Taxation’s War on Cannabis

Harborside, a California cannabis dispensary, appealed the Tax Court’s decision of tax deficiencies totaling over $29 million dollars for the periods between 2007 through 2012. Harborside’s tax liability stems from the IRS’s denial of deductions under IRC §280E and the disallowances of cost of goods sold reported on Harborside’s tax returns. Internal Revenue Code §280E prohibits tax deductions for businesses whose activities involve a federally controlled substance (within the meaning of schedule I and II of the Controlled Substances Act). Unfortunately, cannabis is still and at the time (of the facts in the case) a Schedule I Controlled Substance. 

On appeal Harborside makes two arguments: (1) whether IRC §280E violates the Sixteenth Amendment of the U.S. Constitution; (2) whether IRC §471 regulations excludes certain inventory costs for Harborside (cannabis businesses). This article will not go into the constitutionality of IRC §280E in reference to the Sixteenth Amendment but will focus on the cost of goods sold (COGS) and IRC §471 issue.

The Tax Court erred in determining that “processing costs related to inventory are not includable in Harborside’s cost of goods sold.”

The IRS did not allow Harborside to include purchasing, handling, and storage costs related to the goods it purchased for resale (“indirect costs”) — costs like testing, labeling, curing, storing, trimming, manicuring, maintaining, and packaging the [cannabis], or [cannabis] products — in its cost of goods sold.  Harborside would reject [cannabis] if it wasn’t properly cured, if it hadn’t been sufficiently trimmed, if it had an incurable safety issue such as pathogenic mold, or if it didn’t contain the right “cannabinoid profile.”

In response to Harborside, the IRS admits in the Appellee’s brief, “if Harborside could establish that Section 471 permits it to include indirect costs in its cost of goods sold, Section 280E would not prevent that result, as that section only bars Harborside’s claim to deductions.” Section 471 states that “the use of inventories is necessary in order clearly to determine” income, and “on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.” 

For more clarity on §471, we look towards the regulations for guidance. Treas. Reg. §1.471-3(b) provides, in relevant part:

Cost [i.e., inventory cost] means: In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. To this net invoice, price should be added to transportation or other necessary charges incurred in acquiring possession of the goods. * * * For taxpayers acquiring merchandise for resale that are subject to the provisions of section 263A, see §§ 1.263A-1 and 1.263A-3 for additional amounts that must be included in inventory costs.

Harborside’s appeal will come down to when Harborside acquires possession of the good.

COGS is the costs of acquiring inventory, through either purchase or production. See, e.g., Reading v. Commissioner, 70 T.C. 730, 733 (1978). In support of disallowing Harborside inventory costs, the IRS states that the costs of testing, labeling, curing, storing, trimming, manicuring, maintaining, and packaging products are costs incurring after acquisition of goods. 

But when does Harborside actually acquire the “goods?” Because we cannot make the assumption that cannabis bud is a “good” if it’s still connected to the plant, not consumable because of mold, or not properly tested to determine its CBD/THC levels. At this point and before being packaged and labeled properly, the cannabis bud is a raw material. Thus, the argument could be made that Harborside has not “acquired” possession of a “good,” until the cannabis product is ready for sale and consumption that complies with state cannabis laws. 

Is Harborside a producer?

Although the argument was not brought up in the appeal, Harborside is more analogous to a producer than a reseller. This would put Harborside under Treas. Reg. §1.471-3(c) for its cost of goods sold analysis. Producers must include in COGS both the direct and indirect costs of creating their inventory. See Treas. Reg. §1.471-3(c), 1.471-11. The regulations tell producers to capitalize the “cost of raw materials,” “expenditures for direct labor,” and “indirect production costs incident to and necessary for the production of the particular article…” This would allow Harborside to include in COGS the cost of the cannabis plant, costs of testing, labeling, curing, storing, etc. However, the issue that Harborside runs into with being a producer for this regulation is the idea of control. The IRS places significant weight on whether a taxpayer has an ownership interest in the raw materials or products throughout the process. 

In Suzy’s Zoo® v. Commissioner, 273 F.3d 875 (9th Cir. 2001) the IRS stated, “[t]he only requirement for being a ‘producer’ is that the taxpayer be ‘considered an owner of the property produced.’” A taxpayer can be a “producer,” moreover, even if it uses contract manufacturers to do the actual production. Despite Harborside buying cannabis only from its members that meet its quality-control standards, Harborside does not continue to have ownership interest of the cannabis plant/products from growing to packaging, making it fail the control requirement for Treas. Reg. §1.471-3(c).  

Internal Revenue Service is being consistent with its treatment of cannabis businesses and whether they should be considered a “producer” under Sec. 1.471-3(c). In Richmond Patients Group v. Commissioner, TC Memo 2020-52, the taxpayer attempted to argue it was a producer, but to no avail. The Court concluded that taxpayer lacked the ownership interest to be a producer and even analogized taxpayer’s facts with Harborside stating that “[n]o improvements were made to [cannabis] from the time it was purchased to the time it was sold.”

Although the Court of Appeals have yet to release an opinion on Harborside’s matter, more than likely they will affirm the lower court. The rift between cannabis and the IRS extends beyond §280E and we are now dealing with more of a §471 issue. There is much to be learned and gained from Harborside. The most significant is how to qualify as a “producer” for IRC §471 regulations. If Harborside would have made exclusive rights agreements with the growers (members) to only sell to Harborside, then ownership interests may have been established significant enough to satisfy §471 regulations. However, in some states, exclusivity agreements are prohibited. Or if Harborside would have retained ownership rights to the clones or seeds given to members to grow, then Harborside would have an even better argument that they are a producer. Again, some states do not allow for retailers to have this much influence over a producer (tied house laws). There are even more scenarios that other cannabis business models could implement to avoid the Harborside predicament and allow direct and indirect costs to be included in their COGS as a producer. If nothing else, Harborside continues, as it has done for over a decade, to act as a roadmap of the shifting sands and everchanging landscape of how cannabis and tax law interact. 

The post Taxation’s War on Cannabis appeared first on Cannabis Now.

Wednesday, February 5, 2020 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Wednesday, February 5, 2020 | Curated by host Shea Gunther

// Green Wave Finds 280e Continues To Bleed Cannabis Companies Dry (Green Market Report)

// Could Bernie Sanders Actually Legalize Marijuana Nationwide On Day One As President? (Marijuana Moment)

// Axe continues to fall in cannabis industry as Tilray lays off 10% of staff (Financial Post)


These headlines are brought to you by Curaleaf, one of the leading vertically-integrated cannabis operators in the U.S. With legal medical marijuana dispensaries, cultivation sites, and processing facilities all over the United States, Curaleaf has served more than 165,000 medical cannabis patients and looks forward to helping many more long into the future. Swing over to Curaleaf.com to learn more about this very cool company!


// Dispensaries advance in New Jersey medical cannabis licensing process (Marijuana Business Daily)

// Chart: Cannabis delivery companies adapt strategy to focus on increasing participation by women (Marijuana Business Daily)

// Bill To Legalize Marijuana In Minnesota Will Be Best ‘In The Country,’ Top Lawmaker Says (Marijuana Moment)

// Which California city might show the way forward for cannabis social equity in the state? (Marijuana Business Daily)

// Public comment period opens for Trinidad and Tobago’s cannabis law (Marijuana Business Daily)

// The Feds Are Worried International Marijuana Rescheduling Could Boost Legalization Efforts (Marijuana Moment)

// Using Psychedelics Helps Treat Opioid, Stimulant, and Cannabis Use Disorder (Merry Jane)


Check out our other projects:
Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement.
Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

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Build Your Own Cannabis Accounting Firm with Dope CFO

The more states that come around on
cannabis legalization, the greater the need for knowable and capable
accountants, CPAs, enrolled agents, bookkeepers, CFOs, and MBAs for those
looking to get into the legal cannabis market.

However, many accounting firms, CPAs, MBAs and tax pros simply don’t have the necessary knowledge, tools and work papers of the new laws, regulation, cannabis tax issues and state-wide changes that come with the territory. For example, incorrectly advising cannabis entrepreneurs that they can reduce their tax liabilities by working around section 280E.

Dope CFO is the premiere U.S. cannabis accounting and tax education program. Established as a resource for accountants, CPAs, enrolled agents, bookkeepers, CFOs and MBAs on how to safely and legally navigate the ever-growing cannabis industry, they’re a great resource for anyone looking to build a cannabis accounting firm. The only service of its kind available today, Dope CFO has grown to nearly 500 accountants in 45 states over the last two years.

With Dope CFO’s cannabis accounting program, any accountant, tax professional or firm can become an expert in the cannabis niche in no time at all. Dope CFO is the super simple plug-and-play method to building a world-class cannabis accounting firm, giving you and your employees over 100 work papers, templates, cost accounting, chart of accounts and processes to build a firm to service the up-and-coming cannabis industry. This is really a cannabis accounting firm in a box, a one-step solution to what could otherwise be an incredibly complicated and costly process. 

Still not convinced that Dope CFO
can take your accounting business to the next level? Here are five reasons why
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1. Cannabis Accounting Professionals Make More Money 

Cannabis is a very complex industry
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the average “mom and pop” cannabis company will generate 7+ figures revenues
compared to small non-canna businesses and so can afford to pay higher fees.

Experts also project the legal cannabis industry to be worth as much as $30 billion by 2025, meaning that there’s plenty of money to go around for America’s next big up-and-coming industry. 

2. Cannabis is the Most Underserved Niche

Because cannabis businesses are
still federally illegal, all major banks and most large accounting firms
largely are not serving this niche. The way we see it, their loss should be your
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Over 90% of Americans currently support cannabis legalization. So, when the time comes for it to be declared federally legal, you’ll want to have your foot in the door established and ready to take on cash-rich, needy businesses all over the country. 

3. Fastest Growing Industry in the World

The cannabis niche is one of the fastest-growing categories in both the U.S. and the world, backed by billions of consumer and corporate dollars and already serving millions of people.   

Inexperienced accounting
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cannabis businesses like a traditional business are costing their clients lots
of money, as well as leaving them exposed to potential IRS and state
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The work that you do becomes much
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5. This Niche is Fun & Exciting

There are new developments every
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When you decide that getting into the industry is the right choice for you and your firm, Dope CFO is your one-stop resource for all your cannabis accounting needs. 

TELL US, are you interested in working as a cannabis accountant?

The post Build Your Own Cannabis Accounting Firm with Dope CFO appeared first on Cannabis Now.

Wednesday, February 5, 2020 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Wednesday, February 5, 2020 | Curated by host Shea Gunther

// Green Wave Finds 280e Continues To Bleed Cannabis Companies Dry (Green Market Report)

// Could Bernie Sanders Actually Legalize Marijuana Nationwide On Day One As President? (Marijuana Moment)

// Axe continues to fall in cannabis industry as Tilray lays off 10% of staff (Financial Post)


These headlines are brought to you by Curaleaf, one of the leading vertically-integrated cannabis operators in the U.S. With legal medical marijuana dispensaries, cultivation sites, and processing facilities all over the United States, Curaleaf has served more than 165,000 medical cannabis patients and looks forward to helping many more long into the future. Swing over to Curaleaf.com to learn more about this very cool company!


// Dispensaries advance in New Jersey medical cannabis licensing process (Marijuana Business Daily)

// Chart: Cannabis delivery companies adapt strategy to focus on increasing participation by women (Marijuana Business Daily)

// Bill To Legalize Marijuana In Minnesota Will Be Best ‘In The Country,’ Top Lawmaker Says (Marijuana Moment)

// Which California city might show the way forward for cannabis social equity in the state? (Marijuana Business Daily)

// Public comment period opens for Trinidad and Tobago’s cannabis law (Marijuana Business Daily)

// The Feds Are Worried International Marijuana Rescheduling Could Boost Legalization Efforts (Marijuana Moment)

// Using Psychedelics Helps Treat Opioid, Stimulant, and Cannabis Use Disorder (Merry Jane)


Check out our other projects:
Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement.
Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: OTA Photos/Flickr

Thursday, October 24, 2019 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Thursday, October 24, 2019 | Curated by host Shea Gunther

// Tainted vape pens selling 2-for-1 in illegal California stores (Leafly)

// Maine pick-your-own hemp farm in limbo after bank, insurance company cancel accounts (WMTW 8 ABC)

// MJBizDaily leadership change: Co-founder Farrington stepping down as CEO; Walsh to take reins (Marijuana Business Daily)


These headlines are brought to you by Curaleaf, one of the leading vertically-integrated cannabis operators in the U.S. With legal medical marijuana dispensaries, cultivation sites, and processing facilities all over the United States, Curaleaf has served more than 100,000 medical cannabis patients and looks forward to helping many more long into the future. Swing over to Curaleaf.com to learn more about this very cool company!


// Sen. Liz Krueger optimistic about pot legalization in 2020 (AM New York)

// Gov. Reynolds says she is ‘not afraid’ to take executive action on vaping if necessary (CBS 2 Iowa)

// HEXO Raises $70 Million through Private Placement Convertible Note (New Cannabis Ventures)

// Alberta cannabis producer readies Canada’s largest rooftop solar array (Marijuana Business Daily)

// Canada has a cannabis packaging problem: Here’s what businesses are doing about it (Marijuana Business Daily)

// Judge throws out class action lawsuit against cannabis delivery giant Eaze (Marijuana Business Daily)

// Presidential Candidate Pete Buttigieg Tours Marijuana Dispensary And Grow House (Marijuana Moment)


Check out our other projects:
Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement.
Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: WeedPornDaily/Flickr

Tuesday, October 22, 2019 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Tuesday, October 22, 2019 | Curated by host Shea Gunther

// Mass. governor on timeline to ensure nicotine vape ban complies with law (Mass Live)

// Cannabis firm Harborside owes $11 million under 280E, US Tax Court rules (Marijuana Business Daily)

// Cannabis vaporizer company Pax Labs cuts 25% of workers after missing revenue projections (Marijuana Business Daily)


These headlines are brought to you by MJToday Media, publishers of this podcast as well as our weekly show Marijuana Today and the most-excellent Green Rush Podcast. And check out our new show Weed Wonks!


// Hemp Regulations Will Be Issued Within Weeks, Top USDA Official Says (Marijuana Moment)

// Legalization of drugs is the way to combat cartels, former Mexican president says (CNBC)

// Key Mexican Lawmaker Proposes Legalizing All Drugs To Combat Cartel Violence (Marijuana Moment)

// Soccer Star Megan Rapinoe Signs On With CBD Brand Mendi (Green Market Report)

// Maine requiring cannabis label for recreational products (Marijuana Business Daily)

// Marijuana businesses increasingly plan to sue if regulators fail to award them a business license (Marijuana Business Daily)

// Snoop Dogg given bouquet of 48 joints for birthday (Swiowa News Source)


Check out our other projects:
Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement.
Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: Jaro Larnos/Flickr

Wednesday, February 27, 2019 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Wednesday, February 27, 2019 | Curated by host Shea Gunther

// Congress asked the Fed chief about marijuana banking: ‘It would be nice to have clarity’ (CNBC)

// Vermont Senate Expected To Vote On Legal Marijuana Sales Bill This Week (Marijuana Moment)

// All 2020 presidential candidates now support marijuana legalization efforts – even the Republicans (Boston Globe)


Today’s headlines are brought to you by MJToday Media, publishers of this podcast, Marijuana Today, and the Green Rush podcast. If you need to reach the best audience in legal cannabis, sponsorship of our shows is a fantastic choice. And if you want to make your own podcast, but need some help with production, then we’re there for you! Get in touch today.


// Owning marijuana stocks may skunk your security clearance or chances of getting one (Federal News Network)

// Arizona’s Dr. Sisley Completes Marijuana for PTSD Study (AZ Marijuana)

// Alaska’s marijuana business owners at odds with new governor’s plans for industry (Marijuana Business Daily)

// FDA Is Exploring ‘Alternative Approaches’ To CBD Regulation Commissioner Says (Marijuana Moment)

// Marijuana Tax Revenue Should Fund Subway Improvement New York’s Cuomo And De Blasio Say (Marijuana Moment)

// Joe Biden’s Drug War Record Is So Much Worse Than You Think (Leafly)

// Aurora’s CA$150 million cannabis greenhouse fully licensed for cultivation sales (Marijuana Business Daily)


Check out our other projects:
Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement.
Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: OTA Photos/Flickr