Big opportunities in cannabis clients, compliance
California has long been a pioneer in the cannabis industry, so it came as no surprise that many of the sessions at the recent Accounting and Finance Show in Los Angeles focused on demystifying the very young and evolving industry, and sharing advice on how to work with potential clients in the business.
The web of cannabis taxation provides a big opportunity for accountants in the industry, and is what led the panelists of one conference session to form their own practice, DOPE CFO, to cater to this burgeoning vertical.
“It is the fastest-growing industry in the world,” said Naomi Granger, who co-founded the company, which provides CFO services to clients but also offers a training program for other businesses entering the space. “You can demand higher fees because your clients are earning more revenue.”
Granger, along with her co-founder and co-presenter Andrew Hunzicker, listed other reasons entrepreneurs should consider entering the cannabis market, including that:
- One thousand new commercial cannabis licenses are issued monthly;
- It is highly regulated, leading to higher fees;
- It is underserved, so clients will be easy to find;
- Clients will have the need for monthly/quarterly GAAP accounting;
- There are state/investor/banking reporting needs;
- The industry faces ongoing challenges; and,
- There is a huge risk for noncompliance.
To that last point, Granger and Hunzicker cited the recent Alterman v. Commissioner case as one example of a business needing greater oversight. A medical marijuana business in Colorado was audited in 2014, and the claims that it made for certain expenses in 2010 and 2011 were denied, in a ruling finally reached last month that requires them to pay back taxes and penalty fees of nearly $500,000. Four years of litigation and debilitating expenses could have been avoided with proper record-keeping and compliance-advisory services, the presenters explained.
“How much can you charge to save a business $500,000?” Granger asked the audience before outlining more opportunities in this market niche.
“This is largely underserved — bigger firms won’t get into the space because of federal regulations; their insurance won’t allow them to,” she continued. “[Cannabis] businesses are hiring friends and neighbors to do their books. When they hire us, they don’t know the difference between assets and liabilities.”
Granger and Hunzicker shared their tips for launching and growing a cannabis accounting or bookkeeping practice. The main secrets to their success were:
- Provide world-class service. Go deep into one niche to provide the necessary expertise and resources.
- Tie fees to revenue. Don’t charge by the hour, but by a rate exhibiting your value. DOPE CFO charges a percentage of top-line revenues.
- Assemble a team. Granger and Hunzicker do higher-level CFO work but “don’t touch taxes,” instead partnering with a trusted network of professionals to whom they can outsource these services.
- Pick a strong niche. DOPE CFO obviously found one, with Granger explaining that sales for the currently $10 billion industry are expected to surpass soda sales by 2030. “Accounting should take advantage of the economic benefit this industry is bringing to our country,” she said.
- Good lead-generation methods. Businesses will need to go beyond traditional networking approaches, like meetings over coffee, to getting more involved in the industry through events like trade shows, Granger explained.
In following these steps, Granger said, people will discover there is “a ton of need for accountants” in the cannabis industry.
During a session on cannabis compliance, Aaron Lachant, a partner at law firm Nelson Hardiman, gave a brief overview of the state of the industry, reminding attendees that cannabis is still illegal at the federal level. Currently, 30 states and the District of Columbia allow some regulated form of marijuana and nine states have legalized marijuana for recreational use.
“Despite all that, cannabis is still illegal under the federal law,” Lachant emphasized. “Clients are violating federal law.”
California, where cannabis is legal for medical and recreational use, is in the process of implementing a new system, the California Track-and-Trace system, to record the inventory and movement of cannabis and cannabis products through the commercial cannabis supply chain, from cultivation to sale. CCTT uses METRC software, which is also utilized in other cannabis-legal states.
“You have a whole bunch of cannabis businesses coming into your door, and they fall into boxes depending what they are,” Lachant explained, listing them as the cultivators, manufacturers and distributors.
That last link in the supply chain is “the most important in the California system. The distributor is the choke point, before anything can go to retail,” Lachant explained. “The distributor is responsible for taxation collection and, No. 2, laboratory testing.”
Lachant’s co-panelist Ani Galyan outlined the levels of regulation and taxation cannabis businesses can be subjected to, including Code 280E, especially on the retail level, which, because marijuana is a Schedule 1 controlled substance, limits retailers in their deductibility of business expenses to the cost of goods sold, impacting their profitability. On the state level, cannabis businesses are subject to regular sales tax, excise tax, and state and local taxes.
Businesses that are not collecting sales tax “are taxing themselves out of business,” Galyan explained. Cannabis business “clients are going to get audited every year they’ve been in operation. The client will have to eat that sales tax. We train clients, at the retail level, to start collecting sales tax.”
That tax will be computed on top of all other taxes, including excise and state and local taxes. Another tax, calculated the moment the cannabis leaves the cultivator to go to either the manufacturer or straight to the distributor, is a cultivation tax, Galyan explained, with rates subject to change. The excise tax is imposed on the purchaser; the individual who walks into the retailer to purchase the product.
City tax will also come into play, Galyan said, and in Los Angeles, for example, there are various levels of taxation.
Galyan also dispelled the myth of cannabis businesses being unable to use banks. “It’s a misnomer that clients don’t have banking … 30,000 clients have banking, there is banking going on,” she said, adding that there are many small banks in California that specifically serve the industry.