today doesn’t help small farmers, it can potentially hurt them.”

“The harsh reality is that 2022 was one of the most, if not THE most, challenging years the industry has ever faced. The challenge has been felt in all markets, with mature markets like Oregon feeling the greatest impact,” the statement says. “We are facing declining demand, oversupply, and over-penetration of stores. Oregon has more stores per capita than most markets. On top of all these challenges, Congress’s inability to pass the SAFE Banking Act, along with 280E, limits the industry’s access to capital and puts incredible financial pressure on all licensed cannabis businesses.”

The statement says the company is “in survival mode” and that industry operators “will only make it through this by working together.”

“We are completely committed to getting all of our partners paid what they are owed and feel their pain,” the statement says. “Chalice is also owed a great deal of money from our wholesale partners and understand firsthand the challenges all of us are facing.”

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2023 Cannabis Industry Predictions: Data, Operations, Technology, Employment, and Events

12/23/2022

While Congress may have failed to deliver significant cannabis industry reforms as we close out the year, cannabis entrepreneurs, professionals, and experts already have their eyes and hearts set on 2023. In this third installment of our 2023 Cannabis Industry Predictions series, we asked specialists in cannabis data, technology, employment, events, tourism, and industry operations for their expectations for the coming year.

Scroll down for their full reactions, expert advice, expectations, and more!

And in case you missed it, be sure to check out the first chapter of our 2023 prediction series — which covers cannabis retail, branding, education, and consumer packaged goods — and the second chapter, featuring experts in cannabis science, cultivation, and agricultural technology, as well as industrial hemp and psychedelics.

Data

Roy Bingham – Co-founder and CEO of BDSA
“The industry will face short-term headwinds in the form of supply, pricing and regulatory challenges, but the long-term outlook remains strong. Short-term growth will primarily come from emerging markets both in the U.S. and globally. As mature markets in the western U.S. face stiff price pressure and continued illicit competition, emerging markets present some of the best opportunities for growth in the industry. As the more mature markets see sales slow, consolidation, attrition of smaller brands, and M&A activity will accelerate in 2023. Brands that embrace premiumization, portfolio price tiering, and highly differentiated offerings are expected to stay ahead of the pack and hold on.”
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Employment & Hiring

Megan Carvalho – National Campaign Coordinator for Cannabis Workers Rising, a United Food and Commercial Workers International Union program
“As America’s largest cannabis union, UFCW has spent nearly two decades leading the charge on advocating for workers in the emerging cannabis industry and our efforts are only heating up. We’ve been front and center in legalization efforts, ensuring states prioritize the people who make this industry run and that cannabis jobs are safe, good, and equitable. The coming year will be all about organizing. The national wave of union organizing is happening here in the cannabis industry too and UFCW is redoubling our efforts to help any cannabis worker who’s ready to strengthen their workplace with a union.”
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Kara Bradford – CEO and Chief Talent Officer of Viridian Staffing
“2023 is shaping up to be quite different than 2022 in cannabis employment. We’ve already started seeing layoffs, and this will likely continue with the number of equity investments declining and the cost of debt sharply up. As their ability to finance further growth becomes more challenging and we see a shift from a candidate’s market back to an employer’s market, cannabis companies are going to become more selective in their hiring. While we have seen a trend towards greater specialization and fewer responsibilities in recent years, the need and ability of cannabis companies to run leaner is likely to reverse this trend.”
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Danielle Schumacher – Founder of THC Staffing
“In 2023, more cannabis companies will unionize – not by choice but because employees are fed up with unfair and unsafe work environments. Groups like Cannabis Workers Coalition are leading the way for employees who are organizing for better pay and working conditions. Mainstream unions such as UFCW now have cannabis-specific departments. Meanwhile, people with years of valuable cannabis experience will continue to leave the industry due to low or no pay, abusive company cultures, etc. A silver lining is the potential for coalitions of community-based organizations and ethical entrepreneurs to work together to carve out more space for small businesses.”
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Events

Jenn Tramaglino – CEO of Cannect Hospitality
“In Nevada, the new year will usher in the opening of legal cannabis consumption lounges. These new venues will host parties, performances, and educational events. For the first time ever in Las Vegas, ticketed events, coupled with cannabis sales and consumption, will be available to the public. Overall in 2023, Cannect anticipates brands to raise the bar on engaging event buildouts. We expect to curate a lot of custom fabrication, branded gamification and use of new technologies. We all love to walk up to an activation and go, “WOWW!” We believe there will be a lot more “WOWW!” coming in 2023.”
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James Zachodni – CEO of Farechild
“With an economic slowdown worldwide, cannabis brands are going to have to be smarter on where and how they utilize their marketing dollars. I believe a lot of traditional media dollars will move over to live-events where brands will see a direct ROI by connecting with their customers rather than throwing thousands of dollars at billboards and other antiquated forms of marketing. Events will need to become more niched down to bring true value to the brands by delivering a platform to maximize the brand’s reach, not just supply meaningless impressions.”
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Operations

Kenneth Mason, CPA, MBA – CEO of Equibis (Cannabis Accounting for Good)
“There’s a ton of long-term potential in cannabis. However, many companies are currently unprofitable. Some folks are being forced to close up shop because they don’t have the cash flow to survive long-term. Considering the broader economy, inflation, extraordinarily high taxes in cannabis, and financing being down 65%, the next twelve months are going to be very challenging for those that are not actively using their financials to budget, forecast cash flow, and create a plan to put away cash for the rainy days.
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Zachary Garippa – CEO of Order.co
“2023 will be about access to financing and HOW companies are spending those funds. Scale and profitability matter – the best operators focus on continued growth and managing their spend/cash flow. Banks, especially private capital, will lean in further with creative financing to enable profitable growth. Consolidation will continue, with buyers and sellers looking to show how quickly the combined entity can drive incremental bottom line. And, as states continue to legalize, time-to-market penetration will accelerate, and multi-state operators will have an advantage here. Spend efficiency will be instrumental to growth.”
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Jesse Parenti – Founder and National Director of Nine Point Strategies
“As more states open up we still don’t have the national support by the Fed that is needed yet to get things to move faster. People are still in jail for something that shouldn’t be illegal. Banking and 280E are still major problems for the industry, with no relief coming from the federal government anytime soon. All levels of operators need to work on internal efficiency and operations moving forward. This needs to be supported by having strong foundational culture, reinforced by safety and accountability. Lastly, work to stabilize any profit you can, so they can stay alive to see the success of your efforts.”
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Public Relations

Kenneth Loo – Founder and CEO of Chapter 2 Agency
It will be all about New York in 2023. Look out for big names, great retail, consumption lounges, cannabis cafes, high wattage celebrities, fashionable approaches and lots of craziness surrounding this Empire-State gold rush. The crisis in California cannabis will continue and begin to permeate other regions. Marketing that directly supports the perseverance of craft and heirloom cannabis as well continues to celebrate small farms will be a major part of the conversation next year. These efforts must encompass more than just donating a percentage of proceeds. This will manifest in cause-related, policy-changing efforts and creating supply chains to discover additional access points for this category.
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Ricardo Baca – Founder & CEO of Grasslands: A Journalism-Minded Agency
“My prediction for cannabis PR and cannabis marketing in 2023 is that the largest media outlets in the U.S. will finally start covering cannabis more often, and in a way this plant-based industry deserves. But why? Because weed is now legal in the media capital of the world, a.k.a. New York City. And with that legality, which will see dispensaries opening as early as December 2022, we will see the behemoth media organizations (and ownership groups) start cozying up to the idea of covering cannabis as the legal agricultural product and consumer packaged good that it is. This will be a very good thing for our agency’s clients and the industry as a whole, as we will all benefit from deeper and more open-minded news and lifestyle coverage than what has come before.”
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Sonia Hendrix – Founder of GALLERY PR
“Lifestyle/Wellness PR in 2023 will be transformative. From emerging social media technologies and trends that impact how and where consumers read and share content, to the vibrant social justice movements and political action campaign efforts uniquely employed state-to-state. Globalization: cannabis communities are more connected than ever. Growth opportunities through mobile will be big as more people use mobile for online purchases and engagement. Well-timed educational campaigns will remain vital: educating the press, who educate the public. The internal tug-of-war between “new” and “old” operators, and fight for more female executives will remain; albeit with more male advocates.”
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Supply Chain

Jun Lee and Vince Ning – Co-CEOs & Co-Founders of Nabis
“Market fluctuations will continue into 2023 from shifts in regulations, like tax responsibilities that still don’t resolve tax burdens the industry is responsible for. Without proper reform, cash flow disruptions may continue throughout the supply chain. We’re hopeful positive changes, like eliminating the cultivation tax, will bring support to cultivators so that they can operate more sustainably. Profitability is key, and as more states come online, we foresee operators leaning into geo-expansion rather than putting all their eggs in one basket. The key for strong operators will be identifying when to pursue new opportunities, and when to remain focused.”
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David Hua – CEO and Co-founder of Meadow
“2023 is the year we find out if legal cannabis is recession-proof, and which operators are equipped to weather that storm. Fewer consumer dollars to spend, higher prices, and a persistent unregulated market mean operators will need to find efficiencies that squeeze every dollar per gram and make steady increases to margins. Smart technology and efficient workflows will be critical to gaining a competitive advantage in this environment, particularly when it comes to consolidating or eliminating unproductive tasks, savvy inventory forecasting, high-ROI marketing, and capitalizing on favorable regulations (like California’s delivery trunk size increase to $10k.)”
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Donna Leach – Senior VP of Supply Chain at HERBL
“2022 has been a challenging year for operators across the supply chain, including distributors. You can attribute this to tax impacts, unique costs such as fleets with expensive security requirements, and fuel costs. Some of our responses to this climate have been service rationalization, tightening up our operations for maximum efficiency, and an investment in tech development for increased automation. In 2023, I expect to see consolidation across the industry, more aggregated ordering at the retail level, and stakeholders choosing partners that streamline operational efficiencies. Operators that have continuously improved their supply-chain capabilities will be best-positioned for the future!”
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Tech

John Yang – CEO of Treez
“Retailers in new markets like New York will need help getting up and running and existing markets may continue to struggle while the illicit market continues to thrive, and as consumer spending continues to trend downward in the face of economic struggles nationwide. Our data shows that consumers are buying as frequently as they used to, but average order spend is down ~15% in overall gross sales. Companies like Treez will need to bridge the gap and provide the right technology and insights to help retailers manage their businesses more efficiently. Retailers are not getting the tech solutions they need to do that today, and those who deliver that value are the ones who will win more business and drive the industry forward.”
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New Jersey Assembly Approves Bill to Let Cannabis Licensees Take Business Deductions

11/01/2022

The New Jersey Assembly has passed a bill that will allow licensed cannabis businesses to deduct certain expenses from their state tax filings, Marijuana Moment reports. The law, which still needs to pass the Senate before going to the governor, is in contrast to the federal tax code known as section 280E, which does not allow companies working with Schedule I or II narcotics to take advantage of federal tax write-offs.

Sponsored by Assemblymember Annette Quijano (D), the bill passed the lower chamber 60-6 a month after it was introduced in committee. The bill dictates that the gross income of New Jersey cannabis businesses “shall be determined without regard to section 280E of the [federal] Internal Revenue Code,” the report says.

A fiscal analysis by the New Jersey Office of Legislative Services found the change may “result in an indeterminate annual loss of revenue” to the state as cannabis businesses’ tax burdens fall, and, on the provide “access to these deductions and credits may also help generate more economic activity by cannabis businesses,” while increasing revenue for “the state and local governments that tax cannabis businesses might indirectly realize an indeterminate amount of additional annual revenue.”

New Jersey passed adult-use cannabis reforms in 2020 via a legislature-approved ballot measure. It had regulations in place for the new system by August 2021 and by April 21, 2022, began selling cannabis to adults over 21.

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The Pitfalls of Cannabis Operations

8/16/2022

Operations Ownership

After working directly with Oklahoma’s cannabis industry over the past couple of years, our firm thought it a good idea to pen an article articulating the most common and pressing issues we see in the industry.

Our experience comes from working with many cannabis companies in Oklahoma. Our work and experience is with well over one hundred cannabis companies in all segments of the Oklahoma market: Grow, Processing, Dispensary, Transportation, and Wholesale.

Cannabis operations face many hurdles not common to many other industries. One of the first and most problematic is being a mostly cash business.

Accounting / Cash Only (Mostly)

When cannabis began in Oklahoma, being cash only was not a choice. As banks were slow to open operations to cannabis operations, it was the only option. Even as the banks adapted to service the cannabis industry, it comes at quite a cost (especially when compared to any other business sector), often costing upwards of $1,000 per month, per account.

As banking has come more readily available, most of the clients we see have opted to move cash management and storage to banks. This, in our opinion, is a great move. However, even as banking has become a more popular option for cash storage, nearly all transactions are still conducted in cash. As cash is readily available in the businesses, it is easier to pay cash. Therefore, even as banking becomes available, cash management and receipt tracking are still one of the toughest areas for cannabis operations to manage.

Receipts and Proof of Expense

The largest issue of operating with all or mostly cash is keeping track of expenses. Without a bank or credit card statement, it is IMPERATIVE that you keep receipts! Without receipts, there is no expense (in the eyes of the IRS).

If your company is going to operate on cash, use old-school cash systems!! To ensure you can easily track and verify cash, consider the following procedures:

Cash Safe Log
- All Cash that enters or exits the safe should be logged! Log the Date, Time, Amount In or Out, Person Removing Cash, and Reason for the Cash Move (Deposit from Owner, Deposit from Sales, Paid Joe Bob for 2 Pounds of Cannabis Flower, etc).
Register Cash Procedures
- Beginning Cash should be the same at the start of every shift ($150.00)
  - Cash should be counted by the budtender and the manager, at the same time, and a signed receipt (by both) verifying the beginning balance).
- Only 1 person can be allowed on a register (if more than one, even a manager, it erases the ability to track missing cash to one particular person).
- The drawer should be pulled by the manager AND the budtender at the end of the shift, counted and a receipt signed by both parties verifying the ending totals.
- A deposit should be made for each drawer for all cash in excess of the beginning cash ($150.00). A shift report from the Point of Sale (POS) should show the expected cash from the budtender’s shift, and should match the cash removed from the drawer for deposit, and should be dropped in a tamperproof bag. The drawer, with $150.00, should be placed in the safe or counted by the bud-tender coming on shift to verify it starts at the beginning cash ($150.00).
- This cycle should be repeated for each drawer used.
- All cash drops should be picked up and dropped in the safe (and entered in the safe log).
Purchase Journal
- It is a great idea to keep a purchase journal for all cash purchases.
- Track
  - Person Paid
  - Date
  - Amount
  - Purchase Description
  - Total Paid

As you can see, operating in an all or mostly cash operation requires quite a bit of additional work to ensure:

You are not missing cash due to theft or accidental over/underpayment.
You have an IRS Audit Ready Log
- Please note, the IRS is increasing the number of Audits performed on Cannabis companies as there is such a large potential for fraud and tax evasion. (https://mjbizdaily.com/is-irs-ramping-up-marijuana-business-audits-after-covid-19-lull/)

The Benefits of a Bank Account or Credit Card

The ability to use banking or credit cards for business operations is often taken for granted, by most businesses: most other businesses in the United States have cheap, convenient banking readily available to them wherever they are located.

Banking provides many positive benefits to businesses.

Safe, convenient cash storage
The ability to transfer money and payments virtually anywhere
An IRS accepted 3rd party verification of money moves that can be used as a business log to verify an expense (See this article for accepted IRS supporting documents: https://www.irs.gov/businesses/small-businesses-self-employed/what-kind-of-records-should-i-keep)

Filing all the Forms

8300 Forms

IRS Form 8300 are forms required for all transactions, in cash, totaling $10,000 or more. A common misconception is that a payment of less than $10,000 followed by an additional payment of less than $10,000 does not have to be reported. This is INCORRECT. (see this article: https://www.irs.gov/businesses/small-businesses-self-employed/irs-form-8300-reference-guide#:~:text=The%20law%20requires%20that%20trades,Escrow%20arrangement%20contributions)

Type of Payments to Report

Trades and businesses must report cash payments received if all of the following criteria are met:

The amount of cash is more than $10,000
The business receives the cash as:
- One lump sum of more than $10,000, or
- Installment payments that cause the total cash received within one year of the initial payment to total more than $10,000, or
- Previously unreported payments that cause the total cash received within a 12-month period to total more than $10,000
The establishment receives the cash in the ordinary course of a trade or business
The same agent or buyer provides the cash
The business receives the cash in a single transaction or in related transactions

As you can see, any cash installment payment that totals $10,000 within a 12-month period of the first payment must report on form 8300 to the IRS.

Additionally, a new 8300 Form must be filed each time an additional $10,000 cash payment milestone is crossed. In essence, if someone pays you $25,000 in cash in a 12-month period, you would need to file two 8300 forms!

The 8300 form is required to be filed within 15 days of the $10,000 in cumulative payment being received.

Payroll (940 and 941)

All businesses paying employees need to file Federal Payroll Tax Returns. For most businesses, these are 940s (filed annually) and 941s (filed quarterly). Payments for these tax types are on a completely different schedule. Most businesses are required to make payments on a monthly or quarterly basis. The payments are called federal tax deposits, and all businesses are required to make federal tax deposits via the Electronic Federal Tax Payment System (EFTPS).

If a business makes a payment by any means other than EFTPS, even if the payment is made on time, they face a 10% penalty.

Max Freq. of cash payments by tax form (not for tax deposits, only tax due): https://www.irs.gov/payments/frequency-limit-table-by-type-of-tax-payment

How to make cash payments: https://www.irs.gov/payments/pay-your-taxes-with-cash

What to expect when you make a cash payment at in IRS office: https://www.irs.gov/payments/what-to-expect-when-you-pay-cash-at-an-irs-office

Where to make cash payments with retailers (up to $1k per day): https://www.irs.gov/payments/pay-with-cash-at-a-retail-partner

IRS Code – There Isn’t Any!

280E

Ok, prepare yourself. This is 280E!

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. (https://www.law.cornell.edu/uscode/text/26/280E)

Yep! That is it! 77 words! The whole of this much talked about “Cannabis Clause” is 77 words. Cannabis isn’t mentioned, but Schedule I and Schedule II drugs are.

Understanding 280E

Section 280E is a provision in the IRS Internal Revenue Code that stipulates any merchant selling goods considered a Schedule I or Schedule II controlled substance is not eligible to file for any tax deductions or tax credits beyond the cost of goods sold (COGS). Cost of goods sold are raw materials and supplies (seeds, clones, and fertilizer), equipment maintenance and repairs, utilities used to grow the cannabis, inspection and testing costs, and labor involved with cleaning, trimming, curing, packaging and supervisory wages. Keeping an accurate record of these expenses will help if you are ever audited and what accountants call Cost Accounting.

Understanding Cost Accounting

Section 471 of IRS Code
IRS Section 471 details how the IRS expects costs to be capitalized (in other words, booked as an asset and charged off as Cost of Goods Sold when sales are made. The good thing about section 471 for cannabis is this moves many costs that are typically booked as Operating Expense to inventory (expenses that are not allowed for Cannabis, thus Cost of Goods Sold; “expenses”/revenue adjustments that are allowed for cannabis).

The issue with section 471 for cannabis companies as this type of account will increase accounting costs.

Most businesses do not conform to GAAP (Generally Accepted Accounting Practices) in the United States. They simply are not required to do so. Cannabis, however, due to having most expenses disallowed, need to account more closely to GAAP than most small businesses, in order to avoid burdensome taxation: taxation that will literally break the bank.

Documentation (Court Case Rulings)

Most of the “rules” we apply to cannabis accounting and taxation today come from court case rulings. There are no “cannabis” rules in the IRS Tax code. Cannabis is never directly mentioned. IRS 280E is as close to mentioning as cannabis gets.

To begin with, this article is a good summary of some of the court cases, minus CHAMPS: (https://www.dopecfo.com/blog/lessons-in-compliance-from-4-notorious-cannabis-court-cases)

In regards to court cases, CHAMPS is a benchmark case for the cannabis industry. In CHAMPS, we learned how the IRS sees cannabis and related companies. CHAMPS most clearly detailed the way in which the IRS will consider a business a non-cannabis entity. CHAMPS involved a medical marijuana dispensary AND a clinic dedicated to helping people with debilitating diseases and conditions. The clinic employed the majority of the staff, had its own revenue stream, and was profitable without the dispensary sales or revenues.

When is my other business NOT a cannabis-taxed business?

In the CHAMPS case, the IRS Tax Court outlined that if a non-cannabis business is not entirely separate (own accounting books, checking accounts, business setup, etc) and cannot turn a profit without direct cannabis income, it IS a cannabis business. (Example, a business owner owns a dispensary and buys the building and puts it in its own company, then leases the building back to their own dispensary, the new “real estate” company is also taxed as cannabis income, as it cannot turn a profit with the income from the dispensary.

If, however, the building is owned by a company that has many rental locations and the real estate business can turn a profit without cannabis-related income, the real estate business is NOT a cannabis-taxed business under those conditions.

The biggest takeaway from Harborside was determining whether it was a single business or multiple separate entities, and how this holds up in the face of 280E. As the court held in CHAMPS, it is allowable to deduce many expenses not allowed under 280E if one is a real “non-trafficking” business. One of the biggest requirements for a “non-trafficking” business is that the activity conducted must be done regularly and consistently, stand on its own, and fully have the intent of making its own profit.

The courts have determined that a single legal entity can definitely operate more than one business based on these requirements. You can also have multiple legal entities that can be viewed as a single trade or business if they are aligned with the same profit motive. To this end, form over structure will hold up in court. The important thing to note is how the operations function as a unified business, rather than just how your entities are legally structured. (https://www.dopecfo.com/blog/lessons-in-compliance-from-4-notorious-cannabis-court-cases)

Documentation in your books: How Important is it?

One of the repeated phrases or criteria in nearly all of the IRS cannabis tax-related cases involved failure to document!

Several of the court cases involving marijuana had similar wording in the lost cases of businesses fighting IRS tax levies: a failure to document. This is a compelling and preventable phrase! The court said, in essence, if your books matched the case you presented in court, you would have a solid case. However, without documentation (proper accounting and tax filings for each reported year of operation), your expenses (Cost of Goods Sold adjustments) simply do not count: You cannot prove them!

Unfortunately, Olive did not clearly separate the businesses or account for them individually, leading to the Ninth Circuit holding that the owner of the business was not able to mitigate any tax liability because their business consisted solely of trafficking marijuana. Olive suggested that the Ninth Circuit apply their ruling on a previous U.S. Tax Court case, Californians Helping to Alleviate Medical Problems, Inc. (C.H.A.M.P.) v. Commissioner (a case Cannabis industry had won in which separate entities were found to be compliant), but the Tax Court did not agree with the IRS’s and Olive’s estimates, deciding on its own determined COGS amount and determining that none of Olive’s expenses were tax deductible. (https://www.dopecfo.com/blog/lessons-in-compliance-from-4-notorious-cannabis-court-cases)

Other Articles:

Tax Court decisions upholding 280E and Business deductions:
CANNABIS TAX ALERT: Tax Court Decision Upholds 280E and Business Deductions | MGO (mgocpa.com)

Other Articles by Vertices Co:
https://verticesco.com/accounting-for-medical-cannabis-businesses-explained/

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New York to Allow Cannabis Companies to Take State Tax Deductions

4/08/2022

In the agreed-upon Fiscal Year 2023 budget agreement between New York lawmakers and Gov. Kathy Hochul (D), state-approved cannabis businesses will be eligible for the same tax break that is currently in place for other types of businesses.

Including the provisions would help the state’s cannabis operators as U.S. tax law prohibits the industry from any federal tax deductions under Section 280E of the tax code.

The New York tax break would apply to taxable years beginning on and after Jan. 1, 2022.

The budget bills proposed by both the Assembly and Senate, which are controlled by Democrats, include language stating that “the provisions of Section 280E of the Internal Revenue Code, relating to expenditures in connection with the illegal sale of drugs, shall not apply for the purposes of this chapter to the carrying on of any trade or business that is commercial cannabis activity by a licensee.”

Several other states have moved to allow licensed cannabis businesses to take business deductions allowed by non-cannabis companies. A bill introduced last month in California would allow operators to receive a tax credit equal to the amount of the following qualified business expenses: employment compensation, safety-related equipment and services, employee workforce development, and safety training. The bill sponsor, State Sen. Scott Weiner (D), said the measure would help combat illicit sales in the state.

Missouri lawmakers had approved a measure last July that would have allowed the state’s medical cannabis companies to make normal state deductions; however, Gov. Mike Parson (R) ultimately vetoed that bill due to provisions that would have provided tax relief to businesses impacted by city-wide or county-wide public health restrictions which created “significant unintended consequences that could greatly harm localities.”

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Keith Stephenson: Legacy and Longevity in the Volatile Cannabis Industry

10/12/2021

Keith Stephenson is the owner and founder of Purple Heart, the first Black-owned cannabis business to be licensed in the U.S. and the longest-running cannabis dispensary in Oakland, California. During the sweeping social justice protests last year, Purple Heart was hit by a series of burglaries that ultimately crippled the company — Keith is still working to build back his business.

In this podcast interview, our host TG Branfalt asks Keith about entering the cannabis space in the 1990s and launching one of the country’s very first licensed cannabis businesses. This interview also covers Oakland’s groundbreaking social equity provisions (which were largely based on Keith’s suggestions), the early days of cannabis testing, how to achieve longevity in the frequently volatile cannabis space, and more!

Listen to the full podcast below or keep scrolling down to read a full transcript of the interview.

Listen to the podcast:

Ganjapreneur · Keith Stephenson: Legacy and Longevity in the Volatile Cannabis Industry

Read the transcript:

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Cara Wietstock: Hi, I’m Cara Wietstock, Culture Editor at Ganjapreneur, and host our YouTube show Fresh Cut. The best way to understand cannabis business, is to speak directly to those who work within it, and Fresh Cut was created to shed recognition on the people who fill these roles. In this interview series, we focus on those with their hands in the dirt, both literally and figuratively. From cultivators to bud tenders, educators to advocates, activists to lobbyists, we aim to illuminate the workers who keep this industry thriving. Enjoy one-on-one conversations with me and guests, by watching along on the Ganjapreneur YouTube channel, and follow our social channels to keep up with the latest episodes. Have a great day.

TG Branfalt: Hey, there, I’m your host TG Branfalt, and thank you for listening to the Ganjapreneur.com podcast, where we try to bring you actionable information and normalize cannabis, through the stories of ganjapreneurs, activists, and industry stakeholders. Today, I am joined by Keith Stephenson. He is the founder and owner of Oakland, California-based, Purple Heart. The nation’s first Black-owned cannabis business, and Oakland’s longest-running cannabis retailer, which has served the Bay Area for 15 years, but unfortunately was among the cannabis shops targeted by thieves during last year’s unrest in the city. Purple Heart and Stephenson were featured in Ganjapreneur’s March report, Oakland’s Longest Running Dispensary Still Recovering From Last Year’s Crime Spree. I am really, really delighted to have Keith on the show. We got to talk a little bit for that interview, and there was a lot more that didn’t really make it to print that I think that Keith’s story needs to include, so here he is. How are you doing Keith?

Keith Stephenson: Absolutely phenomenal, Tim, and equally as important as how I’m doing, is how are you doing?

TG Branfalt: I’m doing great. It’s a really delight to have you on the show. I really enjoyed interviewing you for our article back in March. But people got to know a little bit, just got to scratch the surface of your story. So why don’t you fill in the gaps, and tell me about your background, and how you ended up in the cannabis space?

Keith Stephenson: Yeah. Well my background is professionally, I was an aviation maintenance technician for 17 years, for one of the top two airlines in the industry. And with that being said, I also had a preexisting juvenile form of arthritis, which was intimately involved in my life growing up. So that’s how I became intimately involved with cannabis.

TG Branfalt: And we talked a bit for the article, about your first jobs in the space. Tell me about your early experience in California’s medical cannabis industry.

Keith Stephenson: Yeah. My first experience professionally being involved, was working with the Oakland Cannabis Buyers Co-op, which was a retailer and a provider of medical cards in the City of Oakland. And from there I also worked at some of the grassroots organizations, like operating the phone banks, and just early adaptor work in the space, which allowed me to learn more about the industry, and realize that this is something that I wanted to be involved in early on. And when I say early on, we’re speaking like 1996, ’97, ’96, somewhere around there.

TG Branfalt: You said you started at phone banks, and you started at the club. What did you learn from those early days, that eventually led to you being able to start your own successful dispensary?

Keith Stephenson: What I learned, is that working in the industry was something that I truly loved. I really felt fulfilled, and it didn’t appear to be a job to me. It was a labor of love. And from that, just being around the plant, and having spent some time in gardening and trying to hone my craft, and just seeing that this was an industry that I liked. So it was something innate, it touched me and it allowed me to interface with other individuals who had some ailment that they were treating with the use of cannabis. So that’s one of the things that really brought me in.

TG Branfalt: You are the first Black-owned cannabis business in the United States. Can you talk to me a little bit about your early days, or even your experience now in what is a still white-dominated industry?

Keith Stephenson: Yeah. Early on, I say that wow, other operators had jumped into the space and I wanted to jump in, however, this was at a time when this Justice Department was really very intensified towards the medical cannabis industry. So I just didn’t have the ability to hop into this space, as an unlicensed operator like some of my other white peers were. And the difference now and then, is that right now you have a larger group of individuals who’ve never really interfaced with medical cannabis patients. So right now we have a market that, in California at least, is more “recreationally” involved. So when I initially started, there were many patients that we would provide cannabis for that succumb to their injuries. And that’s one of the bigger differences that I see, and also the large or well-financed companies that are coming into this space. So we’re really at a point where the industry is emerging, and this is the advent of commercial cannabis sales that we’re seeing.

TG Branfalt: And one of the things that I was really surprised to learn about when we spoke for that article, was that you played a really pivotal role in Oakland’s social equity licensing process. The city was the first in the state to roll those out. Tell me about that process, and what your role was in developing what has become really, a standard for every cannabis program that comes online.

Keith Stephenson: Yeah. So initially I was involved in the industry, and there just weren’t many people of color in space, in terms of being authoritatively and financially binded to companies. The positions you’d see people of color in, we’re typically positions of security to mitigate the threat. And I knew me, myself, I was capable of doing this. And what we have is, we’re talking about retail sales, and while some folks wanted to make it seem more than what it was, it was really business, kids who operate a business, and there are many people of color that operate successful businesses. However, the way I viewed the local regulations at the time at the city level, that some of these individuals that would be qualified to enter into the space, just would not be able to based off of how the regulations were written, because of growing up in an area that was targeted by the war on drugs.

And I just felt like as a collective group, we would never get to the place of opportunity. So I communicated with two Council members back in about 2008, or 2009, about working to change this. And I was just saying, “Hey. You know what, the way it’s written, these individuals that would have a record, they may have been arrested for cannabis, drug sales, or whatever, that they would not be allowed to operate into this space.” So it was something that early on they were like, “Yeah. We can see it.” And it took a decade, it took 10 years for this to come to fruition. So my position was early on, I was a thought leader. And then right before the city rolled out the program, I was really intricately involved in the language to make sure, that these individuals that grew up in these areas, that were heavily targeted by law enforcement for drug sales would have an opportunity.

And it’s one of the things that I shared with others in the industry. And I’ve always communicated like, “Listen, if you really think growing up in the inner city is always easy, I would surely exchange your Hampton experience, or whatever lifestyle that you dealt with in exchange for growing up in urban America.” Me, myself, I grew up in South Central Los Angeles, however, I’ve traveled enough to know that this was a systemic issue. It’s not just regulated to the area that I grew up in. That’s really what it was about. It was about giving opportunity to other individuals that lived in these environments that were targeted for the war on drugs.

TG Branfalt: And you make a good point when you call yourself a thought leader. And I think that, that’s almost an underrated characterization. You have operated and lived through, basically the entire life of California’s, go from the gray market to the medical market, licensed medical market to the retail market. Can you tell me about the challenges, the transition into each of those markets you faced as an operator?

Keith Stephenson: Yeah, absolutely. So the gray market is what I would experience, I would call it prior to the 215 Market. And that was just like, “Hey, California cannabis is really good,” and back then it was really good. And by me having a pre-existing condition, that was really about having continuous and daily pain. I don’t think anyone knows what it’s like to have pain all the time. And I think that’s how the opioid abuse has come into play, because as humans, we deal with pain, and then we want to find a source of comfort. And for many that source of comfort was opioids that were prescription-based. However for me, I realized cannabis made me feel good a long time ago. However, I operated in a safety sensitive position, and even to this day, workers that operate in safety sensitive positions cannot consume cannabis, or CBD.

So for me, it was like, “Hey what do you really want?” And for me, it was like, “I want a quality of life.” So now we matriculate into the 215 era, and my physician recommends cannabis, because a physician cannot prescribe cannabis, but he recommends cannabis. And I’m like, “Okay, this is great. Now I can go to the Oakland Cannabis Buyers Co-op,” and I’m like, “Okay, you know what, they’re hiring. So I’m going to take a part-time job here.” However, the stress of going to work at a facility, and this was a part-time job, and going to a facility that’s on the list of the Justice Department, or DEA is not an easy thing to do. And then you realize, “You know what, I have to work in this industry, because I’m not the only one who feels like this.”

And while there were others that were more pro recreational cannabis, I didn’t have the ability to really think in that frame of mind, because I’m dealing with a preexisting condition, and by the time I’m 26 years old, I’ve had both hips replaced. And I have range of motion issues, and my posture is changing, and I go from being six feet tall to 5’10, and my spine is compressing. So I’m consuming cannabis, and cannabis is alleviating the constant pain, and it’s allowed me to go into more of a recreational mode. So with that it worked out, and I started cultivating around that time. However, it became better being able to cultivate and having some protections from the local Police Department in the City of Oakland, being a cannabis patient.

So from there just going to the hydroponic store, and seeing it become more and more crowded, and then realizing, “Okay, I’ve got to pivot.” So pivoting into the recreational space, it was natural. However, it didn’t happen easy, this opportunity occurred because in my spiritual sense, how I’m communicating, is that the universe wanted me to play a part in this industry. And I spent a lot of time going to Oakland City Council meetings, communicating to staff afterwards like, “Hey. We need more cannabis dispensaries,” because the initial first four dispensaries that were licensed, I wanted to have one of those. However, during that process I had to have emergency surgery. I had diverticulitis and I’m like, “Wow. This is what I want to do.”

So I had to back out of it. And then I get in the industry, I become a retailer. Things don’t happen overnight. My burn rate was very high. It was 132,000 for the first three months. And this is at a time where I was cultivating at home, so I had saved a pretty large amount, like 75 pounds of cannabis to start the dispensary, and had I not done that, I don’t know what would’ve happened. So everything that I’ve learned previously from the time of my inception of dealing with licensed cannabis, and moving towards the timeframe of 2017, that’s when I first interfaced with the new regulators that were a put together by Governor Jerry Brown, to open or to start the Bureau of Cannabis Control.

And some of the individuals were from the Alcohol Beverage Control Department, in the State of California. So they had experience of dealing with a regulated inebriation product, however, they knew nothing about cannabis. So through the years, I think it was 14 years of my experience, I communicated with them the things that I had worked on, processes that the Purple Heart team had developed. And we just poured into them, because we wanted this framework to mirror what was right by the licensed industry standards. And just to go back, when I talk about the first Black-owned cannabis business, and we’re the number four licensed cannabis business in America, it’s about being licensed. I didn’t have the authority. Well, I had the authority, but I didn’t have the protection of going into this without being legally licensed.

So there are other operators that were operating, and then they became licensed. But what I wish to say, is that I am the first licensed Black-owned cannabis business in America, and the number four licensed in the country, period. So my experience in what I’ve given to the industry, is one of love. So as we move into this newly regulated market, me being able to interface with the officials Lori Ajax, and Dean Grafilo, and some of them have gone on to be lobbyists, some have gone on to work for other corporations, it allowed me to communicate what we found to be our best practices. And some of the things were adopted into the state regulation. Such as, at one time I was working on a hydroponic line of products before my mom took ill, that allowed me to go into the efficacy of finding out what’s in the hydroponic nutrients.

And we were moving towards a zero to low, heavy metal analysis. So these are the things that were brought into California regulations. And you have things, like when you use a sulfur burner, when you’re cultivating, sulfur burner is used to mitigate pottery mildew on vegetables and plants. However, it was never meant to be used on plants that would later be combustible. Meaning that we were lighting them, and that lighting the residue from the sulfur burner turned into a carcinogen once lit. So there was just a lot of things that myself, and operators in the City of Oakland learned about testing cannabis, and mold spores, and all these things. And initially I was not someone that welcomed testing. I used to refer to it as the easy bake oven theory, and I just thought it was something that the city wanted, that someone was in their ear to make us spend more money on this service. And I found that there were so many things that were on this cannabis. It was the-

TG Branfalt: Excuse me for a second. Are these the things that you discuss in your role on the Cannabis Advisory Committee as well?

Keith Stephenson: … These are things that I discussed prior to, and this is how I received the opportunity to be appointed to the advisory commission. So these were things that we were doing locally, and I wasn’t the first operator to do it, however, we developed a standard that was so high, that the City of Berkeley adopted our standards for their medical cannabis dispensaries. So it was just something that I wasn’t actually accepting of, because in business you’re looking at top line revenue, overhead, and how do we become not only successful, but profitable. And no one wants to run a business where your finances are tight. However, it allowed us to set this standard, but because me being a Black business owner in a cannabis space, I couldn’t promote what we were doing publicly, because I had to take a seat and just be quiet about it.

However, when you have a Richard Lee, from Oaksterdam University, one of the well known individuals that was really pushing the industry towards adult recreational cannabis, and you have a Steve DeAngelo from Harborside, it makes it easy for you to fall, I won’t say fall, but those are big figures. So it allowed me to maintain my anonymity. However, when you’re a first mover in this space, seems like the reward you get are 280E audits.

TG Branfalt: We can certainly talk about some of these, I guess, administrative, that’s not giving them enough credit, problems. But I want to ask you really quickly, what do you attribute your longevity in this industry? Having covered this space since 2014, I see businesses and people come and go, even some of the people who are riding high for five or six years, then they blow up spectacularly. How do you last this long?

Keith Stephenson: Well, for one, I think that there are three things that you have to have in the modern cannabis space. You have to have knowledge of the industry. You have to have financial, or fiscal responsibility, and you have to love what you’re doing. No one really has anything that’s different, product wise. So you have to be able to deliver exceptional customer care and service, and to be able to know the nuances of the industry. The buying patterns, the sales. Sales tend to go up at certain parts of the year, and they tend to go down at certain parts of the year. So your financial forecasting has to be on point, and you always have to have the ability to mitigate your exposure.

It’s a very costly business. A lot of times you see MSOs, multi-state operators, come into this space, they raise a lot of money, and then they go bust. And part of it is, believing that once you’re going to get in this space, that everything happens just to your favor, and that’s not the case. It goes back to what I was telling you about, me starting in this business, there being very limited competition, and I’m still losing, my negative burn is 132,000 a month for the first three or four months. And it’s like, “How do you mitigate that?” And I think that my history, is that I’ve encountered many turbulent periods of this emerging industry, and not being afraid, not folding, but really sticking to the script.

That I feel, and I believe that I know this industry better than anyone. Now, whether I know it better than anyone or not, it’s what I believe. I believe on my intimate knowledge, my preparation for the space, and how do I prepare myself in 2016 to be here in 2026, and understanding that all the things that I’ve been through, how do I not allow them to impact me? And when I say me, me is synonymous with the business, so there are a lot of things. I didn’t come into this space with billions of dollars. I do believe that the opportunity to be financially successful, is equally as important as being philanthropically successful. A lot of operators in the industry may really feel that, who makes the most money is the biggest winner.

However, how positively impactful have you been in this space? And there are so many things that we could chart our growth by, but ultimately, for me, it’s about how many people, or have you assist in getting into the space? How many brands have you helped break into the space? And when it comes to policy involvement, where have you been? I’ve been involved in the City of Oakland’s policy early on, where I sat on the Measure Z council, which is now the Oakland Cannabis Commission, which is a precursor to what I do at the State level for California. And it’s really me being someone from the industry, and me offering my greatest advice as to how this industry can move forward and grow, not in a manner that’s beneficial for me before the entire industry.

TG Branfalt: Well, and so you discussed your challenges and in our piece that we published in March, we discussed the ransacking of your shop at length with the riots that were happening, under the guise of the protests that were occurring. These are separate incidents, obviously. You had described it as organized crime, it was planned on Twitter. But what we don’t really go into in that story, is the depth into some of the other fallout, such as the insurance problems that you faced, and the issues with METRC that you experienced in the days and the weeks of following the event. Can you talk about those issues, and whether or not they’ve been fully resolved?

Keith Stephenson: Sure. Yeah, we did sustain two burglaries after temporarily closing to become COVID compliant. When I say COVID compliant, I mean building sneeze guards, acquiring the right disinfectants that we can use that are not only safe for our facility, but allows us to counter COVID, and any other sickness or issues that are happening there. So working with the insurance company, this has probably been my first foray into being upset with an insurer. And you realize you’ve paid years of insurance to protect the business, and you’ve never filed a claim, and then when you file a claim, they make it more arduous than what it has to be. And you realize that after talking with your legal counsel, I was told the only way to insurer makes money is by paying you less money than what they owe you.

And then you start to realize, “Well, this is why so much of our citizenry doesn’t like insurance companies, because you have a need to be covered financially, and you have a need to have whatever other harm that happened to be taken care of. But the underlying connectivity is the finances. And I feel that, based on my experiences, I want all the operators in the industry to know. There’s no reward in over insuring your business for more than what you can receive, and what I mean by that, if the business is only going to keep $200,000 in merchandise at the facility, there’s no need to pay for a policy that allows you $500,000 in coverage when you’re not going to have it. And then you start realizing how the adjuster, the insurance company all work together.

So now you’re attempting to find a solution, and then you realize that this is just capitalism. Where capitalism is about making money, but my thing has always been capitalism with a consciousness and giving back to the community. However, when you’re dealing with level business at this point, and the numbers are large what they have to pay you, what I’ve been told is that the insurers, they’ll just put you in a position to say, “Can you afford to litigate this case?” And if you can, they’ll try to get the case kicked out of court, and if they can’t get it kicked out of court, as you start progressing towards trial, then that’s when the insurers start to communicate with you in a manner that they want to resolve this, they want to settle this. But it’s an arduous turn, and I wish for the best for me and my industry peers.

TG Branfalt: Do you think that the response from your incident specifically, has to do with the fact that you are a cannabis business, and there may be a little bit of bias there?

Keith Stephenson: That’s difficult for me to say. I just think that regardless, I can say that may be an inference. It could be inferred that, that may be it. However, I also feel that insurers just they don’t want to pay you. If they have the ability to remove themselves out of any policy covers, they will.

TG Branfalt: So you had mentioned that you have this capitalism with a conscience, and you’ve donated to many community organizations, including Urban Services, YMCA, Oakland School of the Arts, the Oakland Police Officers Association, and the Covenant House of California, among others. What role by and large, do you think that cannabis businesses should have in community building?

Keith Stephenson: I think that as stakeholders in the community, we have to be in compliance with the community, and a community should be in compliance with us. And what I mean by that is, if a cannabis business is operating in a residential community, then you have to be accepting, and accountable to conversations to hear the community’s position. And I also think that if a community moves into a commercial district that has become habited by cannabis businesses, then that community should also put themselves in a position to have to acquiesce. Because I presented two situations that are similar, but different. And some communities are residentially oriented, and others are commercially oriented. And if you move into either districts, you should realize that me being a stakeholder means that I’m accountable to my neighbors, regardless of what they do. Just a couple weeks ago, I went to a facility, and this place, there was an intense cannabis smell emanating from the facility in a residential area. And how does one mitigate that? I can tell you, I like cannabis, however, the strong smell of cannabis in its final weeks of ripening and being trimmed can be rancid to some.

TG Branfalt: Yeah. New York, we obviously just moved into it. Anytime I read about what people describe cannabis as, when I lived in Florida, I remember the smell of the burning orange peels at the Tropicana plant, and that’s what I think about. I’m not somebody who really likes to smell citrus. So to your point, what do you think operators could do better in that regard?

Keith Stephenson: Well, I think that the operators are doing exactly what they planned on doing. However, I think that, that’s a more of a municipal issue and municipalities have to have an understanding of what they are permitting. Now, for the residents of that community, I don’t think they could be upset at the operators that are cultivating, processing cannabis, or anything like that. I think that as a citizen of that community, they have to voice their issue, if they even have an issue. I just found it very loud to be two blocks away and approaching this facility, and just like, “Wow. This is pretty loud.” Now, could I live in that environment? It may be difficult. I’ve cultivated cannabis at home, and it was fine with me because it was my cannabis.

TG Branfalt: Again, just like our conversation for the print article we again, just barely get to scratch the service with you, Keith. Okay. In the final minutes here, could you tell me, 30 years in this industry, it’s literally a lifetime for lesser men and lesser businesses. What advice do you have for entrepreneurs, who seek to be in this space for 30 years?

Keith Stephenson: One, make sure that you love what you’re doing. And so many operators come into the industry, because they look at it as a gravy train with meatball wheels. And I understand, if you want to do something for a financial gain to allow you the affordability, of a quality of life that you might not have right now. However, what makes you happy? So if cannabis makes you happy, you have ideas of doing things your way, try it. Make sure that you are able to be involved, and learn as much as you can about the industry, and make sure that the folks that you’re interfacing with are who they say they are, and that they have the experience that they’re stating to you. Because at this point, I know cannabis is such a young industry as we move into the legality of it, and there are many individuals who, everyone’s a subject matter expert.

However, this is the only industry where the disbarred attorney, or the mortgage broker who created fraudulent loans, can come into this space and say that they are subject matter experts. So do your due your diligence, find out what part of the industry you want to be in, and find out if you’re in a state where the opportunity tends to be not as easy, that you consider going to a state that it’s a lot easier. I spoke to an individual yesterday in the city of Oakland who wants to do it here, but they feel like the California regulation and taxes are a barrier to entry, so they want to go to Oklahoma. And I’m fine with that. And just really have an infrastructure, have sound legal advice, and have some involvement in the industry, where you can reach out to communicate with those in the space that have been doing some things. And if you have to pay for a professional advice, then be willing to do so.

TG Branfalt: I really enjoy being able to have these conversations with you back-to-back. I really feel like I’ve got to know you a little bit between interviewing you for the print article, and I really appreciate you taking the time both then and now, to tell your story, and offer your decades of experience to our listeners. Where can people find out more about Keith Stephenson and Purple Heart?

Keith Stephenson: Right now I would say, just Google Keith Stephenson. Definitely Google Keith Stephenson, and support my GoFundMe campaign that I’ve launched. And as we’re in a process of rebuilding and opening, you can go to purpleheartpc.com, and we’ll start providing more information on there. You could follow me on Clubhouse at purpleheart_keith, and just Google me and continue to listen to you, Tim. It’s awesome for you to share your time and your platform with me, and I greatly appreciate it.

TG Branfalt: Just so our listeners are aware, the GoFundMe, it’s in response to the ransacking, the burglary, robbery of your dispensary last Summer, your retail establishment. Could you tell people how they can find that GoFundMe?

Keith Stephenson: Yeah. It’s at GoFundMe. It says, Help Keith Stephenson Rebuild His Life. And the reason that I chose to put, ‘help me rebuild my life’, is because the cannabis space is one of those unique spaces, where right now no one wants to shake your hand professionally when it comes to financial institutions. And they’ll kick you out of a bank, and they’ll shut down your platform. So I’ve had to personalize this crowdfunding opportunity, by saying, “Help Keith Stephenson.” Because if I say anything about Purple Heart, it’s going to be shut down.

TG Branfalt: It’s unbelievable, it’s unbelievable. Keith Stephenson, he is the founder and owner of Oakland California based, Purple Heart. The nation’s first Black-owned cannabis business, and Oakland’s longest-running cannabis retailer. Keith, thank you so, so much for being on the show. I really wish you the best of luck as you reopen and get back on your feet, and I hope that the next time we talk, it’s about reopening the doors to Purple Heart. Thank you so much.

Keith Stephenson: Absolutely. Appreciate you, Tim. Thank you.

TG Branfalt: You can find more episodes of the ganjapreneur.com podcast, in the podcast section of ganjapreneur.com, on Spotify, and in the Apple iTune store. On the ganjapreneur.com website, you will find the latest cannabis news in cannabis jobs updated daily, along with transcripts of this podcast. You can also download the ganjapreneur.com app in iTunes, and Google play. This episode was engineered by Trim Media House. I’ve been your host, TG Branfalt.

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Missouri Gov. Vetoes Bill to Let Cannabis Companies Deduct Business Expenses on State Taxes

7/12/2021

Missouri Gov. Mike Parson (R) on Friday vetoed a measure that would have, in part, allowed the state’s medical cannabis companies to deduct normal business expenses on their taxes, the Missouri Independent reports.

In his veto message, the governor didn’t mention the medical cannabis tax provisions, rather he said the veto was due to a section that would have provided tax relief to businesses impacted by city-wide or county-wide public health restrictions which have created “significant unintended consequences that could greatly harm localities.”

The bill, which passed the Legislature in May, would have allowed the state’s medical cannabis companies to deduct normal business expenses on state tax returns. Such deductions are not allowed on federal returns due to federal cannabis prohibition.

Andrew Mullins, executive director of MoCannTrade, told the Independent that the organization is “disappointed by the veto” but that members “remain encouraged by the overwhelming bipartisan support for a measure of basic tax fairness that received near-unanimous votes in both the state House and Senate.”

“As our state’s newest industry continues to create thousands of new jobs and generate tens of millions in new spending each month, we look forward to again passing this policy change and seeing it signed into law.”—Mullins to the Independent

The law was the first in the nation to approve such reforms despite Missouri only legalizing cannabis in 2018.

Section 280E of the federal tax code does not allow “any trade or business…that consists of trafficking controlled substances” to deduct normal business expenses, whether or not their business is approved by the state.

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Justice Thomas Says Federal Cannabis Prohibition ‘May No Longer Be Necessary’

6/29/2021

Supreme Court Justice Clarence Thomas, one of the high court’s most conservative judges, on Monday said that the federal “prohibition on interstate use or cultivation of marijuana may no longer be necessary or proper to support the federal government’s piecemeal approach.”

Thomas’ opinion was filed in Standing Akimbo, LLC et al v. the United States.

“Federal policies of the past 16 years have greatly undermined its reasoning. The federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”—Thomas in the opinion

The justice points out that in 2009 and 2013 the Department of Justice issued memorandums outlining policies that prohibit the federal government from interfering with state-legal cannabis programs and businesses.

In the five-page opinion, Thomas points out, rightly, that “legality under state law and the absence of federal criminal enforcement do not ensure equal treatment” for cannabis businesses, noting that legal cannabis operators, under section Internal Revenue Service code 280E, can end up “still in the red after it pays its workers and keeps the lights on” because the company cannot take normal business deductions.

“This disjuncture between the Government’s recent laissez-faire policies on marijuana and the actual operation of specific laws is not limited to the tax context,” Thomas wrote. “Many marijuana-related businesses operate entirely in cash because federal law prohibits certain financial institutions from knowingly accepting deposits from or providing other bank services to businesses that violate federal law.”

The opinion also points out that were cannabis businesses hire armed guards to protect the cash “the owners and the guards might run afoul of a federal law that imposes harsh penalties for using a firearm in furtherance of a ‘drug trafficking crime.’

“If the Government is now content to allow States to act ‘as laboratories’ “‘and try novel social and economic experiments,’” Thomas wrote in the opinion, “then it might no longer have authority to intrude on ‘[t]he States’ core police powers . . . to define criminal law and to protect the health, safety, and welfare of their citizens.’”

The opinion comes as the court last week declined to hear a separate case challenging IRS summons in 280E audits.

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Kenneth Mason: Business Analysis & Accounting for Cannabis Startups

6/21/2021

Expert business analysis and accounting services are vital when launching and scaling a business, especially in the cannabis industry.

We recently asked Kenneth about money management in the cannabis space and how Equibis works to help small businesses navigate potential financial pitfalls and find success even without enormous backing capital. This Q&A also covers the biggest challenges facing cannabis industry startups, Kenneth’s work to facilitate diversity in the cannabis space, the unique financial challenges for social equity entrepreneurs and others from underserved communities, his best advice for cannabis startups, and more.

Scroll down to read the full interview!

Ganjapreneur: After years of experience in finance and accounting, what drew you to working with cannabis entrepreneurs?

Kenneth Mason: I think what you will find with a lot of folks is our personal connections. I’ve had family locked up, family caught in violence surrounding the cannabis. My first time consuming was at about 12/13. I grew up on the south side of Chicago and quite honestly weed has always been a part of everyday living. Going through school and eventually becoming a CPA, I left the world of auditing to start my own business work with small businesses in what I call underserved communities. Most of the companies do not have access to high level CFOs and strategic business advisors. So my heart became set on providing this type of impact on these businesses from communities that I grew up in. As I became more cemented in the community, I began joining social justice initiatives surrounding cannabis. and I quickly saw a need from a business perspective. I immediately began doing my research, learninig, and helping out cannabis companies that I eventually built relationships with.

What is the biggest challenge facing cannabis businesses when it comes to accounting and finance?

By now, I imagine everyone knows that my significant hurdle is 280e. It’s a part of the Internal Revenue Tax Code. To sum it up as simply as possible, a cannabis company cannot take any tax deductions from their gross income. Quick example of how devastating this tax code is. Say a company brings in $100,000 in revenue and has expenses of $99,000 from paying for rent, marketing, employees like an office manager, etc. You only have $1,000 in profit. The IRS says you cannot deduct marketing, certain salaries, etc because cannabis is still a federally illegal drug. The average business gets taxed on the $1,000 profit whereas the cannabis company can easily get taxed on an amount closer to the $100,000 of revenue it brought in. How can a business pay 25% percent on $100,000 which is $25,000 when they only made $1,000 in profit?

For a cannabis startup, how does the experience of working with Equibis differ from working with other accounting services?

Most accounting firms give you the basic bookkeeping and tax work. Some provide audit services. Those are things you are required to have. But, the reality is that getting your taxes done for you at the end of the year won’t make your business successful. It won’t help you reach your financial goals or create a financial plan. What makes Equibis stand out is our focus on guiding your business every step of the way to reaching your revenue goals, profit goals, short term and long term planning goals and much more. I often ask new startups, how much cash do you plan to have by the end of next month? Next year? I have yet to get an actual answer. We don’t simply look at what happened last year or last month. The value we provide comes from our ability to plan for the future, to show you where your business is headed as of right now and what needs to happen in order to be more successful next month. By looking ahead we are also able to avoid the hair on fire crisis mode that most businesses operate with. When my team is able to show you, “Hey two months from now we’re projecting the business to have negative cash flow, let’s push the purchase of the new machine a couple of weeks when we’d have more cash come it”, we help keep the doors open.

Do you serve clients in other markets and regions, or do you primarily stay local to Chicago/Illinois?

Equibis is a 100% virtual firm. We serve nation-wide. We do, however, like to pop in a couple times a year, that’s always fun.

What is the “profit-first model” and how does it play into the services that Equibis offers?

The goal of every business is to be profitable. Every business owner deserves to have their business take care of them financially. So, profit is typically our main priority. It’s simple really. If you aren’t profitable, the business fails. So we help make business decisions with the perspective of how it affects short term and long term profitability.

What are some of the services you offer to underserved communities, and how did this become part of the Equibis mission?

Most of these businesses cannot afford a CFO that can easily run up to $100k to $200k a year. We provide a lot of the services you would typically find with a corporate CFO. We lead the finance department. We look at pricing strategy, cost analysis, employee performance plans, tax planning, employee benefits, all of these things and make sure it’s done correctly and also in a way that the company is still profitable today and tomorrow.

Why is it essential for social equity applicants and other underserved small businesses in the cannabis industry to have financial representation?

Many people start businesses or get into the cannabis industry because of their passions for these things. Unfortunately, passion isn’t enough to run a successful business. Having a company that understand many of the struggles you will face not only from a business perspective but a social and a personal perspective, allows you to work with people you can trust.

Do the financial challenges facing social equity applicants differ from those facing MSOs and other larger operators?

In short yes, most social equity applicants do not have the capital to fund their ventures on their own. I believe that’s why you see the different states attempting to pass bills that would support these applicants financially and operationally. It’s no question social equity applicants deserve many seats at the table, but they also deserve the support to sustain those positions. Large operators have the funding to not only finance their ventures, but to also survive unforeseen events like a pandemic or waiting for licenses to be given. An example is in Illinois. Social equity applicants who did not have as much capital struggled with paying to hold their place on a lease in hopes of acquiring a license that the state had withheld for a year.

Are cannabis businesses at higher risk of being audited? How does working with Equibis lower this risk and/or help in the case of an audit?

Absolutely. An article came out from the IRS blatantly saying increased focus on auditing the cannabis industry is a better use of time because of the higher rate of these audits uncovering issues. It’s complicated. So we not only make sure cannabis companies are properly filing and paying their taxes, but that they are 100% audit ready. Part of working with us means that we set processes in place to cover our butts during any audit. What this also does is take away the stress from the owners. It ends us being passed audits with less involvement from the owners.

What are some of the additional benefits, beyond preparedness and avoiding costly mistakes, that cannabis startups can get out of a partnership with a financial advisor?

You will have a well-thought-out, structured plan on how to achieve all of your business goals and ultimately your goals for your life.

What are some common financial mistakes you see in the industry and how should cannabis companies address them?

Some common financial mistakes I see often are not having good standard operating procedures for cash or having a plan for how money moves within the company. With the standard operating procedures for cash, it’s critical to have good policies and procedures in place for prevention of theft, fraud and for being able to know where every single dollar is at all times. As far as the cash planning/management, smaller companies are not taking the necessary steps to be able to look at their cash position and say “this money is set aside for bills for the month, this amount is going to taxes, this for payroll, this is going to additional inventory. And at the end of the month, our cash balance should be $XXX”. They are spending without tracking and without having an idea of what type of position they’ll be in, in the future.

What’s your advice for entrepreneurs who are launching their first cannabis start-up?

Get your A team together, and make sure to have people with the skills to cover every important area of the business from compliance to finance to people management. Also, make it a priority to systematize and document everything as much as possible. Improving the system of how you operate and documenting it so that it is easily repeatable is necessary to scale and grow your business.

Thanks again, Kenneth, for answering our questions and sharing your expertise! To learn more about Kenneth Mason or Equibis, visit EquibisAccounting.com.

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Biden Appointee Supports IRS Investigations of Cannabis Brands

5/26/2021

Acting Solicitor General Elizabeth Prelogar on Monday filed a brief with the U.S. Supreme Court supporting decisions by lower courts that allow the Internal Revenue Service to investigate state-legal cannabis business for potential Section 280-E violations, Marijuana Business Daily reports.

Prelogar is the fourth-highest-ranking official in the U.S. Department of Justice.

“…The court of appeals merely explained, correctly, that the federal prohibition on trafficking marijuana is itself a sufficient basis for the IRS to investigate potential violations of Section 280E by petitioners, irrespective of state law. … The court of appeals was also plainly correct that the Controlled Substances Act would preempt Colorado law in the event of any conflict. Colorado may, of course, choose not to prohibit conduct that federal law prohibits. … Under the Supremacy Clause, however, Colorado may not authorize individuals or businesses to violate federal law.” – Prelogar in the May 24, 2020 brief

Earlier this month, the U.S. Supreme Court declined to hear a separate 280E challenge but the court said the denial was based on late petition filing.

In February, Prelogar filed a brief in another 280E case with the Supreme Court, brought by Denver, Colorado-based Standing Akimbo, making the same arguments, according to a Colorado Politics report.

“Marijuana is listed on Schedule I of the Controlled Substances Act … without any exception for ‘state-legal’ marijuana,” Prelogar wrote in the February 12 brief. “States may not countermand Congress’s decision to prohibit trafficking in marijuana. Such activity violates federal law even when it does not independently violate state law (and even when it is affirmatively permitted by state law).”

James D. Thorburn, the attorney for Standing Akimbo, told Colorado Politics that the filing shows the administration of President Joe Biden (D) is continuing to argue state-approved cannabis legalization is essentially legally void.

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Missouri Passes Bill to Let Cannabis Companies Take State Tax Deductions

5/25/2021

A bill to allow Missouri’s medical cannabis companies to deduct ordinary business expenses on their state tax returns is headed to Republican Gov. Mike Parson’s desk after near-unanimous legislative approval, St. Louis Public Radio reports.

The law is expected to ease the tax burden of licensed cannabis operators as they are not allowed to take such deductions on their federal filings due to cannabis’ Schedule I status.

The measure simply allows state-approved medical cannabis businesses to claim an income tax deduction in an amount equal to any expenditures which would otherwise be allowed as a federal income tax deduction.

David Smith, a certified public accountant who works with medical cannabis companies, told lawmakers during a hearing that existing law could mean effective tax rates for cannabusinesses of 70% or higher and “some companies may even be subject to income taxes while operating at a loss.”

During a Senate hearing last year, Ncholas Rinella, CEO of Hippos Cannabis, said the level of taxation “limits the industry’s ability to serve patients, supply jobs and reinvest in the communities” they serve.

The law is the first of its kind in the nation, despite Missouri only legalizing cannabis in 2018 – far behind the majority of states that have approved the reforms.

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Court Rejects Harborside Appeal in 208E Legal Challenge

4/23/2021

The U.S. Circuit Court of Appeals on Thursday rejected the 280E appeal from Oakland, California-based Patients Mutual Assistance Collective Corp – or Harborside Health Center – ruling that federal cannabis prohibition prevents legal cannabusiness from excluding or deducting taxable income as business expenses, Reuters reports.

The company had argued previously that 280E is unconstitutional, running afoul of the 16th Amendment, which allows for income taxes. Attorney James Mann, of Greenspoon Marder, said in June that the tax code – which is used by the federal government to tax proceeds from illicit drug sales – “results in a tax that’s not on income, it’s not an income tax, so therefore it’s unconstitutional.”

All of the courts so far have disagreed with Mann’s assessment.

In 2018, the U.S. Tax Court ruled against Harborside, describing the firm as “a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim” because cannabis remains federally illegal.

Earlier this year, the Tax Court ruled that medical cannabis operator San Jose Wellness, a subsidiary of Harborside, is liable for $4.2 million in taxes because federal law prohibits cannabis companies from claiming depreciation and charitable contribution deductions. Judge Emin Toro cited the Patients Mutual Assistance case in his decision. Additionally, Toro said that just because San Jose Wellness sold other, non-cannabis goods, such as t-shirts, and services, such as acupuncture, it does not qualify for any tax breaks.

In Thursday’s unanimous decision, Circuit Judge Daniel Bress also determined that Patients Mutual Assistance had failed to preserve for appeal its constitutional challenge to the tax law and its claim that it was entitled to exclude business costs under a U.S. Treasury regulation.

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IRS Wants to Let Cannabis Companies Pay Taxes Electronically

2/26/2021

During a House Appropriations Financial Services and General Government Subcommittee hearing on Tuesday Internal Revenue Service Commissioner Charles Rettig said the agency “would prefer direct deposits more so than receiving actual cash payments.”

Rettig’s comments at the hearing were first reported by Marijuana Moment.

“It’s a security issue for the IRS. It’s a security issue for our employees in our taxpayer assistance centers, [which] is actually where we receive these payments. We created special facilities in the tax to receive the payments. Then we similarly have to transport the payments themselves.” – Rettig, to the House Appropriations Financial Services and General Government Subcommittee, Feb. 23, 2021

Last year, then-Treasury Secretary Steven Mnuchin said cannabis industry cash “creates significant problems” for the IRS and “creates risk” for agency employees and members of the community. He added that the IRS had to build “cash rooms” for cannabis cash. At that time, Mnuchin urged lawmakers to do something “one way or another” to allow the sector baking services and reduce the burden on the IRS and Treasury Department.

Mnuchin’s comments came months after the House passed the SAFE Baking Act, which would allow cannabusinesses to access financial services. The Senate, then led by Republicans, never considered the bill.

Current Treasury Secretary Janet Yellen has not made any statements about cannabis policy and has not announced any cannabis-related reforms since her confirmation last month. During her tenure as Federal Reserve chair from 2014 to 2018 the agency denied Denver, Colorado’s Fourth Corner Credit Union – a non-profit cooperative formed by state-licensed cannabusiness – its application for a master account, forcing the industry to remain all-cash.

The IRS last year released guidance to industry operators, covering cash payments, estimated payments and Section 280E which prevents cannabis businesses from claiming business deductions.

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Federal Court Rules Cannabis Brand Liable for $4.2M in Taxes

2/19/2021

The U.S. Tax Court on Wednesday ruled that California medical cannabis operator San Jose Wellness, a subsidiary of Harborside, is liable for $4.2 million in taxes because federal law prohibits it from claiming depreciation and charitable contribution deductions, Law 360 reports.

In the opinion, U.S. Tax Court Judge Emin Toro determined that the Internal Revenue Service had lawfully denied the company’s depreciation and charitable giving claims because they are associated with the cannabis trade and the company files taxes under IRS Code 280E which prohibits deductions because the code is used for businesses that buy or sell federally prohibited substances.

Toro said in his ruling that “the requirements of Section 280E are clear.”

Harborside had argued that the tax code requirements were unconstitutional because 280E results in a tax that is not an income tax, running afoul of the 16th Amendment. The Tax Court also ruled against the company in 2018, determining Harborside is “a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim.”

Toro cited a separate 2019 case, Patients Mutual Assistance Collective Corp. v. Commissioner, in his ruling, which determined taxing cannabis companies under 280E was lawful, according to Law 360. Additionally, Toro said that just because San Jose Wellness sold other goods, such as t-shirts, and services, such as acupuncture, it does not qualify for any tax breaks.

The judge also suggested that the company failed to consider previous IRS guidance, case law, and legislative history “to determine its proper tax liability” before filing its petition with the court.

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Tim Fair: Vermont’s Path to an Adult-Use Cannabis Market

11/27/2020

Vermont was the first state to legalize cannabis without relying on the ballot initiative process. The landmark bill, however, stopped short of establishing a regulated adult-use marketplace in the state, which has led to a lot of consumer confusion and resulted in a bustling cannabis gray market.

In this podcast interview, Vermont Cannabis Solutions founder Tim Fair joins our host TG Branfalt to discuss prospects for a future Vermont cannabis marketplace, the state of its medical cannabis and hemp CBD industries, the meddling of federal law enforcement agencies in local cannabis issues, and more.

You can listen to the interview below or through your favorite podcast platform, or scroll further down to read a full transcript of this week’s episode of the Ganjapreneur.com podcast.

Listen to the podcast:

Ganjapreneur · Tim Fair: Vermont’s Path to an Adult-Use Cannabis Market

Read the transcript:

Commercial: At Ganjapreneur, We have heard from dozens of cannabis business owners who have encountered the issue of canna-bias, which is when a mainstream business, whether a landlord, bank, or some other provider of vital business services refuses to do business with them simply because of their association with cannabis. We have even heard stories of businesses being unable to provide health and life insurance for their employees because the insurance providers were too afraid to work with them. We believe that this fear is totally unreasonable and that cannabis business owners deserve access to the same services and resources that other businesses are afforded, that they should be able to hire consultation to help them follow the letter of the law in their business endeavors, and that they should be able to provide employee benefits without needing to compromise on the quality of coverage they can offer. This is why we created the ganjapreneur.com business service directory, a resource for cannabis professionals to find and connect with service providers who are cannabis friendly and who are actively seeking cannabis industry clients.

If you are considering hiring a business consultant, lawyer, accountant, web designer, or any other ancillary service for your business, go to Ganjapreneur.com/businesses to browse hundreds of agencies, firms, and organizations who support cannabis legalization and who want to help you grow your business. With so many options to choose from in each service category, you will be able to browse company profiles and do research on multiple companies in advance. So you can find the provider who is the best fit for your particular need. Our business service directory is intended to be a useful and well-maintained resource, which is why we individually vet each listing that is submitted. If you are a business service provider who wants to work with cannabis clients, you may be a good fit for our service directory.

Go to Ganjapreneur.com/businesses to create your profile and start connecting with cannabis entrepreneurs today.

TG Branfalt: Hey, there, I’m your host TG Branfalt and thank you for listening to the ganjapreneur.com podcast, where we try to bring you actionable information and normalize cannabis through the stories of Ganjapreneurs, activists, and industry stakeholders. Today, I’m joined by Tim Fare. He’s a friend of mine, a friend of the show now. It’s his second appearance. He’s a Vermont based attorney and founder of Vermont Cannabis Solutions. He advises canna-businesses in the state and also defends individuals accused of cannabis-related criminal offenses. How you doing man?

Tim Fair: Doing great. TG, thanks so much for having me on.

TG Branfalt: No, it’s always a pleasure to see you. You’re still in Burlington, while I have absconded deeper into the mountains. So we don’t get to talk or see each other that much anymore, but it’s great to have you on. We have a lot to talk about there’s a lot going on in Vermont, and you’ve done a lot since legalization. The gray market legalization has occurred in Vermont, but before we get into all that sort of stuff, remind people about your background and how you ended up in the space.

Tim Fair: Well, I graduated from law school in 2012, went into criminal defense. And prior to that, kind of my previous incarnation, I was pretty strongly into advocacy for drug policy reform. This is something that has always been a passion of mine ever since college back when I was 18 years old and attempted unsuccessfully to form a chapter of NORML at my community college in Long Island. This is something that I’m just been passionate about. I felt that the United States drug policy has been wrong. Viewing drug use and addiction as a criminal behavior, as opposed to a health concern. This to me just never died. And once I have the opportunity to go to law school and graduate and become an attorney, this was something I’ve had a passion for. So after a few years of learning the ropes, I made the decision to transfer to an area that I felt I could actually have an impact in terms of a … drug policy.

TG Branfalt: So I think the last time that we spoke, legalization was either on the verge or had just passed, but there was no implemented recreational market as you know, and most of our listeners know. And so what is your role been post-legalization in Vermont as it relates to advising businesses?

Tim Fair: Well, you’re exactly right. We passed legalization in 2018 here in Vermont and we legalized our possession of up to an ounce. We legalized home grow of up to the six plants to mature for immature. However, what we didn’t do was legalize any sort of tax and regulated system. So it’s legal to possess. It’s legal to consume. It’s legal to grow a little bit. It is not legal to buy or sell cannabis anywhere here in the state of Vermont. So over the past two years, we have been focusing on kind of two prongs, A developing of our hemp and CBD industry, which we have a thriving industry here in Vermont, thanks to so really great regulation from our department of agriculture, who really supports the industry while at the same time, trying to move forward a tax regulated bill so we can get the commercial marketplace here and that’s posed, of course, its own unique challenges.

TG Branfalt: Well, so let me stop you right there real quick. Just yesterday it came up in a committee, am I correct? And there’s still a pretty big gap there between… What’s the holdup right now?

Tim Fair: Lots. COVID, for one, and we just still don’t have a reconciled bill. There’s still a lot of resistance within our legislature. The speaker of the house, Mitzi Johnson, who happens to be a Democrat has never been on board with cannabis. She doesn’t like it. She’s never liked it. She doesn’t try to hide that she doesn’t like it. And she has really been a roadblock in getting this moved in a quick fashion, but we are seeing movement, basically this conference committee, which the job of this committee is to reconcile the Senate version and the House version of our tax and reg bill, which have very, very different provisions in them, to come up with one final bill, which would then get submitted to the governor. This committee was formed on March 13th, our legislature shut down to COVID on March 15th.

So there was some questions if they would ever have a chance to convene. Yesterday, they convened for the first time. They spent about three hours kind of discussing where the Senate was, where the House was, determined that there were some very big gaps in what they wanted to see, but the movement of just the committee meeting and starting to just work. That was probably the most positive sign we’ve seen in awhile. Two weeks ago. I would’ve said this bill is dead in the water. Now I would say, it’s not dead. It’s still in the water, but we at least see some signs of life.

TG Branfalt: Did lawmakers say anything to the effect during that committee meeting that the state was facing any sort of financial deficits from COVID, which most States are, especially, smaller rural States? Is that part of the impetus or is it just sort of trying to finally let the horse out of the gate?

Tim Fair: I think a little bit of both. The problem is that the state received from their tax department, a estimation of revenue from this bill, which in my opinion, was massively underestimated.

TG Branfalt: What was that? What was that?

Tim Fair: Massively underestimated.

TG Branfalt: What was the figure?

Tim Fair: They anticipate that it’ll take four years before we see any sort of return on the initial investment to get the program started? And they’re saying the amounts will be in one to two million in tax revenue a year based on 20 to 30 million of sales a year.

TG Branfalt: Meanwhile, just to sort of cut you off real quick. Meanwhile, Massachusetts is raking money from New Yorkers, people from New Jersey. So you’d wager to guess that that same sort of influx of out-of-state customers would be coming to Vermont.

Tim Fair: They extrapolate it out from Oregon sales based on one year and then factored in the population change, and taking it to none of the considerations that Oregon and Vermont are very different places.

TG Branfalt: Well, Washington is right there. There’s legalization and…

Tim Fair: Right. But unfortunately a lot of the legislators are using that base. So they don’t yet believe that there’s going to be the income that we believe there will be from this. But there is a strong understanding that the status quo just simply can’t exist. Again, we have this kind of very, very, very loose legalization law that leaves all a lot to be interpreted, a lot that is just not addressed, not answered. They talk about you can have an ounce of flower or five grams of hashish, nothing about concentrates, nothing about that. So what does that mean? Hash? We’re guessing it is, but there’s just a lot that is very unclear, which has made moving forward with our industry very difficult for entrepreneurs and small businesses.

TG Branfalt: So let’s talk a little bit about some of the sort of strangeness of the setup that you guys have there, you described the cannabis laws earlier. So criminally, what charges have you been hired to defend? Well, you have possession of an ounce. You can grow six plants. So you know what charges are state, local law enforcement officials are bringing against people under this regime?

Tim Fair: So it really is interesting. I don’t want to get too much into the weeds, but Vermont has 14 counties. Each County has its own elected state’s attorney. So you have 14 separate States attorneys, who have an unbelievable amount of autonomy to pursue the agendas that they feel are most important. So in certain counties, such as Chittenden here in Burlington, we’re not seeing a whole lot of state prosecutions for cannabis. In other counties with different minded States attorneys we are. So in the last year, just since legalization, I’ve had to defend a husband and wife, husband is a medical marijuana patient and veteran, Navy veteran with diagnosed PTSD and a hemp cultivator who was charged with felony cultivation for cultivating three, what the state police call mature plants, one plant over their limit, which technically isn’t even a felony. Yet him, and his wife, who nothing at all to do with his grow operation, were both charged with felony counts.

We had a great resolution on that. We ended up after quite a bit of back and forth getting the state’s attorney’s office to drop those charges, but not without a lot of work to get put in to convince them to do so. We’ve seen CBD oil manufacturers being arrested when law enforcement believes that what they’re putting together is illegal. There’s a lot of, I’m not going to say it’s intentional, ignorance on the part of law enforcement, but there was a lack of really a full understanding of the differences between hemp and marijuana, CBD and THC. There’s still a huge learning curve. And a lot of this law enforcement will just go in, proverbial guns ablazing. And that’s what we’re still dealing with because in this lack of regulation, there are so many open questions that it makes it very difficult for anybody to be operating on the right side of the law because some simply don’t know what the right side of the law is in a lot of occasions.

TG Branfalt: Well, so in one of the cases that sort of a, I don’t want to say it drew sort of national attention, but it did — there was so many moving parts — and it involved federal law enforcement officials. Am I correct?

Tim Fair: Absolutely.

TG Branfalt: We were talking about the case of a guy named Big John, well-known in the community has a skate shop. I don’t know if he ran for mayor, but people really want him to be made with sort of some of the graffiti you’ve seen, stuff like that. So tell us about that case, how the feds got involved. And it’s a really interesting case. There’s a lot of moving parts and the resolution you got was… I mean, goddamn. So just walk us through that, man.

Tim Fair: Okay. There are a lot of moving parts and I think before we can just jump right into it and kind of need to set the stage a little bit and understand the context of which this happened. John has run Riding High, which is a local skate shop, for the last almost 20 years. He’s amazing, and he has worked with now two generations of kids learning to skate. This has been a passion of his, but John’s their pro skater. He took a nasty, nasty fall, suffered a pretty significant TBI about a decade back, recovered, came back, stuck with it. He’s a great guy, and he happens to be a very strong advocate for cannabis. He believes it’s a healing flower. He believes that it helped him recover from his accident.

And he believes in the positive aspects of cannabis. He makes no hint of how, which unfortunately has resulted in quite a few run ins with law enforcement over the years, where one occasion police came into investigate the reports of a grow as there’s they’re in what as big John do? Big John pulls out of joint lights it up. They’re like, “Big John, you can’t do that.” Like, “Why, it’s my healing medicine.” And John, he wears his heart on his sleeve. He’s an amazing guy. So unfortunately this has created quite a record building up on him. Now, flash forward to 2018, where here in Burlington, legalization has passed and there was an incident with a retailer, not Big John, but another retailer up on Church Street, which is the main tourist drag of Burlington, an open-air pedestrian walkway with shops, decided to start selling amongst other things, marijuana, edibles, allegedly some other substances as well out of his shop on Church Street, directly across from city hall.

And this went on for quite a few months and it pissed a lot of people off. The state didn’t seem to be interested in prosecuting, and we can talk about why that is, but lo and behold, the state did not. And eventually the feds just decided they’d had enough. This was blatant. This was well-known. There were lines right out the door. It was under aged children were having access, no ID. There were reports of firearms being involved, and this was a mess. I don’t think anybody should ever be arrested for marijuana. This was a lot harder than that. So after that there was kind of a shock amongst the town like, Oh my God, this was going on. And it was at that time that I do believe roughly that the feds also began investigating Big John. Now Big John’s shop, Riding High, completely different part of town, down on Battery Street.

The allegations were that he was selling some cannabis out of his store as well. The fact showed that there was ID, there was never any sales to minors. There was never any firearms involved. There was never any other type of substances involved, but the feds decided to begin an investigation and conducted a 16-month investigation into Big John.

TG Branfalt: That’s a hell of a use of federal funds.

Tim Fair: Six undercover buys. You know what the largest buyer was? $40. $40 worth of marijuana was their big bust, several $20 sales. I believe it was a $30 somewhere. After 16 months, 6-7 undercover sales. God only knows how much surveillance time. Yep. A raid a Big John’s house, his business, his property up in upstate New York, and him on his longtime partner, Samantha, were both arrested by federal agents and charged with multiple felonies for a case that honestly, even in 10 years, the feds should never be involved in this. Never.

TG Branfalt: This is DEA?

Tim Fair: This was Northern Vermont drug task force.

So a combination of DEA and local, deputized law enforcement. So yeah, that’s in the middle of an opiod epidemic, in the middle of some really serious issues. This is how the US attorney’s office in Vermont chose to utilize limited resources. And the reality is that unfortunately, we were able to keep Samantha, who was charged with both conspiracy and production, possession of edibles, she started a CBD edible company. There are a couple emails that they claimed were THC. We kept her out. John ended up having spent eight months in pre-trial detention. If it wasn’t for COVID, he may not have gotten out. His was represented by my old mentor, my former boss, Paul Balk, incredible defense attorney. The two of us worked together. I represented Samantha. He was able to get John released on a COVID concern. And when we finally went to sentencing, we were able to get probation for both Big John moving forward, and Samantha, no additional jail time for John, which was an incredible outcome.

I do wonder if not for COVID, that we would have gotten that resolution, but we did. And in a way we hope that after a 16 month investigation, after the tens, maybe hundreds of thousands of dollars spent on this investigation to end up with two probation sentences. Maybe this might show the US attorney’s office that their resources would be spent in a different area. But it really does show that at this point in time, anybody is fair game. And one of the things we’ve seen as a result of this kind of half legalization measure here in Vermont is an explosion of the black and gray markets. Some people going into business, trying to be on the right side of the law. And then some people go into business with no interest of being on the right side of the law, just taking advantage of the opportunities that they see and this half-assed legalization.

TG Branfalt: So with the big John Case, do you think that this would sort of have any impact on how officials may go forward with investigations and things because of the outcome that you were able to get? These guys doing probation, they didn’t get a bigger fish out of all this, right? The result isn’t really sending a message to other people, right? Probation for many people may be worth the risk. What do you think about that?

Tim Fair: Absolutely. That is the hope. If there’s any silver lining to this type of situation, if there’s any good that can come from the unbelievable disruption and impact on John and Samantha’s lives, the unnecessary, unwarranted intrusion and impact on their lives, which was significant and substantial. If any good can come of this, it’s a hope that the prosecutors, the powers that be will look and see and go, “Wow, we spent a lot of resources. We spent a lot of money a lot of time, and this is what the end result was. Did we prove our case? Yes. Did they plead guilty to selling some small amounts of marijuana to adults? Yes. Great. Was that worth it?” Interesting, going back about a decade, decade and a half, if you remember operation Pipe dreams, the FBI spent the single most ridiculous use of money over a million dollars to prosecute Tommy Chong.

TG Branfalt: Well, I was working in the paraphernalia industry when that happened, and the simple fact that it sort of led to nobody being able to say the word bong. It’s ridiculous.

Tim Fair: True, but it also led to a stopping of those type of prosecutions.

TG Branfalt: That’s true.

Tim Fair: Because the amount of resources that were spent for the result, putting Tommy Chung in jail for a while a month or two, and over a million dollars on that particular investigation. So in a parallel, we’re hoping that that will be kind of this, whether it was 50,000 whether it was 100,000, we don’t know how much they spent over 16 months. But with seven buys, with the overtime hours, with the surveillance, it was significant for what ultimately ends up being two probation sentences. The powers that be, hopefully a little bit of common sense would say, “You know what, maybe our resources are better spent somewhere else.” That’s the hope. We have yet to the wait and see what happens. One of the things, however, that the chief justice, the judge, in this case, who was the district of Vermont chief federal judge, one of the things she said was this type of behavior was not legal under state law.

So I don’t want to hear that, and it wasn’t legal under federal law, but she made a point of emphasizing the fact that sales of marijuana still are not legal in the state of Vermont as justification for the investigation and for the prosecution. So this is, again, if we could legalize, if we could establish a taxed and regulated system, now people have a very clear line. They know what they can do and know what they can’t do. And entrepreneurs and business people like John and Samantha would have a route to be able to apply, receive, and get an adult-use dispensary license.

TG Branfalt: Well, is this the biggest issue facing current Vermont, legal operators, right? People who are operating in the hemp and CBD industry. Is this gray market even though it doesn’t really impact them legally because they’re operating within the confines of both federal and state law, is this still the biggest issue facing current Vermont operators? Or is there sort of something else that may be more of a factor, I guess?

Tim Fair: For right now, there is a pretty big distinction between our hemp and CBD industries and the potential adult use industry, and the hemp and CBD industries have their own issues. Most of those on the federal level. And that is the USDA regulations coming out, being just simply unworkable, they had put forth that there needs to be a 0.3% total THC threshold for hemp, which would include THCA. And don’t want to get too much into the weeds on this, but basically putting forth a regulatory scheme that is unworkable for any hemp farmers.

TG Branfalt: Well, didn’t Vermont propose a 1% limit on THC to be considered industrial hemp?

Tim Fair: Yes. And that is under the pilot program are currently operating for this year. Unfortunately, the authorization for that pilot program runs up October 31st. So that will be good for this season. And for everything harvested this season. A big question, and a lot of concern is what happens next season? Will USDA change this or not? Because again, our authorization to act under our 2014 pilot program ends on the 31st. Vermont is a very strong advocate of the 1% total THC standard, which I think is still ridiculously low. However, it is workable. That can be met. A 0.3 on total, it’s ridiculous.

You’ll have to burn every crop. So that’s kind of the big thing right now on the implementation of these USDA regulations, sampling, lab results, not having a robust laboratory system yet, not having any clear standardization for testing. Do we test wet, do we test dry? What’s 0.3? There’s still a lot of open questions within the hemp and CBD realm. So those are kind of separate from our adult use. And frankly, it’s interesting because the hemp and the CBD are looking more at the federal side, the USDA, because there have been regulations at the federal level, while our adult use industry is looking solely at state law, obviously because we have seen no federal motion there.

TG Branfalt: How tough has the last couple of years been for you as an attorney having to figure all this shit out as it comes along?

Tim Fair: I love it. It’s interesting. It’s challenging. Learning this stuff is not the bad part. I love that. Especially at least with tax and reg here in Vermont, the challenges are significant in terms of A, we’ve got 60% approval, but that leaves about 40% who are still opposed. So we have a very strong prohibitionist contingent here in Vermont, more than most people would think. And there’s also internal conflict within the community about S.54 in particular and our tax and regulated bill. There are a lot of cultivators who are very against any sort of regulatory scheme in this bill as well, for some, for very valid reasons and others for some misinterpreted reasons. So it’s kind of fighting a two-front war. We’re trying to explain and deal with the prohibitionists while at the same time, almost having a civil war within the own cannabis community about whether or not tax and regulate as it’s currently proposed is going to be good for the state. So that’s …

TG Branfalt: Do you mind telling me where you stand on it? Do you want to…

Tim Fair: So, as you may or may not know, Vermont was the first to pass legalization, legislatively. Since then, Illinois did as well, different set up than we have here. We didn’t get to do it by ballot initiative. We don’t have the option for ballot initiative. So as a part of any legislative solution, any laws that get passed in a legislative fashion requires compromise. I understand that, I do, there are going to be provisions that we’re going to have to hold our noses and accept in order to get it across the finish line. At which point, once we establish a cannabis control board, now we can start petitioning to try to make the changes that we need to. That is what I do believe needs to happen if we’re ever going to get it over the finish line. However, there is a strong contingent that says, no, we can’t fix it later.

We need to fix it first and pass a better bill. In an ideal world, yes. Is that legislatively going to work? It’s simply not. We have 40% of prohibitionists and in order to get the votes needed again, this is the legislative process and it’s not always great. And sometimes the compromises are not what we would ideally make, but I’ve also been working on this for almost four years. We really started trying to get a taxed and regulated system moved in 2016 for decriminalization. It took from 2016 to now to get a bill. If this bill does not pass, as many people want to kill the bill, we are looking at potentially two, three, maybe four years before we get another one.

TG Branfalt: Well, so in this upcoming election, it’s sort of a big deal for cannabis advocates in Vermont because it appears that Lieutenant Governor David Zuckerman is poised to challenge Phil Scott, a Republican. And anyone who has met Zuckerman knows that he is supportive of legalized cannabis, and he’s an agriculture guy, right? So if this doesn’t pass, wouldn’t the potential election of Zuckerman sort of break that stalemate?

Tim Fair: Well, we have to remember, the executive branch, the governor, we had the legislative branch is passing the laws. Will there be a stronger push from the executive branch and the governor’s office to get something done if David gets elected? Absolutely. Would it be beneficial to getting this done quicker? Absolutely. That is an uphill climb, unfortunately. I know David very well. I would consider him a personal friend. We’ve been friends for quite some time. I’ve supported him in his elections. I’ve turned on phone banking for him when he was running for Lieutenant governor. He’s a great guy. He’s an organic farmer. He is just the right values. But the reality is that Phil Scott, who is a Republican, is a very centralized Republican. He has disavowed Trump, and he has about an 83%, I believe right now, approval rating in how he’s handled the COVID pandemic.

TG Branfalt: 83%?

Tim Fair: 83%, he’s done a good job.

David needs to frame this election properly if he has a chance. And that is yes, Phil Scott’s done a good job and he’s done what any rational sane governor would do, which is listen to the scientists and implement what his department of health is telling him is the safest bet. With Republicans these days, that is incredible in and of itself to run the sentence, but not as anything special as anything that any rational person would do and frame the election is looking into the future.

Okay. Yes, Phil Scott has done a good job. Now, what he has not done is propose or come up or plan for how we are going to recover from this pandemic and from the impact that it’s had. And if David can frame it like that, not looking at the present, but looking into the future, putting forth a strategic plan of which cannabis legalization tax and regularization would be a central part of, I think it has a chance. But of course with everything going on right now, nobody has ever seen anything like this before with what we see in Washington, combined with the pandemic, combined with a uncertainty about what the next 90 days is going to bring between now and the election. I think there’s a lot of variables. And it’s really hard to predict, I think, much harder than in previous elections.

TG Branfalt: How did the local CBD businesses fair during the pandemic that did you guys see a whole lot get sort of shut down or decide to close their doors for good? What’d you see on the ground?

Tim Fair: We have seen a handful of brick and mortar shops closed down for good. Three-month shut down was incredibly detrimental to a lot of businesses. Most of the CBD shops here in Vermont had just sprung up within the last year.

TG Branfalt: Were they considered essential businesses during the shutdown?

Tim Fair: No. So medical cannabis dispensaries were, but CBD stores were not. So there was the brick and mortar shut down. And even now that Vermont is pretty much moved along with our reopening, brick and mortar retail is still taking a huge hit. One of the biggest group of customers for retail here in Vermont are Canadians, a lot of Quebecois and Canadian tourists would come down here to spend quite a bit of money. I would estimate close to a billion dollars a year from Canadian tourists. And of course the border has been shut. So that’s a huge percentage of revenue that has just been completely shut off, has not yet returned. And a lot of people are very skeptical about returning into a brick and mortar shops. So retail in general is taking a huge hit and especially some of the newer CBD stores too have taken a pretty big hit. The people who are doing alright are the ones manufacturing products and doing online sales. Those have seen, if anything an increase.

TG Branfalt: We’ve covered quite a bit of ground here, man. And like we’ve sort of talked about, the last couple of years, you’ve been learning all these new rules, regulations, laws, helping both businesses and individuals in criminal cases, advising businesses, and defending individuals. So right now when it comes to entrepreneurs, what’s your advice for them when it comes to sort of navigating an entirely new set of rules and operations?

Tim Fair: A, have a game plan, a solid game plan. Know why you’re getting into the industry, know what you want to accomplish and then be willing to pivot on a dime. Those are kind of the main rules right now. The successful businesses we’ve seen have had a good understanding of the regulatory framework, know what they can and cannot do and have operated within that framework. Though, businesses we’ve seen that have not been that successful are the ones, well, we’re just going to wing it and see what happens.

Certain cases, I guess that would be a good plan. In this particular industry, it’s just not right now. And an understanding that there are still a lot of unknowns, understanding of the federal/state conflict, which has created a lot of problems for hemp, CBD, and medical and adult use just straight across the industry, understand 280E, understand the legislative process and that things may not work. These are understandings that if people have and people are willing to listen and learn and incorporate into their business plan. And that brings success. Anything else? People lost a lot of money last year like you know, the hemp industry here in Vermont because they didn’t plan.

TG Branfalt: Yeah. And it was sad to see because it was such a robust industry. Everyone was really, really excited about hemp. And then, even in upstate New York and then the bottom sort of fell out. A, Lack of processing and demand and that sort of thing. And that’s a conversation for another time. So where can people find out more about you more about Vermont Cannabis Solutions, get in touch with you?

Tim Fair: Well, my partner, Andrew Subin, and I will be presenting it in NECANN, New England online cannabis conference, coming up next month, which we’re very excited about. You can find us at www.vermontcannabissolutions.com. And other than that, give us a call. 802-504-weed. We love talking about this all day.

TG Branfalt: Wait, wait, wait. What’d you say the number was?

Tim Fair: Our number. 802-540-weed, 9333. I know. We were really excited when they got us that number too, we didn’t ask for it.

TG Branfalt: You definitely asked for it.

Tim Fair: We didn’t. The customer service guy comes in and he’s got this look on his face and he’s like, “You guys are either going to love this or hate this. But I got you 540-weed.” It was amazing.

TG Branfalt: We should have led with that. One day, I think you’re going to have a Saul Goodman type commercial. It’s just going to be, 802, weed. It’d be fantastic.

Tim Fair: First of all, like we want to stay away from the pot leaves and the whole Bob Marley thing and try to be professional. And then he comes in, and we just could not. We’re like, “All right, we love it. It’s just inevitable.”

TG Branfalt: No, you could have a very straight-laced commercial. And then at the end to be like, “Oh, by the way, our number is weed.”

Tim Fair: I love it.

TG Branfalt: I’m going to produce this for you.

Tim Fair: We’ll be waiting.

TG Branfalt: This is Tim Fair. He’s a Vermont-based attorney, founder of Vermont Cannabis Solutions. They advise canna-businesses in the state of Vermont, and he also defends individuals accused of cannabis-related criminal offenses, super swell guy. Dude, it’s nice to have you on again. And hopefully, it’s not another year.

Tim Fair: TG, great to see you. And hopefully we’ll be able to meet and see in person before too, too long.

TG Branfalt: Thanks man.

Tim Fair: Thanks a lot, brother. Have a good one.

TG Branfalt: You can find more episodes of the ganjapreneur.com podcast in the podcast section of Ganjapreneur.com on Spotify and in the Apple iTunes store. On the Ganjapreneur.com website, you’ll find the latest cannabis news and cannabis jobs updated daily, along with transcripts of this podcast, you can also download the Ganjapreneur.com app in iTunes and Google Play. This episode was engineered by Trim Media House. I’ve been your host TG Branfalt.

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IRS May Allow Cannabis Businesses to Take Tax Deductions

9/23/2020

Under new Internal Revenue Service (IRS) guidance, state-legal cannabis operators can reduce gross business receipts using an accounting method available under Section 471, according to a WeedWeek report. Currently, all cannabis-related businesses that are considered illegal under federal law must file under Section 280E, which does not allow normal businesses expense deductions.

“The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.” — IRS update

Attorney James Mann, who is representing California dispensary Harborside in a tax dispute against the IRS, told WeedWeek that the update is a “good thing,” and the agency is “doing what it should be doing which is educating, in particular, the small cannabis business people about how to get into compliance and what the applicable rules are.”

“I know there are cannabis lawyers who say the federal government is constantly trying to crush the cannabis industry, and that may be their experience or may be true,” he said in the report. “But, generally speaking, I think the IRS is just trying to administer the tax law as they see it. Many people disagree with me, but I don’t see that they’re motivated by any special animus toward the cannabis industry. And this guidance proves it. This is the IRS saying, ‘Here are the rules of the game, guys.’”

Section 471, which was enacted under the tax law approved in 2018, allows businesses grossing $25 million or less in revenue to deduct a greater portion of their expenses. The update comes six months after a Treasury Inspector General for Tax Administration report indicated that industry tax compliance could improve with further use of Section 471.

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LRS Now Offers More Than 401(k) Benefits for Cannabis

7/08/2020

In response to successfully supporting the cannabis industry with their 401(k) plan needs, Leading Retirement Solutions (LRS) has launched an additional employee benefits solution: The Cannabis Cash Balance Plan.

Seattle, Washington July 8th, 2020 – Thanks to the employee benefits experts at Leading Retirement Solutions, cannabis companies can now legally add a Defined Benefit or Cash Balance Plan to their employee benefits package and start saving money! Having seen great success with the Leading Cannabis 401(k), LRS has teamed up with veterans from the financial service sector to launch the Cannabis Cash Balance Plan; a trustee directed retirement plan solution for organizations operating in the cannabis industry. By partnering with an approved retirement plan custodian the new strategy supports Defined Benefit, Cash Balance, and other Trustee Directed Retirement Plans. With nationwide availability, this solution overcomes the traditional barriers cannabis companies face when looking to implement a legal retirement plan.

“A company-sponsored retirement plan, like a Cash Balance Plan, is one of the most requested employee benefits,” says Kirsten Curry, Founder and CEO of LRS. “It’s also one of the most cost-effective employee benefits, at one quarter the general cost of what a company typically pays for medical benefits.”

Given how few financial institutions are willing to work with the cannabis industry, many companies are unaware that they can legally sponsor a retirement plan. According to a 2019 Vangst Salary Survey, only 19.2% of cannabis companies offer retirement plan benefits to their employees. The addition of a Leading Cannabis 401(k) or a Cannabis Cash Balance Plan to your benefits package will differentiate your company and help attract and retain great employees. Offering a retirement plan demonstrates to employees that you’re willing to invest in their overall well-being, and that you care about their financial futures, boosting morale and increasing employee retention. Not only will adding a retirement plan reduce turnover, but it will save you money as well! By implementing a retirement plan, companies in the cannabis industry can take advantage of Internal Revenue Code 280E and COGS adjustments allowing for tax deductibility of company made contributions. Speak with an LRS representative today to find out how your company will profit from adding a retirement plan to your employee benefits offering.

For more information or to schedule a plan proposal, please contact LRS at (206) 430-5084 or email us at info@leadingretirement.com.

About Leading Retirement Solutions:
For over 5 years, Leading Retirement Solutions (LRS) has served numerous cannabis companies with their retirement plan needs. With more experience in the cannabis industry than any other retirement plan administration company, LRS develops business solutions that minimize taxation, manage risk, ensure regulatory compliance, and build and protect your wealth. We have multiple retirement benefit structures for cannabis companies of all sizes and will work with you directly to find the best fit for your company. Our team of highly trained and qualified professionals will design, set up, and administer the best retirement plan program for your company’s needs, ensuring your plan is in compliance, and helping your employees grow their retirement savings. For more information on the Leading Cannabis 401(k) and our Trustee directed retirement plan solutions visit: https://www.leadingretirement.com/solutions/cannabis-401k-plan.

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Cannabis, Accounting, Cost of Goods, and Taxation

6/10/2020

Having worked with many medical marijuana growers, processors, and dispensaries in Oklahoma, it has become abundantly clear that the cannabis industry still lacks best business practices and accounting support. As I meet with business owners during my capacity as a c-suite consultant, the stress of the cannabis business is ever-present.

Many operators finished 2018 with high hopes, only to discover the tax bill that awaited them was unlike anything they anticipated! Even those who engaged bookkeepers, accountants, and other “professional” help were caught unaware. As I searched for articles to share with those in the cannabis industry, I quickly realized most were written for peers, not business owners.

This article will detail the issue of accounting, recordkeeping, and taxation for cannabis companies, primarily focusing on dispensaries. A later article will spend time on processors and growers.

The Complexity of the Issue

Basis of the Issue: Cannabis is Federally Classified

Let’s start at the beginning: the causal factor for the cannabis conundrum rests in the fact that marijuana is illegal because it is listed as a Schedule I Controlled Substance under the federal Controlled Substances Act:

Substances in this schedule have no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse.

Some examples of substances listed in Schedule I are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), peyote, methaqualone, and 3,4-methylenedioxymethamphetamine (Ecstasy).

Because marijuana is still listed as a Schedule I drug, its sale is illegal at the federal level. This is the basis of the conflict for legalization, which affects accounting, which rolls into taxation, and the discrepancy between state and federal government. Cannabis business owners are caught in the grind.

Why are my Business Expenses not Tax Deductible?

Prior to the state legalization of marijuana, 280E was a largely inconsequential IRS rule. IRS 280E specifically deals with taxpayers who sell Schedule I or II drugs as a business and essentially states that the federal government does not see the business as legal and does not allow for expenses (rent, salaries, utilities, etc.). Instead, the government only allows for something called Cost of Goods Sold (COGS). Cost of Goods Sold, specifically, is the cost of what was purchased to resell (flower, edibles, etc…). For dispensaries, this is the cost you paid for the product (plus shipping, if applicable). No other costs are allowed to be used to reduce your income subject to tax.

As detailed in Table 1 below, most businesses in the US would expect to pay income taxes on the Net Income (at the bottom of the table) of $4,500.00. The Net Income is (Net Sales – Cost of Goods Sold – Expenses).

Cannabis businesses, however, ARE NOT taxed like other businesses in the US. Based on IRS 280E, they are NOT allowed to deduct any costs other than the cost of their product (Cost of Goods Sold). Therefore, cannabis businesses will be taxed on Gross Profit (Net Income – Cost of Goods) of $50,000.00! That is a major difference in tax liability that results in taxes being charged on $50,000 versus $4,500.

Business Setup – Can it Help?

There are a few ways to go about establishing (setting up) your company. It is important to know the difference between the corporate structures as well as the difference between state and federal designations.

IRS (Federal) Designations

Regarding taxation, there are essentially two types of classifications: Taxable Entities and Passthrough Entities. There are also two types of Corporations: C corporations and S corporations. For the purposes of taxation, C corporations are significant because they are legal entities that are separate and distinct from their owners.

Initially, accountants and attorneys advised cannabis clients to set up as C corporations. This was primarily due to the difference in tax rates between C corporations and other types of tax entities.

Because cannabis businesses are paying taxes on such a larger amount (Gross Profit, not Net Profit), C corporations offered some advantage. The corporate tax rate is approximately 20% (actually 21%), while the highest personal tax rate is around 37%. Below is a demonstration of the tax differences between the two methods.

Recordkeeping and Accounting

Good Recordkeeping

The breaking points in the cases that have gone to trial have largely come down to poor record-keeping. In business, if it is not documented, it did not happen! (Especially to the IRS).

From a ruling in Alterman V Commissioner, TC Memo 2018-83, the court viewed the lack of separation of separate services as an “after the fact” attempt to make one business look like two businesses. Good bookkeeping would have allotted revenue to each service, along with the expense (Cost of Goods) incurred to earn the revenue.

Good recordkeeping costs more! It may require two sets of books, two business setups, and two tax returns if the businesses are run separately. The extra costs MAY be very small compared to the benefits.

Regardless of the type of business you choose to set up, good record-keeping is paramount for audit readiness!

Job Descriptions

Vertically integrated cannabis businesses (those who own both grow and dispensary; grow and processing; or grow, processing, and dispensary operations) have some advantages over simply owning a dispensary (as will be discussed later).

However, in keeping with good record keeping, these companies need to invest the time (or money, if you would like to outsource it) to write good job descriptions. It will not be sufficient to say, “I have a person who works the dispensary, so I pay them for that. Also, they work in processing, so I pay them for that as well.” The IRS may well deem all the salary costs to the dispensary, where labor IS NOT a part of Cost of Goods therefore it doesn’t reduce the dispensary’s revenue.

Detailed job descriptions as well as documented work hours, by job or process, will be of huge benefit during an audit.

Accounting and Taxation

Proper accounting is the gateway to proper taxation. Tax preparers utilize accounting to determine taxable income. Tax preparers are charged with assimilating data into a properly filed tax return, based on the information given to them.

If COGS are incorrect from accounting, they will be incorrect on the Tax Return. For cannabis, accounting, simply stated, is a service you cannot afford to be without.

Knowing what items are allowed to be part of COGS for dispensaries is THE major hurdle to having proper and accurate accounting. Only inventory purchases and shipping for inventory to your dispensary are allowed as COGS items for Dispensaries.

Items not allowed under COGS for dispensaries include:

Rent
Salaries
Contract Labor
Storage
Display Cases
Utilities
Insurance
Professional Fees
Licenses and Fees

Audit and Audit Ready

The chance of a business getting audited in the US is approximately 1.5%. This number fluctuates from year to year but remains relatively stable. For marijuana business operators, the chance of an audit has been reported as high as 10 to 15 percent, according to the Cannabis Business Professionals of Oklahoma.

While getting audited can be intimidating, being properly prepared is key. If you have invested the time in choosing an accounting firm that is familiar with marijuana businesses, gives you sound advice on what you may and may not deduct, and prepares solid financials (thus, data for your tax return), you will come through the audit just fine. Again, preparation is key! Remember: of the major cases that have been tried, most noted poor bookkeeping and accounting as contributing factors to higher taxes, leading to penalties and interest costs.

Conclusion

In review, cannabis dispensaries are only allowed to deduct Cost of Goods Sold (COGS) from net revenue to determine the business’ taxable income attributable to the owners. The lack of proper classification for Cost of Goods Sold purchases (inventory and shipping of inventory to the dispensary) can lead to a massive increase in the already-high tax exposure facing cannabis dispensaries.

Remember, typical business expenses (operating expenses) are not allowed for cannabis dispensaries in regard to taxation. Cannabis businesses pay taxes on the profit left after the purchase of the product. Storage, shelving, rent, insurance, and other normal business expenses are not taken into consideration for federal (and Oklahoma state) taxation.

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Harborside Appeals Cannabis Tax Ruling in Federal Court

6/03/2020

California cannabis company Harborside is continuing its legal challenge to federal tax code 280E but is taking a different approach to the case along with a new legal team, MJBizDaily reports. The company argues that 280E is unconstitutional, running afoul of the 16th Amendment, which allows for income taxes, but attorney James Mann of Greenspoon Marder says 280E, “results in a tax that’s not on income, it’s not an income tax, so therefore it’s unconstitutional.”

The arguments come in a May 26 appeal filed by Mann on behalf of Harborside. In short, 280E prevents standard business deductions by companies that deal federally illegal drugs, including cannabis even when state-approved. In 2018, the U.S. Tax Court ruled against Harborside calling the firm “a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim” because cannabis remains federally illegal.

Mann told MJBizDaily that decision “is just wrong” and calls the determination by the Tax Court and the Internal Revenue Service that state-legal cannabis businesses aren’t afforded the same cost of goods sold deductions “crazy.”

Former IRS officer William Fowler, now a senior adviser with Nevium Intellectual Property Consultants, told MJBizDaily that Harborside is “dreaming” and “grasping at straws” and that the lawsuit risks further entrenching the IRS’s position on 280E.

“They’re really pushing the industry to have some really tight rulings on this. The IRS is preparing more guidance on this, so (Harborside) should have waited until they got that guidance. To me, those arguments are weak, and it’s not good for everybody else.” – Fowler to MJBizDaily

Mann argues that the legal issues in the case are ripe for appeal and that the 2018 opinion was “ill-considered.”

The case is in the U.S. Court of Appeals for the 9th Circuit in San Francisco and a decision on the matter could take years. The original lawsuit by Harborside was filed in 2016 and a decision wasn’t issued until 2018.

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California Cannabis Tax Revenues Pass $1 Billion

3/11/2020

Cannabis-derived California tax revenues have reached $1 billion in just over two years since the launch of recreational sales, the Orange County Register reports. Most of the funds have been used to cover cannabis industry regulatory costs and those associated with the cleanup of public lands harmed by illegal grows, cannabis research, and childcare for low-income families.

Growth, however, has been lower than expected in the nation’s largest cannabis market; slowing in the fourth quarter to 1.5 percent down from 15.5 percent in previous quarters, according to Department of Tax and Fee Administration figures outlined by the Register. The first three months of legalized sales in the state brought in $72.6 million in tax revenues to the state, while the last three months of 2019 brought $172.7 million. California officials had expected to raise $1 billion a year from cannabis industry-derived taxes.

According to the report, 75 percent of cannabis sales in the state still happen illegally as prices at licensed dispensaries are 30 percent to 80 percent higher than prices in the illicit market. California’s tax structure includes a 15 percent excise tax, regular state sales taxes, a cultivation tax by weight, and municipal taxes which can be as high as 20 percent. On January 1, officials actually raised wholesale taxes on flower, leaf, and plants. Regulators said those tax hikes were in line with inflation.

Last October, Gov. Gavin Newsom (D) signed a bill that would override section 280E of the Internal Revenue Service Code allowing state-approved cannabusinesses to take normal business deductions. Lawmakers have introduced bills to eliminate the cultivation tax and temporarily lower the excise tax; however, similar bills have previously failed in previous sessions.

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Buffalo Law School Offering Cannabis Course

1/30/2020

New York’s University of Buffalo School of Law this month offered its first legal cannabis industry bridge course – “The Green Rush” – aimed at compliance and other legal issues in the cannabis space, according to a UBNow report.

The course is being co-taught by UB Law alumni Aleece Burgio, head of Barclay Damon’s multidisciplinary cannabis practice team, and Lee Williams corporate counsel at the Dent Neurologic Institute and supervisor of the Dent Cannabis Clinic’s legal and compliance program. According to the report, the Dent clinic has certified more than 10,000 medical cannabis patients in New York.

The course covers the history of the plant, the science, how it is regulated by federal, state and local governments, criminal law, social equity, CBD, Internal Revenue Service code 280E, real estate, elder law, employment, banking and finance, international law; and how medical cannabis programs have been managed.

“The war on drugs made it taboo to talk about marijuana. But now it’s a real business, it’s a career for a lot of lawyers, and it’s something that’s going to blossom. And in New York, we’re right on the edge.” – Burgio, to UBNow

Burgio, whose first job out of law school was for a boutique law firm in Portland, Oregon helping cannabis startups, said that a lot of employers are looking to build cannabis-focused practices and having the background in legal cannabis law issues gives newly-minted lawyers “a foothold.”

“If a young attorney offers to be the person who takes an interest in it, that really helps,” she said in the report. “There is opportunity for you to grow in New York as an attorney, and if you can stay on top of these ever-changing regulations, you can really do well.”

According to the university’s course catalog, the one-credit course had 38 of 40 students enrolled and ran through January.

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California Raises Wholesale Taxes on Cannabis Flower, Leaf, and Plants

11/22/2019

California is raising its cannabis tax rates on flower, leaves, and plants effective January 1. The California Department of Tax and Fee Administration says the rate hikes “reflect an adjust for inflation” as required by the state’s Cannabis Tax Law.

The flower taxes per dry-weight ounce are being raised from $9.25 to $9.65, while leaf taxes per dry-weigh ounce move from $2.75 to $2.87, and the plant rates will increase from $1.29 to $1.35.

“The 15 percent cannabis excise tax is based on the average market price of the cannabis or cannabis products sold in a retail sale. The mark-up rate is used when calculating the average market price to determine the cannabis excise tax due in an arm’s length transaction. In an arm’s length transaction, the average market price is the retailer’s wholesale cost of the cannabis or cannabis products, plus the mark-up rate determined by the CDTFA. In a nonarm’s length transaction, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.” — CDTFA, Cannabis Special Notice

In October, Gov. Gavin Newsome (D) signed a bill overriding Section 280E of the Internal Revenue Code which allows cannabusinesses to take normal business deductions when calculating their state taxes.

Critics have argued that California’s cannabis taxes are already too high, and a United Cannabis Business Association report in September suggests that unlicensed cannabis operators outnumber legal cannabis businesses in the state 3-to-1.

The state had anticipated cannabis tax revenues would be worth $355 million this year and $514 million in 2020, but in May those estimates were adjusted to $288 million this year and $359 million next year. In May, the Appropriations Committee rejected a bill to lower the state’s cannabis taxes. That measure would have reduced the excise tax from 15 percent to 11 percent and suspended the cultivation tax for three years.

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California Gov. Approves Cannabis Tax Overhauls

10/14/2019

California Gov. Gavin Newsome (D) signed a bill into law on Saturday that will override the infamous Section 280E of the Internal Revenue Code, which has blocked cannabis businesses from taking advantage of the usual tax deductions afforded to other American businesses, Tom Angell reports for Forbes.

Despite the growing hype around the industry, cannabis businesses nationwide have long struggled to break even or stay afloat due to Section 280E. AB-37, proposed by Assemblymember Reggie Jones-Sawyer (D-Los Angeles), would relieve a significant amount of that pressure for California cannabis companies.

“This bill, for each taxable year beginning on or after January 1, 2020, and before January 1, 2025, would specifically provide in the Personal Income Tax Law for nonconformity to that federal law disallowing a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances only for commercial cannabis activity…” — Excerpt from AB-37

AB-37 was approved alongside many other cannabis-related bills, including one bill instructing officials to create and submit an industrial hemp program satisfying the USDA’s requirements and another bill implementing cannabis compassion programs to benefit low-income medical cannabis patients.

The governor, however, chose to veto legislation that would have allowed the use of medical cannabis products in hospitals, saying the bill departed too far from federal laws and would risk losing federal Medicare and Medicaid funding. “It is inconceivable that the federal government continues to regard cannabis as having no medicinal value,” said Newsom.

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American Bar Association Urges Federal Cannabis Law Reforms

8/15/2019

The American Bar Association has issued a resolution calling for the federal government to allow state-approved cannabis programs to operate without interference; the resolution also calls for broad federal law reforms. The organization said the “gap between state and federal law has created a regulatory quagmire that is counter-productive for all parties interested in marijuana policy.”

In their report, the ABA points out that, since the Controlled Substances Act was passed, public support for cannabis law reforms “has ballooned” while federal law “has remained essentially unchanged.” A 2018 Gallup poll found 66 percent of Americans supported federal legalization – 75 percent of Democrats and 53 percent of Republicans – which was up from 56 percent 10 years prior. In 1969, public support for legalization was just 12 percent.

The association points out that while lawmakers have included riders in spending bills to protect state-legal medical cannabis businesses and patients, those riders “do not shield anyone in compliance with any state’s adult-use marijuana laws.”

“Moreover, the protection afforded by such riders is only temporary. If a rider lapses, both medical and non-medical marijuana users and suppliers would be subject to arrest and prosecution by the DOJ, and not just for their conduct going forward. Those using and producing marijuana could also be prosecuted for violations of the Controlled Substances Act they committed while the riders were in effect (so long as the statute of limitations has not expired).” – American Bar Association, Criminal Justice Section, Report to the House of Delegates

The report notes that, despite the riders, cannabusinesses are subject to unusually high federal taxes – specifically 280E – and often cannot obtain financial services.

The ABA offers support for the Tenth Amendment Through Entrusting States Act (STATES Act), which includes protections for state-approved cannabis programs.

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Data

Employment & Hiring

Events

Operations

Public Relations

Supply Chain

Tech

Operations Ownership

Accounting / Cash Only (Mostly)

Receipts and Proof of Expense

The Benefits of a Bank Account or Credit Card

Filing all the Forms

8300 Forms

Type of Payments to Report

Payroll (940 and 941)

IRS Code – There Isn’t Any!

280E

Understanding 280E

Understanding Cost Accounting

Documentation (Court Case Rulings)

When is my other business NOT a cannabis-taxed business?

Documentation in your books: How Important is it?

Listen to the podcast:

Read the transcript:

Listen to the podcast:

Read the transcript:

The Complexity of the Issue

Basis of the Issue: Cannabis is Federally Classified

Why are my Business Expenses not Tax Deductible?

Business Setup – Can it Help?

IRS (Federal) Designations

Recordkeeping and Accounting

Good Recordkeeping

Job Descriptions

Accounting and Taxation

Audit and Audit Ready

Conclusion

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