tax Archives - Green Market Report

Sean HockingSean HockingMay 17, 2019


If you wish to re-publish this story please do so with the following  accreditation:
AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s
Please note all articles published by Cannabis Law Report contain opinions by our external contributors and are not necessarily the views of this publication.

Cantonization – California – Cannabis – We have been looking forward to writing this article for a number of reasons.  We want to begin by thanking John Schroyer of MJBizDaily for introducing us to the issues we will discuss in this article.  We will try to polish some of the raw gems that John identified in a three-part set of articles, How a little-known tax auditing firm became ‘kingmakers’ of California cannabis, Decades of relationships give rise to HDL’s California cannabis stronghold and Profit-maker or profiteer? Cannabis industry conflicted on HDL’s influence, impact

We hope our polishing will serve to enhance John’s journalistic efforts to increase integrity and professionalism in California’s cannabis industry.

There are a couple of personal observations that we are pleased to have the opportunity to include in this article.   John begins by identifying HDL[1] as a “tax auditing” business that has become a dominant force in California’s marijuana industry.  HDL claims to act as a consultant to roughly 125 cities and counties.  We first note that HDL is not a certified public accounting [“CPA”] firm.  Neither the firm nor any of the principals of the firm are CPAs.  We verified the preceding both on and on the California Board of Accountancy website[2]

HDL holds an asset derived from the origins of the firm that appears to be the foundation for its success in California’s cannabis industry.  As a consequence of decades of work in connection with sales tax assessments, many cities and counties use proprietary software run by HDL. HDL has bragged,

“We’re the only company in California that has all the financial information from everyone who pays sales tax,” McPherson said. “What we’ve done is identified cannabis businesses through our queries or clients. … So, every time we run that data, we would always know all the retail companies that are cannabis-related.

HDL’s access to data relating to sales in the cannabis industry that no competitor has drawn criticism from some involved in California’s cannabis industry.  However, the pivotal role HDL is playing in suggesting local tax rates and determining the fates of prospective licensees is far more egregious.  HDL’s suite of cannabis policy services for local governments runs an enormous gamut, from drafting regulatory ordinances – to calculating tax revenue projections – to scoring business license applications.

HDL has become a virtual a one-stop shop for local governments still figuring out:

How to effectively regulate the marijuana industry.

How big they want to allow the industry to get.

HDL claims it oversees roughly 400 licensed businesses through compliance and tax auditing. As more companies come on-line, HDL expects this number will continue to increase

Because California requires city or county approval before any state license will be issued, HDL has fallen into control over hundreds of million-dollar business opportunities.  HDL has been dubbed by some in the industry as “kingmakers” solely as a consequence of being in the right place at the right time and with access to the right resources.  This, of course, is wrong because HDL is playing both sides of the street and is not hindered by professional licensing or regulatory standards.

McPherson’s arrival at HDL is another example of the right time, right place, and right portfolio.


McPherson was planning to retire from his job as head of revenue for the city of Oakland, California, in 2015 when HDL offered him a job.  The job, in part, was offered because of his experience regulating Oakland’s medical marijuana industry.  But McPherson’s sendoff was colored by a contract scandal and newspaper report that he was “forced out” of city government.

One of the city’s vendors, Progressive Solutions (PSI), sued Oakland in state and federal court starting in 2015, alleging its proprietary software had been stolen under McPherson’s watch.

The same vendor then alleged a year later that McPherson had “rigged” the city’s process of bidding contracts by not renewing a deal with PSI for tax auditing software and instead awarding it to HDL. As a quid pro quo, PSI alleged HDL hired McPherson to run its cannabis consulting division.

According to a June 2015 story in the East Bay Express newspaper, McPherson is quoted as saying he had recused himself from the process of choosing a vendor for the software, citing a conflict of interest with HDL.  McPherson did not elaborate on what that conflict was. That scandal has dogged McPherson in the ensuing years and still occasionally causes professional strain.

Jason Callum, president of the San Luis Obispo County chapter of NORML, said he was able to talk his county’s board out of hiring HDL by citing the controversy surrounding McPherson’s exit.

“Because that article from East Bay (Express) came out, then some of the industry folks were like, ‘McPherson left, and this whole scandal, blah, blah, blah,’ and I couldn’t talk about it because it was under litigation,” McPherson said.

Incidentally, we learned more about San Luis Obispo County through our discovery of the California Cannabis Authority [“CAA”][3]

Jackie McGowan was quoted as stating

“Sacramento-based consultant Jackie McGowan, who has been one of the more vocal of HDL’s detractors, blames the firm for a series of high local tax rates that were established in places such as Monterey County and municipalities including Coachella, Greenfield, Marysville, Moreno Valley and Salinas.”

We think that we finally understand that this might be one component of the Colossal Licensing Fiasco that Lori Ajax, or perhaps Nicole Elliott, Governor Newsom’s Cannabis Business Czar, could fix.  Our proposed approaches to a remedy would be:

An order from the California Dept. of Tax and Fee Administration [“CDTFA”] which would expressly limit access to taxpayer information and data to units of government and contractors tasked to perform specific actions. The tax data repository would be taken out of the hands of HDL to preclude them from using it for their exploitation.

The Bureau of Cannabis Control [“BCC”], and its sister licensing agencies could create a rule that expressly denied cannabis licenses to any individual or business entity that was represented by a contractor [such as HdL] if the city or municipality where a permit was being sought had any business relationship with the contractor during a period of time. It would cause “pay to play” to become radioactive.

We understand that this wouldn’t clear up all of the problems, but it would be a damn good start.

While we are not going to draw specific conclusions, our additional thoughts on the topic include

The conduct of HDL and its principals is unethical, unprofessional, and very likely criminal.

Issues that come to mind include:

It is very likely HDL is violating California law and local ordinances in working within a jurisdiction to set up a licensing program and then representing applicants for those licenses.  Think about how much of this kind of thing has gone on since the beginning of time in the construction industry.

It is likely HDL is misusing financial data to which it has access because of its involvement in systems and auditing that gives the firm an advantage in representing clients.  I am not certain of the breadth of California’s limitations on access to confidential tax return information.  With regard to income tax, California’s laws are more restrictive than federal law.  I suspect these same laws apply to Sales Tax information, but I have never looked into this issue.  Real property tax information, of course, is a matter of public record.

A substantial part of the problem that HDL presents relating to the cannabis industry is a product of the two-tier licensing system that California adopted which unfortunately was coupled with a failure of California to defer to local jurisdictions to the maximum extent possible.  As a consequence, a cannabis business must kiss the rings of two different kings to secure a license.

To the extent that HDL has violated California law or local ordinances, including disclosure, ethical, or access to information laws and ordinances, local licenses as well as California licenses, would be subject to cancellation or revocation.

A copy of the request of written advice which was sent to BCC General Counsel, Tamara Colson, Esq. can be read here.

There is also the possibility HDL is exposed to a securities fraud lawsuit, even a class action, based on a number of different theories.

[1] The firm was formerly known as Hinderliter, de Llamas & Associates.  The firm was founded in 1983 as a firm devoted to real property tax and sales tax assessments.  The underlying business model for decades appears to have been based on conducting audits for cities and counties to assist in ensuring such local jurisdictions were collecting the taxes due.

[2] The fact that HDL is NOT a CPA firm raises a number of concerns.  The statement of an HDL spokesperson regarding HDL clients that a substantial number of “municipalities also still use HDL for functions such as marijuana compliance and financial audits’ is misleading and false.  Since HDL is not a CPA firm, it precluded from performing financial audits.  Solely CPA firms can perform financial auditing as a professional service provider.  Further, the preparation of tax returns, and representation in connection with such returns, is subject to both federal and California regulation.  Neither the firm nor its principals, David McPherson or Tim Cromartie, a lobbyist hired by the firm, are Circular 230 Practitioners subject to the Internal Revenue Service [“IRS’s] Office of Professional Responsibility [“OPR”].

Neither the firm, nor any of its principals appear to hold any license as a tax return preparer.

[3] We had an extended discussion with Greg Turner, Esq., the contract General Counsel for CAA who shared the following in response to a California Public Records Act request.

“Thank you for your inquiry, which has been forward to me for a reply.  In your letter, you request copies of or the opportunity to inspect the Memoranda of Understanding (“MOUs”) that CCA has entered into with the State of California’s cannabis regulatory agencies regarding METRC information sharing.

At this time, we have not finalized any MOUs with any agency of the State of California for access to information in METRC.  While we hope to complete those negotiations soon, we have not finalized any MOUs at this time.  See Cal. Public Records Act (Cal Gov’t Code) Sec. 6254(a), (p).

You have also requested copies of any “SOC audit reports, and privacy assessments that may exist.” They do not.”

HDL Cannabis Consulting:


Sean HockingSean HockingMay 16, 2019


If you wish to re-publish this story please do so with following accreditation
AUTHOR: By R.L. Zamarra, CPA*


*R.L. Zamarra served as the Chief Financial Officer at Harborside Health Center in 2010 and 2011.  Since then his CPA firm, Luigi CPA, serves clients in all aspects of the cannabis industry.  He was formerly a Director at PricewaterhouseCoopers.  He has been a speaker at the National Cannabis Industry Association and he assisted with the development of I-502 Regulations for the cannabis industry for the State of Washington.  Mr. Zamarra holds a BS degree in Commerce and an MS degree in Accounting, both from the University of Virginia.  He can be reached at  Luigi CPA offices are at 3819 Cerrito Av. Oakland, CA  94611.

Harborside Health Center v. Commissioner: Implications for the Cannabis Industry and Their Tax Advisors

On November 29, 2018 the United States Tax Court issued its long-awaited decision: Patients Mutual Assistance Collective Corporation dba Harborside Health Center v. Commissioner, 151 T.C. No. 11.  This article explores the implications of this decision for cannabis businesses and their advisors.

Before diving into the specific issues addressed in the case, there are two meta-level observations worthy to note.  First, the Tax Court decided to publish this case not as a Memorandum decision but rather as an Opinion decision.  Memorandum decisions are used only where the law is settled and the decision is based on the taxpayer’s particular facts; whereas Opinion decisions are used where the Tax Court believes the case involves a sufficiently important or novel legal issue or principle.  Thus, the Tax Court wanted to make it clear that this decision sets precedent for the entire cannabis industry with respect to one or more substantive aspects of tax law.

Furthermore, the opinion is a whopping 62 pages in length, about 4 times the number of pages the Tax Court has devoted to any other IRC Section 280E case for a state-legal cannabis business.  This shows that the Tax Court has had a change of heart with respect to the cannabis industry.  To the Tax Court, a Federal judiciary that had not previously granted cannabis businesses this level of respect, they seem to be acknowledging that this new industry, still illegal under Federal law, has now gained sufficient traction nationwide to warrant more tax-authority guidance from them.  Accordingly, they delivered.

Implications for Non-Retail Cannabis Businesses

Harborside’s business operations, as described in the court’s decision, is a retail operation.  This seems to be an assumption being made by the Tax Court based upon the evidence submitted (or not submitted, see below).  But not all cannabis businesses are retail operations.  Does this Harborside tax decision have any impact for cannabis businesses engaged in cultivation and/or manufacturing?

Before we address this question, please note that the US Tax Court has not issued any decisions under Section 280E (neither memorandum nor opinion) for any non-retail cannabis businesses.  All IRC Section 280E tax cases to date have involved retail businesses.  This is very important to understand.

The regulations under IRC Section 471 (and for that matter under Section 263A) provide different rules applicable for manufactured goods than the rules applicable for goods purchased for resale.  Treasury Regulation 1.471-11 applies to “inventories of manufacturers.”  These rules allow broad leeway for manufacturers to include in the cost of inventory produced any and all production costs, whether direct or indirect, so long as some portion or attribute of that particular cost relates to inventory acquisition, production or storage (and so long as the same method is used on the taxpayer’s books for beginning and ending inventory and the method does not distort income.)

Such broad leeway is not allowed for taxpayers who cannot claim to be a “manufacturer.”  Rather, such taxpayers can only claim as Cost of Goods Sold (“COGS”) a much more limited set of costs, which include only the actual cost paid to outside parties, plus the cost to purchase and store the inventory.

Pivotal Question:  Is Harborside a Producer?  A Grave Error in Logic

The Tax Court correctly understood that there are two very different sets of rules for determining Cost of Goods Sold; one applicable to producers that is very broad and one applicable to taxpayers that are not producers that is more restrictive.  Harborside attempted to argue that the rules applicable to producers should apply.  They were on the correct path; but they faltered with their incorrect logic.

Harborside and their team of legal representatives had been actively engaged in cannabis activism for many years; they were involved in fighting legal issues at all levels of government, including actions at the state level to protect their flow of supply from their cultivators.   Under California’s Proposition 215, the law under which Harborside was operating, all cannabis that Harborside buys must be grown under authority of a “collective agreement” between Harborside and their member-cultivators.  The purpose of this “collective agreement” is to shelter the cultivator from criminal prosecution under state drug trafficking laws.

This “collective agreement” concept is California cannabis law, it is not tax law!  Apparently Harborside’s legal team did not understand their own error of logic.  We can only speculate, but it might seem reasonable that this error of logic was caused by reasoning that all cannabis grown for Harborside is being grown under their “authority” and therefore the activities of the cultivators should be ascribed to Harborside.  A non-cannabis tax lawyer would not have made this argument.

Under basic concepts of tax law, the cultivator purchases his own materials and supplies, pays his own occupancy costs, pays his own workers, and takes risks that his plants might get damaged or destroyed.  Prior to the transaction between Harborside and the cultivator, it seems clear that the cultivator owns the inventory, not Harborside.

The Tax Court first correctly determined that a “producer” is more broadly defined than a “manufacturer.”  Whereas the determination of a “manufacturer” turns upon the activities of the taxpayer to induce a physical change to the inventory, the test for a “producer” turns only upon whether or not the taxpayer owns the inventory undergoing contract-manufacturing.  The Tax Court concluded that Harborside did not own the inventory of their cultivators (prior to acquisition of such inventory by Harborside).  Therefore, Harborside was determined to not be a “producer” and therefore it was limited by Section 471 to deducting only direct COGS.

Could Harborside Have Argued Producer Status?

It is publicly-available information that Harborside was acquiring its inventory from its cultivators.  If Harborside was operating like most other California retail cannabis dispensaries at the time, they were probably purchasing bulk cannabis flower.

But it seems that this bulk cannabis flower arrived at Harborside’s facility already tested, already separated from unsaleable stems, already weighed-out into small retail packages, already packaged in Harborside-branded packaging and already labeled.  We are drawing this conclusion from Harborside’s failure to argue otherwise during its Tax Court proceedings.

However this conclusion seems to fly in the face of publicly available information.  For most other California retail cannabis dispensaries operating at the time, bulk flower was purchased “unprocessed.”  Unprocessed cannabis comes in one large bag of one to several pounds: it has typically not yet been tested; it has many stems still holding together larger kolas (that do not fit into small retail packaging), it likely contains some shake and small buds that must be separated and sold at a lower price (sometimes in bulk and sometimes at retail); it has not yet been put into branded packaging and it has not yet been labeled.

Since Harborside did not make these arguments, we can only speculate that Harborside did no processing of bulk flower into retail packages.  If our speculation is not correct, it would seem that Harborside missed an opportunity to argue a fact that could have changed the Tax Court’s ruling.  Is it possible that their legal team’s understanding of this tax law case was clouded by their focus on California criminal law and Proposition 215 rules?  Did their legal team conflate these two separate bodies of law?

Again, we can only speculate, but it seems as though they did.  It seems that they were so confident in their legal position on this point that they missed the opportunity to advance an argument that could have swung the decision by the court into their favor.

Qualification as a “Producer:” Differentiating from Harborside’s Facts

Tax Court cases are deemed to be “authority” that all other similarly situated taxpayers must follow.  However, if a taxpayer’s facts can be differentiated from the facts in such authoritative tax cases, then the ruling does not have to be followed.

Most California retail cannabis dispensaries take the tax position that bulk cannabis is not yet ready for retail sale, but rather it must be further “manufactured.”  A change to the essential character must take place prior to retail sale.  In fact, many changes to the essential character must take place before bulk “unprocessed” cannabis can be ready for retail sale.  Here is a non-exhaustive list of all of those processes:

  • Testing by a third-party outside laboratory for contaminants and pests and destruction of all failing cannabis;
  • Removal of unsaleable stem-weight resulting in a loss of valuable product and a shrinkage of inventory;
  • Separation of by-products, such as shake and small buds, and readying same for either a separate bulk sale or for sale at a lower retail price point;
  • Assembly of the cannabis flower into small retail child-resistant packaging;
  • Proper labelling of the packages to conform to strict labelling laws, including such information as weight, warnings, information necessary to enable a recall of products, information on dosages and other usage directions, etc.
  • Branding of the finished product for the retail business, if applicable.

A review of this list of activities would lead any business owner or executive (cannabis or otherwise) to conclude that these are “manufacturing” activities since they result in “a change to the essential character.”  Thus, cannabis businesses that engage in these activities should be considered to be a “manufacturer” with respect to such products.  Since the test for a manufacturer is stricter than the test for a “producer,” and since the Tax Court has inferred in this case that a producer should be allowed to use the more flexible rules under Section 471, it would seem reasonable to conclude that cannabis businesses that perform these steps should be allowed to capitalize into inventory many more costs than merely the price they pay to the cultivator.

Impact on the Cannabis Industry

This unfavorable Tax Court decision sets a precedent that is not in the best interests of the new cannabis industry still trying to get its legal footing.  Whether or not it could have been argued differently we can only speculate.

Is there a message here that the United States Tax Court is trying to send out to the industry?  An observer might envision a hypothetical meeting of senior IRS officials and senior members of the Federal Executive Branch discussing the large amounts of tax revenues being collected by state and local governments, with a certain amount of envy.  They might have discussed how the Federal government might get some of these tax revenues; they might have concluded that they should remove application of 280E from these businesses and instead ask Congress to pass legislation for a Federal cannabis excise tax (the proper way to tax cannabis federally).  Then they might have considered the likelihood of such legislation passing a divided Congress and concluded it would not be possible.  Then their next thought might have been that as long as IRC Section 280E is valid law, they will be able to get their Federal slice of cannabis taxes without any legislative changes.  Is Section 280E here to stay as the Federal government’s cannabis tax take?

If you feel the answer to this question is YES, then you must conclude, as I have done many years ago, that legal retail cannabis is dramatically underpriced.

William SumnerWilliam SumnerMay 16, 2018


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 BorchardtDebra BorchardtDecember 13, 2017


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


About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


Recent Tweets

@GreenMarketRpt – 7 hours

48 hours left to register! This week in 200+ owners, , , and medi…

@GreenMarketRpt – 10 hours

You built your company, now what? Five Tips for Cannabis Companies Thinking of Selling

@GreenMarketRpt – 3 days

Our biggest fans this week: mmlg_llc. Thank you! via

Back to Top

You have Successfully Subscribed!