This is the 6th and Final part in the series titled Navigating the Application Process in the Medical Cannabis Industry, where Mora Mota Group looks to share some of the keys to success as a small business startup look to emerge within this industry.
As you begin to operate in the Medical Cannabis Industry, staying compliant with all the nuanced regulations at the Federal, State and Local levels is necessary to running your Medical Cannabusiness and ultimately staying in business.
Operating within any regulated market requires businesses to oblige and comply with the rules, and the Medical Cannabis Industry has no shortage of regulations. Unfortunately for Cannabis business owners, State legislators responsible for writing these laws are not the best judges for determining how the Cannabis Industry should be regulated. As a result, every aspect of the grow cycle is tracked from the first step in the grow process, to harvest and post-production processing, all the way to the final retail sales.
The intent behind the strict regulations helps to align the States with the enforcement priorities illustrated by the DOJ in the Cole Memo. Nevertheless, Medical Cannabis Companies operate under extreme scrutiny that makes it difficult to run an efficient and profitable business. Identifying the issues related to your unique Medical Cannabis venture takes experience in understanding the regulations in the specific State you operate in. Having the right support system to help you navigate through any bottlenecks created by the regulatory system is key.
In this post, Mora Mota Group will highlight the significant burdens State Licensees in the Medical Cannabis Industry face on a continual basis, providing examples of the negative consequences imposed on your business, and some tips on how to mitigate some of the burdens to free up cash flow and improve your business’s ROI.
Tax and Fees
Medical Cannabis Businesses must understand the Federal Tax implications they’ll be facing when dealing with a Schedule I Controlled Substance. One defining IRS tax code is Section 280E which prevents an entity from deducting their general business expenses if “...the activities which comprise such trade or business ... consists of trafficking in controlled substances;” this specific tax code significantly burdens Cannabis businesses because these business may not deduct general business expenses, resulting in tax bills easily outweighing the potential profits generated by these businesses.
Along with Federal Tax codes, State-established Cannabis laws will subject Licensees to excise taxes, retail sales taxes, State license and application fees, including any municipal fees associated with doing business in a particular community. Although these taxes and fees are associated costs with doing business in this Industry, it should be made aware of and clearly acknowledged as regulators will look to revoke a License for failure to comply with their strict regulations.
Tips for mitigating your Operating costs
Here are a few strategic tips on how Medical Cannabis businesses can structure their operations in order to decrease their cost of doing business:
- Diversify your brand: If you are operating a retail space such as a Dispensary, be sure to separate different aspects of your business that are not related to Cannabis Sales (employees, paraphernalia sales, branded merchandise, books and records, etc.). By organizing your operations to effectively segment your business to properly account for the non-Cannabis sales, your may be able to deduct those general business expenses to decrease your tax bill.
- Use Accrual-basis accounting: Where your operation consists of growing, manufacturing, or processing Cannabis, the Cost of goods sold (COGS) is the only deduction available to businesses trafficking for federal tax purposes. Using accrual-basis accounting allows a business to capitalize as many expenses as possible to COGS. This may be the only way to offset the costs of your overall tax bill as 280E doesn’t allow operational expenses to be deducted.
- Segregate your operations: Consider taking the time to establish a separate entity that will hold any land, buildings and equipment and lease it back to the operating entity. While this opportunity may take time to establish and set up, this new entity will not be subject to 280E and will not be subject to the deduction restrictions imposed by 280E.
Supply Chain Tracking
Every State has required a “Seed to Sale” (S2S) system in order to account for and prevent the diversion of Medical Cannabis products. Strict compliance with this requirement is necessary as it aligns the State with the Federal Government’s priorities to deter potential federal enforcement. There are few established ancillary companies that provide inventory tracking software to the Medical Cannabis Industry, each having their unique system features that Cannabis Companies favor and disfavor across the board.
Despite the system used by the State, companies must pay an annual licensing fee to use the State-chosen system. Although some of the major systems have created significant issues for their users, costing them heavily in the long run, and burdening the overall Operational Plan of a Licensee. For example, Washington State has recently begun accepting bids for a new inventory tracking system as their current system provider decided that the litany of issues with the State’s program has forced them to back out from renewing their contract.
Additionally, these IT companies are the subjects of cyber attacks as they handle millions of amounts of data points integral to the Cannabis Industry at large. Earlier this year, a major Denver-based S2S Company had their systems hacked, compromising hundreds of Medical Cannabis retailers across the Country; this event forced some Medical Cannabis Licensees to jump ship to alternative Software providers in order to stay compliant.
Tips for using Seed-to-Sale Software
While it may be impossible to predict the next cyber attack, here are some tips on how to choose and use the right Tracking software for your Medical Cannabis business:
- Choose an Established Tracking Partner: Having faith in the S2S company you choose is essential as they will be managing the integral points of the operational processes of your business. Look first to established businesses in highly regulated markets such as New York or Illinois as they have experience with strict Medical Cannabis markets. Additionally, they will have encountered and solved issues newer companies may never have experienced before.
- Hire an experienced MJ Consultant: While you may own and implement the best S2S platform the market has to offer, if your company is not equipped to efficiently utilize this potential, you may be throwing money away. Hiring an established and experienced consultant to partner with your company will help to guide your operations to full optimization, and make sure your business stays open and compliant in the event a setback occurs.
Medical Cannabis companies have been operating in risky waters for years in States that authorize the sale of Medical Cannabis, while Federal law continues to classify these businesses as operating in violation of the Controlled Substance Act. However, Medical Cannabis companies have received some insulation from prosecution, at the Federal level, thanks to the Ogden and Cole Memos produced during the Obama Administration.
These Memos outline the eight enforcement priorities followed by the Department of Justice, providing guidance on how to balance the efforts made in Medical Cannabis States and the overall enforcement goals of the DOJ. The memorandum even addresses that “the existence of a strong and effective State regulatory system” for Medical Cannabis “may allay the threat” to the federal enforcement interests. While these guidelines are non binding law, it helps signal to State-legal businesses what they should be aware of when operating and how the Federal government focuses their priorities on the matter.
In addition to these guidelines, Congressional action has taken place recently through the Rohrabacher-Farr Amendment to prevent funds from being spent by the DOJ in Medical Cannabis States. This move was made to stall efforts to crackdown on State-legal compliant Medical Cannabis businesses, but is also considered temporary and has required renewal every year since 2014.
A flurry of bills have been introduced this year in the U.S. Congress, over ten between the House and Senate, in order to either Reschedule, Decriminalize, or Respect State’s rights as it relates to Cannabis. Although there is bipartisan support on some of these bills, there is no guarantee progressive legislation is passed without concerted action by the Medical Cannabis Industry.
Tips on progressing the Legislative process
Getting involved in the Medical Cannabis Industry is not difficult but it takes some courage to “break out” into the Industry and fully commit your efforts. Here are some ways to introduce yourself to the movement:
Communicate with Legislators: It is important for the lawmakers in charge of changing our laws to know who they are fighting for. Hearing from educated, well-mannered individuals that wish to communicate their views on sensible drug policy can make an impact on your legislator making an informed vote on the matters.
Volunteer on Cannabis campaigns: More and more grassroots organizations have been successful in effectuating change through ballot initiatives that seek to legalize Cannabis in some forms. The recent success in States across the country indicate the growing acceptance that Cannabis should be legal for either Medical or Adult use. Cannabis won’t legalize itself so volunteer, donate, or share information on Social Media to spread the word about Cannabis campaigns in your community.
Support Cannabis Organizations: All the efforts made up to this point was made through disruption at the Local, State and National levels. Many times, efforts were spearheaded by non-profit organizations whose sole purpose is to help change the perception and conversation related to Cannabis, and our Industry would be nowhere without them. Consider joining and supporting organizations like MPP, DPA, NCIA and MCBA to forward the efforts to end the Prohibition of Cannabis at the Federal Level.
Keeping your business profitable, operational, and solvent will take a concerted, perpetual effort beyond the scope of any Business Plan. You should take the time to learn about changes in laws or regulations to help educate your employees, partners and customers. As a business owner, the onus is on you to take the lead and move your business towards success; failing to plan for the enormous burdens such as tax bills, changing regulations, or even a contamination can stress any Company out of business. Stay up to date and look to Mora Mota Group to facilitate your success through the Medical Cannabis Application Process and beyond.