My background as a CPA spans multiple industries, including healthcare, insurance, and hospitality. However, my greatest passion and joy has been growing my cannabis-specific practice, Rebel Rock. Given my many years in the industry, it is no surprise that cannabis is garnering domestic and international attention as one of the largest emerging markets in modern times. It is also no surprise that many more CPAs, accountants, and bookkeepers are starting to notice this. While I understand the enthusiasm for something new and exciting (I get it, accounting isn’t exactly a “sexy” profession), the mama bear in me cannot help but want to provide unsolicited advice about why I do not recommend it jumping in headfirst.
Cannabis is really complex
The sale of any cannabis containing THC in the US is federally illegal. However, the loophole we have around state rights makes the industry grow (no pun intended). While the federal government can impose some restrictions on individual states meant to protect the constitution, they still recognize the autonomy of the states to self-govern. Therefore, laws allowing the sale of cannabis are state-specific. This means each state where cannabis is legal, either medically or recreationally, has its cannabis program, reporting requirements, tax laws, and oversight governance. As a result, no two cannabis programs from state to state are the same.
Even at the local level, cannabis governance can be variable. Does your state allow for both medical and recreational sales? Chances are those two programs, what is permitted under each and why, are different. Again, reporting and governance of these programs may also be different. This means that reporting sales under a medical program may have to be tracked differently than those under a recreational program. Chances are that the tax laws related to each are different as well. And not just referring to income tax filings, this also relates to TPT and sales tax filings.
While I illustrate just a snippet of the massive amount of information you need to know in each state you want to service clients in, be aware that your clients will expect you to know it all. Unfortunately, getting it wrong can have damaging consequences.
Cannabis f*ck ups are a BIG deal
Although state-to-state cannabis programs are legal, federal illegality still has important implications for the industry. First and foremost is 280E. This small subsection of the IRS tax code eliminates substantially all business deductions for cannabis operators. Additionally, the support burden for allowable business deductions is challenging to maintain and complicated by heavy cash transactions. If a cannabis company cannot support its numbers, the IRS does not take an accommodative stance. Improper or insufficient support for allowable deductions will result in the deductions being denied. This means that a cannabis company could presumably have a taxable liability based on 100% gross revenue. Want to know what’s worse? Cannabis companies and their owners cannot declare bankruptcy in the US. The resulting financial consequences can be devastating.
And there’s more!
Ready for some additional complexities?
- Did you know cannabis companies cannot transport cannabis across state lines even if two neighboring states have legal cannabis programs? Doing so is considered a federal drug trafficking offense.
- Did you know you finding a banking relationship is exceedingly difficult for cannabis operators? This means you better be ready to service a client that deals in heavy cash.
- Did you know you can be personally penalized for servicing the cannabis industry even though you are not directly involved in operations? Per point #2, bankers, lenders, and other professional services may refuse to work with you just because of the affiliation.
- Did you know that all cannabis transactions must be tracked from “Seed-to-Sale”? This is additional state-required reporting to ensure no illegal product makes its way into the supply chain. Different seed-to-sale tracking software is used state to state, and the seed-to-sale software used by the cannabis operator may also differ from the one the state requires. This means you will need to get a crash course in multiple software solutions.
These complexities that are unique to the cannabis industry I discussed are just the tip of the iceberg. While I love servicing cannabis clients, I also spent many years learning about the industry first. Therefore, if you consider entering the market, be aware that you need a lot of education before soliciting clients. Failing to do so can have truly devasting consequences for you and your clients.