Category Archives: Marijuana

Thinking of starting a cannabis business in Maine? New laws will keep you on your toes. PART I: New Rules

During 2018, the Maine Legislature passed two Bills dealing with the future of the marijuana business in Maine that are to become effective this December. Both are designed to end the wild west nature of the industry but they have very burdensome tax and operating rules. This three-part series will breakdown some of the business, accounting and tax issues surrounding the future of Medical and Adult use marijuana sales in Maine. Part I looks into the impact of the new rules on Dispensaries and Caregivers. Part II will review the “adult use” market and Part III looks to the future of the cannabis industry.

Part I: Dispensaries & Caregivers

The Act to Amend Maine’s Medical Marijuana Law allows both dispensaries and caregivers to continue to supply marijuana to registered “cardholding” patients. New rules increase the number of existing medical dispensaries from 8 to 14 and allow dispensary ownership to be set up as for-profit entities.

Registered Caregivers will be able to cultivate a total of 30 mature plants, 60 immature plants and unlimited seedlings, rather than have a dedicated amount of plants per patient as the old rules dictated. These caregivers may also transfer 30% of the mature plants grown during the year to other registered caregivers or dispensaries in wholesale transactions. The new law also allows caregivers to share a building with others, using separate and dedicated grow space, but it prohibits consortiums. (Multiple growers working together to grow co-owned crops). Caregivers will be allowed to manufacture marijuana products and concentrate for medical use, except that a caregiver may not manufacture food unless licensed to do so.

Both medical marijuana groups will face increased reporting requirements. Under section 2430-G 1.A.(3), registered caregivers, dispensaries, testing facilities and manufacturers will be required to undergo an annual audit of business transactions conducted by an independent 3rd party. At this point it is not clear if the legislature used the term “audit” loosely, or if they are actually requiring an independent CPA to issue an audit report on the company’s financial statements. If the latter is true, auditors will be partially hamstrung by the vast majority of cash transactions that are conducted. In addition to gaining an understanding of the seed to sale product tracking software, I anticipate that auditors will likely employ creative strategies, like testing cannabis production against fertilizer usage or energy consumption in order to issue an opinion.

From a tax perspective, dispensary and caregiver sales are subject to sales tax at rates of 5.5% for marijuana, topicals and paraphernalia, and 8% for prepared food products or “medibles”. Readers should be aware that the Maine sales tax bulletin #60 is a good resource for determining sales/use tax industry specifics and for highlighting that agriculture and manufacturing exemptions do exist. Once applied for, these exemptions can save thousands of dollars by reducing or eliminating sales taxes on fertilizer, grow lights, airflow systems, equipment, utility bills and other direct cultivation and manufacturing expenses.

Other highlights of the Medical Marijuana law include, a 7-year record keeping requirement, and a deduction for Maine income tax purposes of the amount disallowed by the IRS under Federal 280E for both individuals and corporations. Dispensaries no longer need to be a Maine Not-for-profit corporation taxed as a C corporation. This opens the door for other types of entity formations (S-Corp, LLC etc), provided that all officers or directors are residents of ME.

The future of the Maine medical cannabis may well float on the implementation of the adult use market. Part II of my report will outline the Maine adult use market.

James Boulette, CPA has been advising medial cannabis dispensaries in ME and MA since laws were enacted allowing for legal sales. He is one of New England’s leading experts in the application of 280E.

 

Will Taxes Mean the End of Marijuana Reform?

Last November, Maine voters approved the legalization of recreational marijuana. Since then, entrepreneurs in the industry have begun gearing up now for what will become a real growing frenzy. Warehouse space is being gobbled up by speculators looking to participate in what is already a multibillion-dollar industry. However, all parties should be wary of IRS Code Section 280E.

The states that have legalized marijuana impose sales or excise taxes which are generally passed directly to the consumer of between 10% and 30%. Colorado alone is expected to report sales in excess of $1,000,000,000 with a tax structure that includes a 2.9% sales tax, a special recreational sales tax of 10% plus a 15% excise tax. Needless to say, State and local governments in Colorado are cashing in. What is not so widely known is that the federal government is also cashing in and the entire industry is at risk.

By my count, 23 states now allow for medical or recreational use but the federal government has made no headway in removing marijuana from its list of Schedule 1 controlled substances. The significance of this categorization is important because IRS Code section 280E denies most deductions incurred by businesses trafficking any substances listed on Schedule 1. Since the Maine tax code piggybacks the federal code, it also disallows trafficking/selling related expenses. Currently, corporations in Maine face a federal and state tax rate of 45% on its gross profit. Without the ability to deduct ordinary business related expenses, the industry could see effective tax rates between 80-90% of income.

So how does Congress protect Maine’s marijuana industry? The fix is simple. Congress should remove marijuana (sold legally under state law) from the list of Schedule 1 drugs. To a limited degree, many bills addressing parts of this issue have been put forth and sit in committee somewhere, each seemingly stonewalled. The most recent bill introduced into the House, “States’ Medical Marijuana Property Rights Protection Act” gives some insight to the magnitude of the problem of using your property to grow marijuana. The bill removes real estate from the list of items that can be forfeited as a result of a violation of the Act.

The Controlled Substances Act currently imposes forfeitures which include, among other things, the forfeiture of “All real property, including any right, title, and interest… any lot or tract of land and any appurtenances or improvements, which is used…a violation of this subchapter…”. The aforementioned bill only sets out to remove from the penalty section the forfeiture of real property but does not remove Marijuana from the list of Schedule 1 substances.

This should be a reminder to all, even those merely renting warehouse space, that until the federal law removes legal marijuana from its Schedule 1 list, the life of the industry is on the line.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.