Tag Archives: taxes

May 22, 2023

The Hot Debate Embroiling New York’s Potency Tax

By Abraham Finberg, Rachel Wright, Simon Menkes

On March 31, 2021, New York legalized adult-use cannabis with the passage of the Marijuana Regulation & Taxation Act (MRTA). Perhaps the most controversial portion of the Act was Section 493(1)-(3), which established taxes on the potency of cannabis products sold by distributors to retailers. Many cannabis advocates condemn this tariff, arguing that it increases the effective tax rate to such a high level that legal cannabis businesses can no longer compete against the illegal operations. A movement to repeal this tax and substitute a flat tax of 20% is gaining momentum.

Potency Tax Rates & Official Projected Total Tax Percentage

The three potency taxes are:

Edibles (food & beverages): $0.03 per mg of THC
Concentrates (vapes & resins): $0.008 per mg of THC
Flower (loose flower or pre-rolls): $0.005 per mg of THC

The THC tax accrues when cannabis is sold from a distributor to a retailer and is paid to the State by the distributor. If the distributor is also a licensed retailer, such as a microbusiness, the tax accrues at the time of the retail sale.

Along with the state excise tax of 9% and the local excise tax of 4%, the New York Office of Cannabis Management has projected a total tax burden of 20% on an average cannabis purchase.

Potentially Higher Total Tax Percentage

Critics of the potency tax say that it drives the total tax rate much higher than official estimates. In a recent study by the Cannabis Service Team of New York law firm Barclay Damon LLP, tax attorney Jason Klimek (Klimek is also chair of the Tax Committee for the New York State Bar Association’s Cannabis Law Section) provided an analysis showing an effective total tax percentage of 31%-41% on a typical cannabis purchase.

Potency Tax Likely to Result in Higher Tax Rates Down the Line

Rachel Wright will be discussing taxes and more on October 17 at the CQC in New Jersey. Click here to learn more. In addition to possibly burdening legal cannabis businesses with higher taxes, a major problem with a potency tax is that it is product-based, not price-based. This means that, if the retail price of a cannabis product is forced down by market conditions, the potency tax remains the same and effectively becomes a higher percentage of the sales price than it was before.

Because legal cannabis businesses are competing with illegal businesses which pay no taxes, it is likely that legal prices will be forced downward in order for those businesses to compete. This is what has taken place in California, as well as in other states with a strong illicit market. It is much harder for legitimate cannabis operators to remain competitive if they’re saddled with a potency tax. Critics of the potency tax point out that, of the 38 states in which cannabis is legal, only Connecticut has a potency tax.

Increased Costs of Compliance and Other Issues

The potency tax requires producers to pay significant lab expenses for testing of products. Plus, the tax burdens small cannabis producers with higher record-keeping and personnel costs just to manage the process.

Another concern is that today’s testing equipment is not accurate enough to provide a precise measure of THC and thus a precise tax calculation. One recent report by a New York cannabis law firm showed how current testing could result in a variance in taxation of 35% as well as in a retail user consuming 35% more THC than expected:

A lab may have a Measure of Uncertainty (MU) of 3% with a confidence interval of 95%, meaning that there is a 95% chance the true value [of THC] will be within ± 3% of the stated value. Under these hypothetical facts, a farmer that produces 1,000 pounds of cannabis that tests at 20% total THC has a product that may actually range from 17% to 23%. In terms of taxes owed, the difference would be a range of $385,560 to $521,640. Presumably, the farmer would be taxed at whatever percentage is reported on the label, but would be able to choose the percentage on the label, so long as it fell within the MU… This results in at least two problems. The first problem is that the government may be shortchanged in its tax collection. Second, there is a public health concern resulting from underreporting… if a farmer is incentivized to report the lower percentage, that could result in a consumer consuming approximately 35% more THC than expected.

State Legislators Take Action

On March 6, 2023, Assembly Majority Leader Crystal Peoples-Stokes (D) and state Senator Jeremy Cooney (D) announced Senate Bill S4831 which would replace the potency tax with an increase in the state excise tax, from 9% to 16%. Combined with the local excise tax of 4%, New York would then have a total “flat tax” of 20%.

Cooney commented, “Replacing the potency tax with an increase in the excise tax will allow licensed operators, including social equity operators, to sell competitively-priced products and be less susceptible to undercutting by illicit market prices without sacrificing revenues.” The bill is currently in the Senate Budget and Revenue Committee.

New York’s potency tax has come to be seen by many as a burden to adult-use cannabis companies. Many believe it results in increased taxation and costs of compliance and leaves the nascent legal adult-use cannabis industry in a less competitive position vis-a-vis those companies that operate illicitly. In addition, the variability of the laboratory measurements used in the calculation of the potency tax opens the door to confusion regarding the correct amount of tax owed to the state and could lead to consumers absorbing significantly higher doses of THC than expected.

Businesses that are in favor of substituting an increased rate of excise tax for the potency tax should contact their state legislative representatives and urge support for Senate Bill S4831.

April 5, 2023

Montana Revisited: How Did Its Cannabis Gold Rush Pan Out?

By Abraham Finberg, Simon Menkes, Rachel Wright

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A little over a year ago, we at AB FinWright took a look at the newly-opened adult-use cannabis market in Montana and posed the question: Is Cannabis the Next Gold Rush for Montana? Now, with our 20-20 hindsight, we can see that cannabis sales have taken off in the Treasure State and the tax dollars are rolling in. But political infighting has arisen that threatens to derail the will of the voters who approved adult-use. In addition, arbitrary local approval has set many cannabis entrepreneurs on edge, wondering if they’ll have a business a year from now.

Sales: Predicted Versus Actual

When voters passed Initiative I-190 in 2020 and adult-use commenced January 1, 2022, the Cannabis Control Division (CCD) of the Montana Department of Revenue expected total adult-use sales in 2022 to top $130M. Montana’s imbibers blew that figure out of the water. By the end of last year, the Treasure State had notched up almost $210M of adult-use sales, alongside $93M of medical sales, for a total of almost $304M. With a state population of only 1,085,000, that translates into $280 of cannabis sales per capita. For context, Oklahoma sold $214 of cannabis per person in 2022, while California did only $135/person last year. (It’s estimated that 55% of California’s sales are made by illegal dispensaries, which would translate into a far more robust total of $301 of cannabis/person.)

How Has the Tax Situation Changed in Montana?

At the beginning of 2022, we noted that Montana charges a 4% cannabis tax on medical sales and a 20% cannabis tax on adult-use sales. A 3% maximum local tax was part of the new law, but only 3 counties had enacted it. Fast forward a year and 17 more counties have chosen to enact the local tax, all of them charging the maximum 3%. 10 states allow adult-use sales and have no local tax, which leaves 26 counties that have prohibited adult-use sales (the red counties).

The good news: wholesale sales are exempt from cannabis taxes, and there is no regular sales tax on retail sales, so there is no tax-on-tax (unlike California, which has sellers calculate and collect sales tax on the sale price of their cannabis products plus the cannabis excise tax they’re required to collect).

Montana does not follow Internal Revenue Code 280E and allows normal business deductions for licensed (legal) cannabis corporations, as well as pass-through entities and individuals with licensed cannabis operations.

As State Cannabis Tax Revenue Goes Up, Fights Break Out Over the Funds

Total cannabis tax revenue for 2022 was almost $46M and is projected to rise to $53M for the fiscal year 2023-2024, which starts this July 1, 2023.

Eyeing this revenue, Governor Gianforte (R) initiated House Bill HB 462 on February 17, 2023, whose intent is to funnel revenue away from state parks and wildlife as approved by the voters, and more towards law enforcement and the state’s general fund.

I-190, along with approving adult-use cannabis, specified that the first $6M in tax revenue would go for the state program Healing and Ending Addiction through Recovery and Treatment. All remaining funds would be split between the general fund 65%, various parks and wildlife programs (32%) and veterans and surviving spouses (3%).

HB 462 would see the general fund receiving 75%, law enforcement 7.5%, veterans and surviving spouses 5%, with parks and wildlife reduced to 12.5%. Many feel this subverts the will of the electorate.

On almost the same day as HB 462 was introduced, another bill was put forward, AB 420, which would eliminate the 4% cannabis tax and 3% local tax on medical marijuana. The bill’s sponsor, Representative Mike Hopkins, a Republican from Missoula, believes that adult-use tax revenues are “more than capable” of funding the adult-use program as well as the other addiction and parks and wildlife programs enumerated in I-190. The bill is being countered by the Montana League of Cities and Towns which believes that repealing that tax would create a $4.5M dent across those communities who instituted the local tax.

Both bills have been tabled in committee and will continue to be debated in the second half of the 2023 legislative session.

Retail, Cultivation & Manufacturing – Grandfathered Licenses Only, for Now

Original adult-use legislation stated that, from January 1, 2022, until July 1, 2023, only Montana medical licensees who were licensed on November 3, 2020 (or had an application pending with DPHHS on that date) might be issued a license for cultivation, manufacture or sale of adult-use marijuana. In an explicit effort to give current Montana-based dispensaries a temporary advantage over out-of-state players, the new law imposed an 18-month moratorium on all new licenses. Once the moratorium expires, new license holders will be limited to a small Tier 2 license, which restricts the amount of cannabis they can grow.

New license holders will need to show one year of Montana residency in order to even apply. That being said, there’s nothing stopping an out-of-state business from buying an existing business from a current Montana resident.

Near the North entrance of Yellowstone in Park County, Montana

In an update to this legislation, a rider was recently added to HB 128 that would extend the licensing moratorium two more years, to July 1, 2025. The bill was approved by committee on February 14, 2023 and will come before the House later in this legislative session. In a recent presentation on cannabis in Montana, Bozeman cannabis attorney Christopher Young commented, “I’ve talked to Jason Ellsworth (R, Senator, President of the Montana Senate), and I’ve been told HB 128 is going to pass.”

HB 128 Has Many Medical Cannabis Businesses Worried

The number of medical cannabis cardholders has dropped drastically since adult-use became legal, from 40,522 registered cardholders on January 1, 2022, to 22,325 on January 1, 2023, a reduction of 45%. For those dispensaries that initially chose to remain exclusively medical (18% of all dispensaries), as well as those that, for one reason or another, missed the boat to sell adult-use, they have seen a significant decline in revenue. Consequently, a significant number have been eagerly awaiting the July 1, 2023 to apply to sell adult-use cannabis. The possibility of having to wait an additional two years has them very concerned.

At a hearing on HB 128, Norman Huynh of Pacific Valley told lawmakers he believes he can’t continue to sell only to medical cannabis cardholders because he doesn’t make enough. “There are only a finite amount [sic] of cardholders left,” he stated.

An adjustment in HB 128 is being debated which would allow 16 medical shops to become adult-use that had applied for adult-use before January 1, 2022 but who didn’t complete the process. Without this adjustment, many of these medical dispensaries believe they’ll face bankruptcy.

Opt-In, Opt-Out – Fickle Counties Have Cannabis Companies Nervous

Initiative 190 legalized adult-use cannabis by default in the counties that voted for it. In 2021, the Montana legislature hammered out implementation of adult-use cannabis in House Bill 701, and one provision of this bill allows counties and municipalities to vote to opt-out of legalization.

Granite County, which became a green county when nearly 55% of voters approved I-190, chose to do just that, opting-out of adult-use sales on June 7, 2022. The county’s sole dispensary, Top Shelf Botanicals, had begun selling to recreational users and estimates 80% of its customers are now adult-use. It has responded to the opt-out by drafting a new initiative to get voters to opt-back-in to adult-use sales. Their struggle to re-win the hearts of Granite County’s voters is ongoing and appears to be an uphill battle.

While Granite is the first county to opt-out of adult-use sales, changing them from a green county to a red county, movement is under way to opt-out in Cascade County, Carbon County, Ravalli County and Flathead County, among others. The opt-out movement is gaining strength in the state and has Montana dispensaries concerned. “The opt-out provision is very problematic, and I think it’s more problematic than people recognized at the time,” says Kate Cholewa, lobbyist with the Cannabis Industry Association. “What other business would people accept being in the position of potentially losing their business every two years?”

Taxability of Discounted Products – Department of Revenue Parses the Details

Initially, it was thought that the Department of Revenue required cannabis tax to be assessed on the regular retail price of a product, even though that product might be discounted. However, the DOR now says this is not always the case. “If the discount is offered to all customers, as opposed to a discount that is offered to only a particular individual or group, the established retail price can change.”

Examples where the discounted price becomes the new, lower established retail price: every Friday you offer everyone a 20% discount on certain products, or, you offer discounts to medical cardholders only. An example of when you must charge cannabis tax on the original, non-discounted price: a discount offered to a particular group, such as veterans or students. (Why medical cardholders are not considered a particular group is unclear, but this information is from the state’s website.)

Tax Comparison to Other States

We stand by our original assessment that Montana is actually a low-tax state for cannabis operators. First of all, it doesn’t follow federal statute 280E, but instead allows the deduction of regular operating expenses on state income taxes. In addition, unlike some states like California, Montana does not charge sales tax on top of cannabis taxes i.e., it doesn’t charge tax-on-tax.

If one examines tax rates, while Montana’s adult-use tax is high at 20%, its medical tax of 4% is a low one. The local tax of 3% (compared with Los Angeles’s 10% adult-use local tax, for example) is quite low and is not charged by 37% of the counties that have adult-use sales.

And if AB 420 is passed and the medical and local cannabis taxes are repealed, Montana will truly enter the ranks of low tax cannabis states.

March 28, 2023

New Jersey Moves to Remove State’s 280E Tax Code

By Jason K. Gross, Esq.

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The New Jersey legislature recently approved legislation that would allow licensed cannabis businesses to deduct ordinary business expenses on their state tax return that they are prohibited from deducting on their federal tax return, and such legislation has been sent to Governor Phil Murphy to potentially sign into law. This relates to the universally dreaded (among those in the cannabis industry, at least) Section 280E prohibition. This legislation is important because it would change current law to allow legal cannabis businesses in New Jersey to operate on more of a level playing field with other businesses in the state.

Cannabis operators and applicants are penalized by their inability to deduct certain expenses on their state and federal tax returns. The cause for this frustration is twofold. First, under federal law, cannabis is considered a Schedule I controlled substance under the Controlled Substances Act, 21 U.S.C. § 801 (CSA). Second, under IRS Tax Code Section 280E, cannabis businesses that are legal under state law are still considered drug traffickers for the purposes of federal tax law. While a related issue that is often considered along with Section 280E is whether or not it is sound public policy to continue to classify cannabis as a Schedule 1 drug, that is beyond the scope of this article.

It is important to understand the history and purpose behind Section 280E. The history is unusual in that Section 280E was enacted in 1982 as a reaction to a court case in which a convicted cocaine trafficker asserted his rights under federal tax law to deduct certain business expenses, including a portion of his rent, the cost of a scale and packaging expenses. The court agreed that the cocaine trafficker should be legally able to deduct his ordinary business expenses as part of his criminal enterprise. The federal government then created Section 280E to punish drug traffickers by removing the profit out of drug deals. Section 280E provides, generally, that no deduction or credit will be allowed in running any business that consists of trafficking any controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).¹

Fast forward several decades and New Jersey has legalized medical and adult-use commercial cannabis activities. Still, because cannabis remains a Schedule 1 controlled substance, federal law prohibits legal cannabis companies from deducting ordinary business expenses and New Jersey has similarly applied the Section 280E prohibitions. New Jersey’s legislators understand the inequity in having legalized, State-compliant cannabis cultivation, processing and retail businesses, where those same businesses cannot take advantage of standard expense deductions applicable to other legal businesses.

If enacted, this New Jersey legislation would decouple New Jersey’s business tax provisions from the Section 280E rule barring deductions for cannabis businesses. Under the proposed New Jersey tax code revisions, a licensed cannabis business’s gross income would be determined without regard to Section 280E of the Internal Revenue Code.² The legislation was approved overwhelmingly in both chambers: by the New Jersey Senate in a vote of 32-3; and by the New Jersey assembly in a vote of 69-8. It would apply to tax years beginning on January 1 of the year following the date the Governor enacts the legislation.

The State Capitol in Trenton, New Jersey

Under Section 280E, a business may not deduct expenses unrelated to its costs of goods sold (COGS), which are, generally, the costs to a cannabis business of producing cannabis products and inventory, including transportation costs to purchase the wholesale cannabis. Virtually everything else is subject to the Section 280E prohibition and non-deductible. So, all other typical costs, such as wages and salary, overhead, advertising, insurance, travel expenses and depreciation do not reduce taxable income. These ordinary expenses are still necessary for the operation of all businesses (to varying degrees). If businesses cannot legally deduct such expenses on their tax returns, their tax liabilities will increase and they will have less money to invest in their facilities and equipment, pay higher salaries and expand their operations.

The impacts of Section 280E are dramatic. An example helps to illustrate this. Consider a hypothetical C Corp. with gross sales of $1 million, COGS of $600,000 and other expenses of $300,000. Such business has a gross profit of $400,000 and net income of $100,000. If the business is normally taxed as a C Corp. at the 21% Federal tax rate, it would pay $21,000, or 21% of $100,000 net income and also $9,000 in State taxes (applying 9% State tax rate on $100,000 net income), for a total tax liability of $30,000. However, that same business in the cannabis industry would pay $120,000 in combined Federal and State taxes, with 21% Federal tax on $400,000 gross profit plus 9% State tax on $400,000 gross profit. As this demonstrates, a cannabis business may be taxed on 100% of the expenses a non-cannabis business could write off. Instead of a 30% effective income tax rate, the cannabis business in this example would have a 120% effective income tax rate. Such business that would otherwise have a profit instead would have a deficit.

Section 280E places a significant tax burden on legal cannabis operators that does not exist for other businesses. While New Jersey’s legislators cannot change the Federal tax code, they are taking action to revise New Jersey’s tax code to level the playing field. Let’s hope the Governor signs into law the pending New Jersey legislation to decouple its tax law from Section 280E.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

References

1. The relevant text of Section 280E provides: 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.

2. The full text of the legislation provides: In the case of a taxpayer that is a cannabis licensee, there shall be allowed as a deduction an amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed because cannabis is a controlled substance under federal law, and income shall be determined without regard to section 280E of the Internal Revenue Code (26 U.S.C. s.280E) for cannabis licensees.

March 15, 2023

Adult Use Cannabis Begins in Compassionate Connecticut

By Abraham Finberg, Simon Menkes, Rachel Wright

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On January 10, 2023, Connecticut joined those states in our union that have opened their doors to adult use cannabis sales. Seven dispensaries stepped through those doors and by January 31, Connecticut had recorded $5.1 million in adult use sales, plus an additional $8.2 million in medical sales for a total of $13.3 million.

Like other states now embracing adult use, Connecticut has enacted a strong social equity program, with mixed results so far. Also, perhaps more than any other state, Connecticut has committed to protecting its existing medical cannabis patients and has put in place various mechanisms to guard their access to cannabis.

Slow Roll-Out of Retail Cannabis Licenses

Like other recently-legal states, Connecticut’s rollout of its retail licenses has not been rapid. The state’s initial goal has been to issue twelve retail licenses by lottery, with six reserved for social equity applicants. Also, the eighteen already-operating medical licensees were given the option to upgrade to a hybrid medical-adult use license, a process separate from the lottery.

Governor Lamont at a press conference on January 9, discussing the social equity focus

As of the end of February 2023, there appear to be only twelve current (approved to do business) retail licenses, with eleven of those twelve belonging to medical-adult use hybrids. The majority of the 39 retail licenses listed on the state website are still in the provisional phase, which allows them to “work toward securing a final license.”

Connecticut Social Equity

Connecticut has committed to a robust social equity program and provided an early application opportunity for social equity applicants ahead of non-social equity applicants. In addition, the Nutmeg State has reduced fees for adult-use licenses by 50% for Equity Joint Venture applications, which is where investors agree to partner with a social equity applicant. Further, the state has eliminated 43,754 low-level cannabis convictions.

Connecticut’s social equity requirements are less rigorous than those of neighboring New York and New Jersey, which may provide additional entry opportunities for both in-state and out-of-state entrepreneurs. Connecticut defines a social equity applicant as requiring that at least 65% of a business be owned by an individual with less than 300% of the state median household income in the past three tax years. Since the median household income was $79,855, that individual would need to have earned less than $239,565 annually.

Subversion of the Lottery Process

The lottery for the six initial social equity licenses was held in May 2022 followed by the lottery for the initial six general licenses, which took place in September 2022. Both were administered by a professor and department head at the UConn School of Pharmacy (the state law stipulated the lottery operator must be part “of the state system of higher education”).

15,605 applications were received for both lotteries. Unfortunately, many of the winning applicants flooded the lottery system with hundreds of applications, spending hundreds of thousands of dollars to do so. One example, SLAP ASH LLC, accounted for 850 of the 8,360 applications submitted to the social equity lottery, winning 2 provisional retail licenses. Another company, Jananii LLC, spent over $200,000 to submit 807 entries, receiving one provisional retail license. “There were individuals applying for licenses who submitted 50 applications or more to enter the lottery,” said House Majority Leader Jason Rojas, D-East Hartford. “That wasn’t our intent.” Rojas and others are looking at other options for the next lottery to try and combat the problem.

Protecting Medical Cannabis Patients

Perhaps what makes Connecticut’s adult use cannabis program most unique is its outsized commitment to protecting medical patients’ continued access to cannabis. Concerned that adult use sales wouldn’t leave enough supply for patients, the state mandated a cap of ¼ ounce of cannabis for all adult use purchases. Lieutenant Governor Susan Bysiewicz commented that this action emphasized the importance of “not losing sight of a very robust medical program.”

Lt. Gov. Bysiewicz speaks to an audience on the day adult sales became legal, outside of the ZenLeaf Meriden dispensary.

With the recent strong sales of adult use cannabis, however, patients have expressed concern about access, and now the Nutmeg State is considering further action. A bill is being considered in the state legislature which would create a state cannabis ombudsman. This individual would act as a liaison between patients and the state and would, in effect, be there to put pressure on the four licensed growers. These cultivators are required to submit a medical cannabis preservation plan to “ensure against supply shortages of medical marijuana products” and are in many ways responsible for continued patient access to cannabis.

Licensing Fees

Connecticut lottery winners’ license fees will vary from $1,000 for a micro, to $25,000 for a retail, to $75,000 for a cultivator, subject to a 50% reduction if the applicant is deemed social equity. However, once the field is open to regular applicants, the fees will become sizeable.

Retail license fees will be $1 million and cultivation license fees will be $3 million, and even with a 50% reduction for an Equity Joint Venture application, the investment will be significant. The $1 million fee also applies to any existing medical dispensary that wishes to convert to a hybrid license without going through the lottery process. The four existing cultivation companies that wish to service the adult use market and avoid a lottery process will have to pay the $3 million as well.

Tax Issues

Connecticut cannabis-businesses are obligated to pay a sales tax of 6.35%, a gross receipts tax of 3% and a privilege tax of $0.00625-$0.0275 per mg of THC, depending on the item. Other than New York, Connecticut is the only state to have a tax based on the potency of the cannabis product.

Federal Tax Subject to Section 280E

On the federal level, cannabis businesses are subject to Internal Revenue Code Section 280E, which disallows deductions and credits for expenditures connected with trafficking in controlled substances under the Controlled Substances Act, schedule 1 or 2. As cannabis is a schedule 1 drug, cannabis companies are only permitted to reduce their sales by cost of goods sold when determining their taxable income. By example, a cannabis dispensary would only be allowed to deduct the cost of the product purchased and the cost to transport the product to the dispensary, while disallowing such significant expenses as rent and payroll. All cannabis businesses must forgo expense deductions related to selling, general and administrative expenses, as they are disallowed under the tax code.

While some states like California have not conformed to 280E and allow their cannabis businesses the same deductions as other businesses, Connecticut is not one of those states. Personal income tax starts with Federal Adjusted Gross Income while corporate income tax starts with Federal taxable income as reported on line 28. There are no provisions that say Section 280E does not apply. This will mean a significantly heavier state tax burden for cannabis businesses.

Labor and Employment Issues

Cannabis is expected to fuel significant employment growth in Connecticut, and experts project more than 11,000 cannabis jobs will be added once the market reaches full capacity. These jobs are expected to include full time and temporary positions in all cannabis verticals: cultivation, manufacturing, distribution, retail, marketing, testing, finance, accounting, legal, compliance and C-suite.

As part of its social equity program, the state has made it clear it would like to see cannabis businesses employ individuals from those communities that have been disadvantaged by the war on cannabis. Connecticut has also made it a requirement that every approved licensee enter into a “labor peace agreement” with a labor union, and that such an agreement shall be an “ongoing material condition of licensure.”

The state is focused on maintaining quality control on all aspects of its adult use cannabis businesses, including the people involved. Licenses are needed for all cannabis employees along with a special license for key employees in managerial positions. Additionally, financiers must be licensed, with a Backer license required for individuals with direct or indirect financial interests in a cannabis establishment totaling 5% or more.

Connecticut cannabis employees must be pre-trained through the state’s Social Equity Council. The state also requires that each license recipient have a workforce development plan approved by the Council “to reinvest or provide employment and training opportunities for individuals in disproportionately impacted areas.”

In Summary

No adult cannabis state has come close to having a smooth opening for it adult use sales program, and Connecticut is no exception. With well-funded groups gaming the license lotteries and medical patients concerned about their continued access to cannabis, the Nutmeg State has its work cut out for it. But with its strong commitment to social equity and its outsized commitment to protecting its medical cannabis patients, Connecticut can serve as a role model for compassionate cannabis capitalism. 2023 will reveal how the state rises to its challenges and matures its cannabis marketplace.

February 20, 2023

New Jersey’s Careful Approach to Cannabis: Part Two

By Abraham Finberg, Simon Menkes, Rachel Wright

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Click here to read Part One where we examined the state of the market, licensing, approvals and sales. Part Two delves into all things taxes.

A “Raft” of Taxes

Like New York, New Jersey cannabis companies will be dealing with a raft of taxes:

Federal Section 280E: Will It Apply in New Jersey? Well … Sometimes

Section 280E disallows deductions on federal returns for expenditures connected with the illegal sale of drugs, requiring retail cannabis businesses to add back such significant expenses as rent and wages for sales staff.

Unlike New York, New Jersey’s recent cannabis legislation did not state that cannabis businesses were exempt from 280E. However, the state’s individual tax laws do not conform to the internal revenue code, and accountants are inferring that 280E won’t apply to sole proprietorships. Conversely, the state’s corporations must start their tax calculations using Federal taxable income, meaning 280E would apply.

Sales Tax

Retail sales of adult use cannabis are subject to a 7% sales tax. Beginning July 1, 2022, medical cannabis sales are exempt from sales tax.

Purchases by cultivators of farming equipment and related property, such as plants, fertilizer and drip irrigation, are exempt from sales tax. Purchases by all cannabis businesses of materials used to contain, protect, wrap and deliver adult use cannabis are exempt from sales tax.

Excise Tax

The CRC has been empowered to collect a “Social Equity Excise Fee”, to be adjusted annually. The fee is currently $1.10 per ounce, but the CRC is able, but not mandated, to amend the fees to between $10 and $60 an ounce after nine months of adult use sales. At least 70 percent of all cannabis tax revenue is earmarked for investing into impact zones.

The fee is imposed on any sale or transfer of cannabis from a cultivator (or alternative treatment center that also cultivates) to any other cannabis business. The fee is not imposed on transfers from one cultivator to another, or from a cultivator to an alternative treatment center. The facility that purchases the cannabis is responsible for collecting the fee and remitting it to the NJ Division of Taxation.

Local Cannabis Transfer and User Taxes

Each municipality is authorized to impose a Local Cannabis Transfer Tax on sales from one cannabis establishment to another (including from one cultivator to another), and on the sale of cannabis to retail consumers. The allowed rate is capped at 2% of receipts, with the exception of cannabis wholesaler sales, which are capped at 1%.

Atlantic City, which considers itself friendly toward cannabis, passed an ordinance in September 2021 authorizing the collection of a 2% tax on retail adult use cannabis sales and a 1% tax on wholesale sales. Many cities with alternative treatment centers already have a 2% tax on medical cannabis. It is assumed they’ll be enacting the 2% transfer tax on adult use sales if approved to operate.

Other Unique Points About New Jersey Cannabis

Adult use sales are limited: adults may possess up to one ounce total of cannabis products and can only purchase one ounce at a time.
New Jersey is the only state that has legalized cannabis, but kept it illegal for a cannabis consumer to grow their own weed. Growing even one cannabis plant can land the offender in prison for up to five years and incur a $25,000 fine.
About 400 municipalities have opted not to have retail cannabis shops; 98 have said yes. The new law has caused battles between mayors and their city councils, including the city of Paramus. 60% of Paramus residents voted in favor of adult use sales, and the mayor has stressed the benefit of the 2% transfer tax. Paramus city council unanimously rejected adult use cannabis, however. Some council members are against any sales, while others want to wait and see how other towns fare. Says Council Member Maria Elena Bellinger, “Ultimately … I feel that getting more data will only help us come to the right solution.”

Time Will Tell

New Jersey believes its careful approach will create the best adult use cannabis environment for its citizens. Only time will tell if the Garden State ends up avoiding some or all of the problems faced by states like California and New York.

February 14, 2023

New Jersey’s Careful Approach to Cannabis: Part One

By Abraham Finberg, Simon Menkes, Rachel Wright

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This is Part One where we examine the state of the market, licensing, approvals and sales. Part Two will delve into all things taxes. Stay tuned for Part Two, coming next week!

On the surface, New Jersey’s new adult use cannabis program is similar to the program of its larger neighbor across the Hudson. Like New York, New Jersey is attempting to right generations of social wrongs by providing support for disadvantaged applicants and expunging people’s records for prior cannabis-related offenses.

However, the Garden State is in many ways a more cautious state. It is, after all, one of only two states where it’s still illegal to pump your own gas. Although the Cannabis Regulatory Enforcement Assistance and Marketplace Modernization Act (the CREAMM Act) became effective August 19, 2021, New Jersey has gotten off to a slow start. April 22, 2022 marked the first day of legal adult use cannabis sales, and only thirteen dispensaries participated, all of them Alternative Treatment Centers (medical cannabis dispensaries) who’d received a coveted “Authorization to Operate” from the state’s Cannabis Regulatory Commission (CRC).

Types of Licenses

In addition to the standard types of cannabis licenses: retailer, cultivator, manufacturer, wholesales, distributor and delivery, New Jersey has also approved a microbusiness license, which will be limited to 10 employees or less and 2,500 square feet or less of operation space. A cannabis business may apply for more than one type of license.

The CREAMM Act limits the issuance of cultivator licenses to 37 (not including cultivation licenses issued to microbusinesses). However, the state has decided to abolish that cap in order to boost the sagging cannabis market, and the cap will expire February 22, 2023.

The CREAMM Act also describes three special sub-types of licensees:

Certified diversely-owned business – the state wants to issue 15% of licenses to minority-owned businesses and 15% of licenses to woman-owned and disabled veteran-owned businesses.
Social Equity business – owned by people who have lived in an Economically Disadvantaged Area. Will receive special priority.
Impact Zone business – located in an Impact Zone (towns with higher-than-average unemployment, crime and cannabis arrests), owned by people from an Impact Zone, or employing residents of Impact Zones. Will also receive special priority.

License Fees

Licensing fees vary widely, from $1,000 for a microbusiness, to $10,000 for a retailer and from $5,000 for a small cultivator to $50,000 for the largest cultivation operation. Alternative Treatment Centers applying for adult use licenses will pay $100,000 for a single dispensary, $400,000 for a single cultivation license and up to $1,000,000 if they’re a vertically integrated business with 3 adult use dispensaries.

“FINAL AGENCY DECISION: APPROVAL” Doesn’t Mean Approval To Operate

As of February 9, 2023, approximately 950 cultivators, dispensaries, and manufacturers had received CRC letters marked “FINAL AGENCY DECISION: APPROVAL OF CONDITIONAL LICENSE APPLICATION.” However, the letter stated recipients “shall not engage in purchasing, possessing, selling…cannabis or cannabis products.” Instead, it gave permission to 1) rent/purchase a site, 2) gain municipal approval and 3) apply to the CRC to for conversion to an annual license, which will allow them to actually operate. The conditional license phase is 120 days with an automatic 45-day extension.

On October 27, 2022, the first 18 annual adult-use licenses, which do allow the holder to open an adult use cannabis business, were issued, and as of January 13, 2023, only 46 annual adult-use licenses had been awarded.

Notoriety doesn’t seem to be moving the time table much faster. Famous rapper and actor Ice T and his ex-playboy bunny partner, Charris B, have been given conditional approval by the CRC and have obtained location approval from Jersey City. They are now waiting for conversion to an annual license, which as of mid-February 2023, they had still not been granted.

Current Sales

From April 22 to the end of June, New Jersey had collected $4,649,202 in tax revenue from sales of adult use cannabis. That amount included $219,482 in Social Equity Excise Fees and was based on $79,698,831 in total sales of adult use cannabis. The 3^rd quarter of 2022, July through September, saw a jump in sales of adult use cannabis in New Jersey to $116,572,533. With medicinal cannabis sales included, the total went up to $177,710,764.

Stay tuned for Part 2, covering taxes in the Garden State, coming next week!

February 10, 2023

Rhode Island Embraces Adult Use Cannabis, But With A Bitter Tax Pill

By Abraham Finberg, Simon Menkes, Rachel Wright

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Although Rhode Island is the USA’s smallest state, it has traditionally taken an out-sized dislike for cannabis and its users. It first banned cannabis in 1918 and, up until recently, had some of the strictest mandatory minimum sentences for large-scale possession, sentencing those with more than 5 kg (11 lbs) to 20 years’ imprisonment and fines of between $25,000 and $100,000.

Rhode Island’s Change of Heart

These days, however, the Ocean State has turned over a new leaf. It legalized medical cannabis in 2006, and on May 25, 2022, legalized adult use sales as well. Starting in December 2022, Rhode Island residents could purchase cannabis from five of the six medical cannabis dispensaries across the state which have also been approved to sell to adults.

Over the course of 2023, the state is expected to issue licenses for an additional 28 dispensaries, including a portion reserved for social equity applicants and worker-owned cooperatives. At the same time, 33 cities and towns across Rhode Island voted to determine whether cannabis businesses would be allowed in their jurisdiction. 25 of these municipalities ended up approving these measures.

Social Equity

Like many retail-legal states, Rhode Island has enacted social equity support for cannabis licensees. The state is divided into six retail license zones, and within each zone, one retail license will be reserved for a social equity applicant and one for a worker-owned cooperative. In addition, the state’s cannabis legislation provides for a $1 million fund to help support the social equity license recipients. Funded by all fees collected from adult-use cannabis businesses, this assistance fund will provide grants, promote job training and workforce development, and administer programming for restorative justice. The legislation also establishes a process whereby individuals may have their misdemeanor or felony convictions for cannabis possession expunged.

How Tax-Friendly Toward Cannabis is Rhode Island?

The Ocean State still has a way to go to be considered a truly cannabis-friendly state. For one thing, the state is forcing both individuals and corporations to conform to Internal Revenue Code section 280E which disallows deductions and credits for expenditures connected with trafficking in controlled substances under the Controlled Substances Act, schedule 1 or 2. This means cannabis companies will only be permitted to reduce their sales by cost of goods sold when determining their taxable income on their state tax returns unless they decide to take more aggressive tax positions. For example, with a conservative IRC 280E tax position, a cannabis dispensary would only be allowed to deduct the cost of the product purchased and the cost to transport the product to the dispensary, while disallowing such significant expenses as rent and payroll. All cannabis businesses must forgo expense deductions related to selling, general and administrative expenses, as they are disallowed under the tax code under this traditional method. Rhode Island has also disallowed cannabis businesses from taking an R&D tax credit as a result of conformity with federal tax law.

In addition, Rhode Island is requiring retailers to collect 10% state cannabis excise tax plus 3% local cannabis excise tax from its customers, along with the standard 7% sales tax. Good news: sales tax is not calculated on the excise tax collected (unlike California, which does impose tax-on-tax). Medical sales are subject to sales tax but not to excise tax, and excise tax is not charged on cannabis accessories. Excise tax, like sales tax, must be remitted to the state by the dispensary on or before the 20^th of the following month.

In Summary

Rhode Island has taken a big step forward from its anti-cannabis past by legalizing adult use sales and by supporting equity applicants as well as the expungement of past criminal convictions for many of those victimized by the war on cannabis. While Rhode Island’s excise taxes are not the worst we’ve seen, the state’s support of 280E will make it a lot harder for cannabis businesses to thrive.

January 18, 2023

Compliance as a Revenue Center: Banking & Cannabis, More Similar Than You Think

By Kevin Hart

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Have you ever been to the DMV, only to be turned away because you didn’t have the countless forms of identification needed? Sometimes it feels like no amount of ID or proof of residence is enough, whether it’s your 2nd grade report card or an electric bill from 25 years ago.

That feeling is what it’s like for anyone working in compliance; regardless of industry. Banks are no different. They need to possess compliance documents such as Consolidated Reports of Condition and Income and other Federal Financial Institutions Examination Council (FFIEC) reports that work like the laundry list of documents you need to get a driver’s license or get your car registered.

The same can be said for newly licensed and legal cannabis companies. They often need state and local inspection documents, federal background checks and a list of other documents that make a CVS receipt look minuscule in comparison.

Historically, across all industries, the whole process of gathering and providing these sorts of documents can turn into a bit of a charade. Many companies do the bare minimum to check the compliance box and achieve certifications. Various teams and stakeholders try to skate through the compliance process by providing answers that reflect what they think the enterprise customer wants to see (vs. the reality).

In order to achieve long term growth, financial institutions (FIs) and cannabis companies alike need to start executing compliance plans. FIs are always seeking new growth and revenue opportunities, and cannabis companies are constantly under the scrutiny of regulators. Identifying new solutions that can help companies grow quickly while also maintaining compliance should be an essential part of the roadmap.

Financial Institutions and Cannabis

Many think that financial institutions and cannabis businesses would be on opposite ends of any spectrum. Banking is a mature and established industry, while legal cannabis is a new, fast moving and constantly evolving space. So, on one side, there is a risk averse fiscally conservative and traditional business model, and on the other side is an industry that is outside of the mainstream.

Let’s look at this perception from a different angle though. What is true is that both industries are highly regulated and must comply with the rules placed upon them by regulators; and if their house isn’t in order, the consequences can be disastrous (Read: Massive fines or even losing the ability to operate). CRBs and FIs deal with the security and dual control of inventory, and making sure customers are properly identified and of legal capacity to conduct business. In most cases, both are small businesses within their respective communities. ‍

Moreover, each of the industries are forced to navigate nearly-constant regulatory change, making the act of complying with applicable regulations a moving target. For most of these types of businesses, regulatory compliance is cited as one of the largest (and most expensive) challenges they face in day-to-day operations.

Compliance as Revenue Protection

When financial institutions make the decision to offer services to the cannabis industry, they naturally look at the market opportunity to determine whether the effort associated with the increased compliance obligations outweigh the potential benefits. Traditionally, compliance is viewed as a cost center, but in reality, it’s a revenue protection center. As the old saying goes; “an ounce of prevention is worth more than a pound of cure.” Compliance is that prevention.

Failing to fully comply and meet regulatory compliance standards can cost organizations billions. Having a trusted system of compliance established should not be looked at as a cost-sucking measure for businesses, when it really is negligible when the cost of getting it wrong is far more substantial. Setting up a truthful and transparent compliance program isn’t just the right thing to do, it also protects revenue.

As the cannabis industry continues to grow, navigating around pain points is becoming increasingly expensive for the companies participating in it, many of whom are still struggling to turn a profit. Specifically, an IDC forecast shows global revenue from GRC solutions growing from $11.3 billion in 2020 to nearly $16.2 billion by 2025. And the average business hires and spends upward of $50,000 to $200,000 on consultants to manage compliance. It’s not uncommon for companies to dedicate five to 10 people working on compliance every week for hours and months on end.

Many in the banking industry are worried about forging into a stigmatized stream of revenue like cannabis, but with the right compliance solutions in place, they can have peace of mind. These solutions guarantee that revenue from cannabis is done legally by analyzing where each dollar came from, and denying those that don’t meet the minimum criteria. Having visibility into cannabis-related business (CRBs) accounts that do the enhanced due diligence is the only way to operate.

By implementing purpose-built compliance management solutions, financial institutions are able to unlock new revenue streams and scale cannabis banking operations. Meaning that as cannabis continues to gain mainstream momentum, and becomes less scrutinized locally and federally, these FIs that take part will be ahead of the curve.

Looking Ahead

With recent movement towards legalization in the House, cannabis investors are optimistic about the industry’s future. So how can the cannabis market overcome these hurdles and remain highly profitable?

To start with, CRBs must have greater access to accredited financial institutions like banks and credit unions. Owning bank accounts, obtaining credit cards, and applying for small business loans is essential to growth. Providing CRBs with access to proper financial support and compliance control is crucial for the cannabis market to continue to thrive.

Federal legislation such as the SAFE Banking Act is currently thought of to be the silver bullet that will open the floodgates for CRBs and FIs to work together. But in reality, this is a myth, as the SAFE Banking Act will simply make the current compliance rules stricter.

To be a first mover FI in your area, businesses must start by implementing a scalable, verifiable cannabis banking program. The real customers and financial opportunities are out there, and are even greater than what you might have modeled given the growth of the industry. The ability to do this today is real.

September 1, 2022

As More Opportunity Arises in the Cannabis Industry, Potential Business Pitfalls Also Increase

By Jonathan Storper

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Benjamin Franklin famously advised fire-threatened Philadelphians in 1736 that “an ounce of prevention is worth a pound of cure.”

With industry growth and maturation comes increased opportunities and challenges. As the cannabis business matures and spreads into new geographic regions, the industry can take advantage of larger markets; however, it also faces increased risk and litigation across a myriad of its operations. This article identifies some of those growing pains along with suggesting how to avoid the more obvious and typical types of issues before they become a problem.

Contracts/Commercial Agreements

One source of emerging trends in cannabis litigation notes that about 1/3 of litigation in 2022 could be classified broadly as commercial disputes. As the various state laws allow for expansion of legal cannabis operations into more states, operators will enter into more commercial agreements to grow and scale operations across the United States.

I am surprised by how many companies do not adequately document their commercial agreements. A host of issues too numerous to discuss in depth here should be addressed in a commercial agreement depending on the type of transaction. In short, make sure agreements are in writing, signed and include an effective date. They should be complete and unambiguous, allocating responsibilities and risk as intended.

Fundraising

When fundraising, whether as debt or equity, a company must comply with complicated and technical U.S. and applicable state securities laws. These laws and regulations require either the registration of the securities offering, which is very expensive, or an applicable exemption from a registration. Failure to comply could lead to lawsuits filed by investors trying to recoup all their money, even if they have no damages, along with possible fraud claims or fines and penalties imposed by applicable federal or state agencies.

Landlord-Tenant disputes

When renting commercial real property, create agreements that address the major issues in writing in case of disputes with property owners. Understanding the lease terms and requirements, as well as tenant rights and duties under state and local law, are essential. Pay attention to lawful uses, minimum term and renewal options, operating expenses and tax requirements, tenant default issues, base rent and other rental charges, common area maintenance charges, maintenance and repair, tenant improvement requirements and allowances, sublet and assignment, and requirements for the refund of the security deposit.

Employment

A common area of misunderstanding that leads to disputes is the law governing employee relations. Companies often misclassify employees, creating valid claims for past due benefits, fines and other damages for failure to classify correctly. In California, for example, correctly classifying a worker as an independent contractor is difficult. Some common mistakes to avoid include:

Designating non-exempt workers as exempt and misclassifying employees as independent contractors.
Failure to pay required minimum wages or overtime.
Not providing required meal and rest breaks.
Failure to keep accurate time records for non-exempt workers.
Inaccurate and noncompliant payroll records (aka “wage statements”) with all the required information.
Improperly administering leaves of absence, especially for employees with medical conditions or disabilities.
Not carefully documenting performance issues by using performance reviews, or “writing up” poor performance, etc.

Failure to have a written employee handbook covering important policies such as vacation and required conduct, as well as misapplying those policies, can lead to disputes. Pay attention to state and local employment laws that apply at the different stages of development and growth.

Intellectual Property

Protecting the company’s intellectual property is important to maintain the goodwill and value of a business. Carefully evaluate the requirements for any patent, trademark, copyright, and/or trade secret protection and come up with a plan to implement and monitor the applicable intellectual property assets. Do not disclose possible patentable intellectual property and inventions before filing a provisional patent application, or the ability to obtain patent protection will be destroyed. Before using a tradename or trademark in commerce, investigate if anyone else is using a similar name for similar goods and services. Failure to do so could lead to claims for infringement and a judgement requiring the company to stop using its preferred name or logo after investing time and money in creating the brand. Consider registering at the state and federal level the name and logo to secure your rights in the brand. What and where a cannabis company can register its brand name and logo for protection are currently limited, so be advised registration can be tricky.

Trade secret protection attaches to valuable information not readily ascertainable by lawful means, such as a formula, pattern, method, device, compilation, program, technique, or process that is secret. Protection afforded to trade secrets does not expire if the information is kept secret. For instance, the Coca-Cola formula has been kept secret for over 100 years, thus maintaining its value. Companies must also implement and maintain appropriate measures to protect the inadvertent disclosure of the information in order to maintain an asset’s status as a trade secret. Before disclosing any confidential information, make sure to have a proper written confidentiality agreement in place with the recipient, or you may lose the protection afforded by trade secret law.

Hiring the right workers to develop valuable intellectual property is important to the success of any business. Make sure to have employees and contractors assign their interests and ownership rights to the work they create, and develop a written invention-assignment agreement in favor of the company to avoid ownership disputes. Interests in copyrightable works created by service providers must be assigned in a written agreement. Failure to do so could diminish the company’s value.

Taxes & Licensing

Sometimes a business unavoidably gets behind in paying its taxes. Failure to pay taxes on time leads to penalties and fines and possible expensive audits by the tax authorities. In addition, personal liability can attach to directors and officers for failure to pay employment taxes. Cannabis companies may have several licensing requirements as well that are important to track to stay in good standing.

Insurance

Adequate insurance is a must-have for every business. Conduct a periodic checkup of the company’s insurance coverage. Consider directors’ and officers’ insurance, general commercial liability and property, products liability, workers’ compensation, employment practices liability coverage, cybersecurity, and business interruption insurance. Those types of coverage are important protections for the risks related to any business that sells a product or service, has employees, deals with the public, or could lose income from unanticipated events like fire, natural disasters and civil interruptions. Discuss your particular insurance needs with a qualified insurance broker, as one size does not fit all.

Consult with Qualified Legal Counsel

Consult with legal counsel to analyze and prepare for the risks noted in this article and other common legal issues to protect the company’s assets, avoid disputes and build and maintain company value. Otherwise, you may find that, as old Ben Franklin noted, you’ll spend many pounds to try to cure problems that could have been avoided with just an “ounce of prevention.”

August 29, 2022

Cannabis Industry Sales Tax Utility Exemptions

By Dennis Anding, CPA, Renee Sorrels, CPA

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A utility study can help cannabis growers, cultivators and processors identify opportunities for sales and use tax savings by exposing potential refunds. Thirty-five states currently allow a sales tax exemption for utilities used in manufacturing or processing activities. Thirty-four states have published guidance that provides for a formal utility study process while one state, Mississippi, does not have formal guidance. For Mississippi, the process is to work with the state contacts to secure the exemption.

Generally, the exemption includes the purchase of electricity, natural gas and water and typically applies to the percentage of electricity, natural gas and water used or consumed within the manufacturing process as defined by state statutes and regulations. However, in some states purchased electricity, natural gas and water might be 100% exempt if certain usage percentages are met or exceeded. Facilities that grow, cultivate and process cannabis generally use significant kilowatt hours of electricity in the manufacturing process, and this exemption can result in sizeable tax savings. Without the proper analysis, unwary taxpayers might unknowingly leave significant utility savings on the table.

How to qualify

To qualify for the exemption, states require eligible taxpayers to perform a utility study to analyze the usage of utilities within the manufacturing process versus the taxable use of utilities (such as in general and administrative and office areas). Some states have a predominant use provision under which if 51% or more of an electric or gas meter is used in manufacturing then 100% of the meter’s tax is exempt, while many other states will exempt only the exact percentage of qualified usage as calculated by the utility study.

Some states require the study to be conducted by a third-party provider. Texas requires that the utility study be performed by a certified professional engineer. Taxpayers that engage a third party to conduct a utility study would be wise to consider completing a cost segregation analysis on their facility at the same time, as the two analyses together could bring extra value and savings.

Study process

An energy analysis and comparison should help establish the qualified utility usage percentage used in claiming the sales tax exemption. Once the usage percentage has been calculated in the respective state, it makes sense to review invoices from utility vendors to quantify any sales and use tax overpayment amount.

Refunds for sales and use taxes previously paid can then be requested directly from the state taxing authorities or any vendors retroactively back to the state’s open statute of limitations (typically three to four years). Taxpayers should also establish the exemption prospectively to obtain the benefit of not paying sales and use tax on the amount of manufacturing usage on future invoices. An updated exemption analysis might be needed every three to four years, depending upon the applicable state rules, or when the processing area undergoes a significant update, such as adding new machinery and equipment to the facility or removing machinery and equipment from the facility.

Other sales and use tax refund opportunities

In addition to the exemption on qualified utilities, many states extend the manufacturing exemption to qualified machinery, equipment, and consumables. Generally, to qualify the equipment must cause a physical or chemical change upon the product and be predominantly or directly and exclusively used in the manufacturing process. The exemption may apply to supplies and consumables that are used or consumed in the process as well. Agricultural exemptions are also available for cannabis growers, cultivators, and processors to potentially qualify for.

Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.