In the Weeds: The Cannabis Industry Needs Accountants
This year, the major accounting technology conference Accountex (formerly SleeterCon) happened concurrently – and down the street from – the largest cannabis industry conference in the United States, the Marijuana Business Conference and Expo. Seemingly an unrelated coincidence, the timing turned out to be kismet: Accountex attendee Penny Breslin, a financial technology consultant based in San Diego, found herself fielding questions from Expo attendees asking whether she “knew any good accountants.”
As it turns out, Breslin told me, the marijuana business is in desperate need of accounting (and legal) services as the drug becomes legal state by state at a rapid pace. But what would it take for an accountant, or a suite of accounting software, to take on a cannabis-related business’ books?
First, it’s important to understand that the legalization of marijuana does not mean it suddenly becomes easy to buy and sell at will. Each state in which marijuana is legal, either for medical use, recreational use, or variations therein, has its own laws surrounding the trade. Also, businesses have been moving, buying and selling marijuana on the black market for decades. Moving a company from illegal to legitimate carries with it a complicated tax burden that straddles state and federal rules.
Legalization via the states means that while marijuana may be legal in some states, it is still illegal federally. Of course, this doesn’t stop the IRS from taking its piece of the tax pie – up to 70 percent, thanks to Section 280e of the Tax Code, a measure Congress passed in 1982 to ensure that businesses dealing in illegal substances cannot make use of any deductions or tax credits. The code as it relates to marijuana is complex, and an accountant taking on marijuana-related businesses needs to have a good understanding of Sec. 280e, possibly working in tandem with a lawyer serving the business, too.
While I was in Las Vegas attending Accountex, I met with Eric Gomez, CEO of Canopy San Diego, a business accelerator for the legal cannabis-ancillary industry. “Ancillary,” because due to cannabis still being federally classified as a Schedule I drug, businesses that physically touch the product – such as growers, distributors and dispensaries – can lose their deductible status under 280e, making it difficult to do business. So Canopy San Diego provides startup funding for companies such as Apothecarry, which makes “luxury cannabis accoutrements” such as humidors and storage containers; LooseLeaf Tech, a software company that provides a platform for patients and healthcare providers to collaborate and gather data on the benefits of medicinal cannabis; and MycoCann, which provides soil solutions for growing the best cannabis plants.
“Through Canopy San Diego, investors can invest in the whole cannabis industry,” Gomez explained. “No one knows right now which segment will take off fastest.”
The accounting technology segment also has a wide opening into the industry, as long as companies can avoid losing deductible status when they start dealing with cannabis-related businesses – Gomez noted that if companies are making profit from money that comes from the direct handling of marijuana, they occupy a grey area under 280e that hasn’t been fully illuminated yet. Because of its Schedule I status, the movement of marijuana product has to be tracked meticulously at every turn. Solutions such as the Sage Live and TomTom Webfleet collaboration, which provides cloud-based accounting for companies with fleets of vehicles; and startup ZipBooks, which provides an end-to-end accounting solution for mobile businesses like electricians that need to track mileage, are well-positioned to meet the cannabis industry’s needs.
While SalesPad, an ERP solutions provider, has no immediate plans to enter the cannabis space, its structure is another example of what is needed to enter a brand new, rapidly growing market quickly. "Our core competency in CRM, inventory, purchasing and point-of-sale allows us to build out vertical offerings quickly," explained vice president of operations and business development Jeremy Boogaart. "And our advantage is that we build from books and accounting forward, where many of the industry vertical software packages start with industry specific operations and features and back their way into an accounting integration as an after thought. That is why you see so many industry (not just cannabis) solutions that are poor at accounting and inventory specifically."
So accountants and accounting technologists: Keep an eye on the cannabis industry. Perhaps you’d be interested in learning what it would take to get into what promises to be a booming market.