tax Archives - Green Market Report

StaffAugust 19, 2020
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2min14950

For the past century, America has been in a fierce debate regarding the legal status of marijuana. And while individuals on both sides of the issue are passionate about their positions regarding the morality and safety of cannabis, those against legalization have largely had their way— until very recently.

Fast forward to the present day and you’ll see a significant change in the legal landscape. At the time of writing, 33 states allow medicinal marijuana use and 11 states allow legal recreational use. Furthermore, 9 additional states may organize a vote for legalization on their 2020 ballots.

So what changed? Among other things, the promise of marijuana tax revenue was a huge motivator. Reframing the marijuana debate around its merits as a tool for government funding has been extremely helpful for the pro-legalization cause, and it’s led many states to experiment with legalization.

But what are the results of this experiment?

Has legalization of recreational cannabis actually led to economic growth for these states? And what does this mean for the future of marijuana legalization in the country?

Go to the CPA Accounting Institute for Success to find out more!

This infographic republished with permission.


StaffMay 31, 2019
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6min15920

By Lewis Taub, CPA, Director of Tax, Berkowitz Pollack Brant

Despite the legalization of cannabis on a state-by-state basis, federal tax laws continue to limit the availability of certain tax benefits for businesses engaged in cannabis production and sales. Yet, with advance planning and analysis, cannabis companies and their investors have an opportunity to maximize their tax savings while maintaining compliance with federal laws.

Federal Tax Law

Under federal tax laws, most U.S. businesses may deduct from their taxable income the ordinary and necessary expenses they incur to operate their companies, including costs for rent, repairs, interest, depreciation, and employee compensation, and benefits. However, the federal government does not extend this tax-saving benefit to businesses that sell cannabis, which the Controlled Substances Act (CSA) classifies as a schedule I drug that is not approved for medical use in the U.S. This restriction prohibiting cannabis companies from deducting business expenses even extends to those entities located in states that have legalized the sale of cannabis for medical purposes.

There is, however, one significant exception to the disallowance of expense deductions for cannabis businesses.

An Exception for Producers and Resellers

The Internal Revenue Service (IRS) permits “businesses trafficking in controlled substances” to deduct the direct costs of the goods they sell against their income. Cost of goods sold refers to inventory a business purchases to resell to customers and is considered to be an adjustment to income and not an actual deduction.

Cost of goods sold is calculated as 1) the cost of product (inventory) on hand at the beginning of the year, plus 2) the cost of product that was produced or purchased since the beginning of the year, plus 3) direct and indirect production costs, minus 4) the cost of inventory on hand at the end of the year.  

This IRS provision allowing a deduction for costs of goods sold represents a significant tax-savings opportunity for businesses in the cannabis industry, specifically “resellers” that merely buy products to sell to customers and “producers” that control the production of the product to be resold. Yet, the opportunities to deduct expenses as part of costs of goods sold are much more expansive for producers than for resellers.

For example, resellers can include in costs of goods sold the amount they pay for the purchase of the cannabis plus any transportation expenses or other necessary expenditures incurred in acquiring possession of the product. In contrast, the tax laws allow producers to include in costs of goods sold their direct material costs for growing the product, including outlays for plants and seeds; direct labor costs for planting, harvesting and sorting product; and indirect production costs, including rent, repair expenses, employee wages, utilities, and maintenance. Therefore, many of the operating costs that cannabis businesses may not deduct because the federal government considers to be trafficking in controlled substances can now become deductible as costs of goods sold for producers. The deductible amount depends upon the company’s inventory costing system. Typically, indirect costs are allocated based on methodologies that include a standard amount based on a fixed formula. For example, a certain dollar value of indirect costs could be allocated based on a fixed percentage of direct costs.

It is important to recognize that over the past few years, the tax court has sided with the IRS in taking the position that a cannabis business was a reseller and not a producer, thereby reducing the cost of goods sold available for the business to offset its gross sales. This issue may continue to influence the cannabis industry as vertical integration among companies will produce true tax advantages. That is, entities combining through acquisitions will be better able to control the entire process, from production through distribution, and qualify as producers that can deduct the additional cost of goods sold,   

Cannabis businesses face a complicated tax-compliance landscape. Yet, opportunities are available for maximizing business expense deductions and improving tax efficiency when cannabis companies plan early under the guidance of experienced tax professionals.

About the Author: Lewis Taub, CPA, is a director in the New York office of Berkowitz Pollack Brant Advisors and Accountants, where he works with entrepreneurial business, multinational and multi-state corporations on tax planning and compliance strategies. He can be reached at ltaub@bpbcpa.com.


William SumnerMay 16, 2018
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5min17980

As the debate to legalize cannabis in the state of New York rages on, one report offers to shed some light on the financial incentives that come with legalization. On May 15, 2018, New York City Comptroller Scott Stringer published a report estimating the potential size of the state’s legal cannabis market and how much tax revenue it would generate for both the city and the state.

According to the report, the New York state cannabis market could see up to $3.1 billion in annual sales, with up to $1.1 billion being generated in New York City alone. In terms of tax revenue, legal cannabis could generate up to $436 million for New York state and $336 for New York City.

In order to estimate both market size and potential tax revenue, Stringer used several different data points. First Stringer used data from a 2012 survey conducted by the New York City Comptroller’s Office, which estimated the size of New York City’s cannabis market to be approximately $1.65 billion.

Stringer then used aggregate data on marijuana sales in both Washington and Colorado to help improve estimates. Although both New York City and state have larger populations that Washington and Colorado, Stringer estimates that a smaller segment of the New York population uses cannabis.

It is estimated that only 8-10% of New Yorkers use cannabis on a monthly basis; compared to the 17% of Colorado adults and 11% of Washington adults. With the estimated rates, Stringer was able to determine that approximately 1.5 million New York residents use cannabis, of which an estimated 550,000 live in New York City. These estimates do not include the nearly 1 million individuals that work in New York City but commute from out of state, nor does it account for out of state and international tourists.

To estimate tax revenue, Stringer devised a tax structure based off of what other states with legal adult cannabis sales have. Under this theoretical tax structure, state-wide cannabis sales would carry a 10% excise tax on top of the normal 4% state sales tax. Like many other states, cities and municipalities would be free to levy local cannabis taxes up to a certain percent; in this case 25% would be the ceiling.

Assuming both New York City and state were to implement this tax structure, legal adult cannabis sales would generate $336 million and $436 million in tax revenue, respectively. In a statement, Stringer said that aside from the tax revenue generated by cannabis, legalization would also go a long way towards reducing public safety costs and reducing “a source of harm that has afflicted communities of color for so long.”

“This is not just about dollars – it’s about justice. Not only is marijuana an untapped revenue source for the City and the State, but the prosecution of marijuana-related crimes has had a devastating and disproportionate impact on Black and Hispanic communities for far too long,” said New York City Comptroller Scott M. Stringer. “There is simply no reason for New York to be stuck in the dark ages. This new analysis shows just how much New York City and State stand to benefit by moving toward legalization.”

Stringer went on to note that a legalization bill has already been submitted to the state legislature by Sen. Liz Krueger and Assemblywoman Crystal D. Peoples-Stokes, which is called the Marijuana Regulation and Taxation Act.

Separately, New York City’s Mayor Bill DeBasio called for the New York Police Department to overhaul its marijuana enforcement policies within the next 30 days. The New York Times recently published a story about racial disparity and marijuana arrests. It turns out that 86 percent of those arrested for low-level marijuana possession were either black or Hispanic.


Debra BorchardtDecember 13, 2017
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4min19290

The state of Colorado is now releasing sales data on marijuana transactions. Previously, the state only posted tax revenues, leaving researchers and journalists with guesswork as to how that translated into sales. So far, total sales through October have increased 42% year-over-year and tax revenues through November have increased 16%.

On Wednesday, the state released medical and retail sales data going back to January 2014, even though sales began prior to this date. Going forward, monthly reports will be published on the seventh business day of each month. The data is self-reported by the businesses and aren’t audited or use the Metrc tracking system.

“We know this information is highly desired by the general public, media, and researchers,” said Mike Hartman, executive director of the Colorado Department of Revenue (CDOR). “To that end, in our efforts to be as transparent as possible, we will now provide aggregate sales data. That, coupled with state tax revenue data already provided, will give an accurate picture of the financial footprint of this burgeoning industry.”

Marijuana Sales Reports

Calendar Year Total Marijuana Sales Total to Date
2014 $683,523,739 $683,523,739
2015 $995,591,255 $1,679,114,994
2016 $1,307,203,473 $2,986,318,467
2017 (Jan – Oct) $1,259,861,988 $4,246,180,455

Updated December 2017

Calendar year is defined as January 1 – December 31

 

The Department of Revenue also stated that the Office of Research and Analysis would produce monthly reports that would show the total sales for retail and medical marijuana by county. Plus, the ORA will calculate a cumulative total of actual sales figures from year-to-date and total sales per year. The sales reports will be posted on the same day as the tax reports.

Colorado changed its marijuana sales tax on July 1, 2017. Retail sales taxes rose from 10% to 15%. Retail products were exempt from sales tax on personal property. So far in 2017, the state has collected $226 million in total marijuana tax, license and fee revenues.

Marijuana Taxes, License, and Fee Revenue

Calendar Year Total Revenue
2014 $67,594,323
2015 $130,411,173
2016 $193,604,810
2017 (Jan-Nov) $226,157,028

Updated December 2017

Calendar year is defined as January 1 – December 31

 


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