Anecdotally, we know that foreign investment in the US Cannabis industry is very commonplace. This is a growing market that’s attracting lots of attention from firms in Canada and overseas. However, partnering your cannabis operation with foreign investors comes with additional tax reporting requirements. IRS Form 5471 and Form 5472 are two such requirements that come with steep penalties if not filed accurately and on-time.
A lot of foreign investors don’t know about these specific filing requirements. If you’re a cannabis entrepreneur with ties to the US market, make sure you avoid high fees and file these forms before the July deadline.
Form 5472: What is it?
IRS Form 5472 is what is known as an “information form” that provides information for any businesses that have owners, partners, or shareholders from another, non-US country. Businesses, including cannabis businesses, must disclose all transactions with international partners, owners and shareholders. This form is required to be submitted annually for C Corps and LLCs with at least 25% foreign ownership, shareholders, or partners.
The penalty for not filing the IRS Form 5472, or for filing it late, used $10,000 – but, since 2017, that fee has increased to $25,000. The IRS requires this form to make sure no one is avoiding paying taxes on transactions between US and foreign participants. Ultimately, its aim is to stop foreign tax evasion and money laundering. It also prevents companies from benefiting from tax exemptions for which they aren’t eligible.
What is Form 5471?
IRS Form 5471 has a similar informational purpose as Form 5472, but applies for foreign companies owned by US persons. US citizens and green card holders who own at least 10% in a foreign corporation, must file Form 5471, even if they are living overseas.
Who has to file this form? It is required of any US persons who are “officers, directors, or shareholders in a foreign corporation.” Foreign corporation is defined as a legal entity formed under the laws of any country other than the US. It doesn’t matter whether your business entity qualifies as an LLC for US tax purposes – “US tax rules stipulate that any non-US entity will be classified as a corporation by default if all owners have limited liability,” explains one expert.
The penalties for not filing the 5471 are incredibly high. You will be fined $10,000 for each tax year you fail to provide the information requested on the form, plus an additional $10,000 fine if the information is not provided within 90 days of the IRS providing a notice of failure. Thereafter, there’s a fee of $10,000 for every 30 days until the information is filed.
What is a reportable transaction?
Form 5472 asks for “reportable transactions”. A reportable transaction is “any exchange of money or property with the foreign shareholder such as a payment for sales, rents, royalties, interest.” The payment of dividends does not qualify as a reportable transaction. For a cannabis company some transactions you may have had that you would include are:
If you’re wondering who qualifies as a related party, this term covers any direct or indirect foreign shareholder that owns at least 25% of the reporting corporation, as well as a range of other entities that meet the tax definition of “related”. This is a broad term, and if you have doubts, it’s best to speak to a qualified CPA.
Can you apply for penalty abatement?
It is possible to apply for a penalty abatement, but beware: in most cases, this is rarely granted. If you wish to try your luck, you begin the process by sending a letter to the IRS explaining your situation. The IRS will consider your argument and take around 6 - 8 months to approve your case or not. The stakes are high – it’s better to file your forms on time and avoid this situation altogether. Typically these forms are due with your annual tax return, but as 2020 is a unique situation, you can still file Form 5472 or Form 5471 before the deadline in July.
If you need help with filing your Form 5471 or Form 5471, then please get in touch with our team for assistance.
IG Report: The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance
A new federal watchdog report says cannabis businesses owe vastly more in taxes to the federal government and more audits would uncover it.
The owner of Uncle Ike’s cannabis dispensary in Seattle, Ian Eisenberg, sees a lot of would-be entrepreneurs enter the marketplace with lofty visions for how they want their business to look and operate.
Eisenberg told The Daily Beast in 2017 that he’d love for his own business to be configured more like a cannabis boutique with stations dedicated to concentrates, big-name growers, edibles, and more. But the exceptional tax burden faced by cannabis businesses compared to any other type of business in the United States makes that all but impossible.
“Everything from how the store is laid out to merchandising to inventory management, [the tax code] dictates how the business operates,” Eisenberg said. “It’s more like a 7-Eleven, because it’s all about efficiency.”
Due to a section of the U.S. tax code initially written by Congress to strip drug tycoons of illicit proceeds, state-legal cannabis businesses just in the three states of Washington, Oregon, and California faced a collective estimated federal tax burden of an astonishing $475 million when projected over five years.
That’s according to the watchdog inspector general for the U.S. Treasury Department, the parent agency of the Internal Revenue Service. While the inspector general is part of the agency itself, that office is responsible for independently evaluating the performance of the Treasury Department and its component agencies, such as the IRS.
In other words, the inspector general audited the auditors.
In a new report, he describes the exploding cannabis industry in the United States and the obligation of the IRS to enforce federal tax rules, even if they result in legal cannabis businesses being forced to pay as much as 70 percent of their income in taxes while a traditional business may pay closer to 30 percent.
Cannabis businesses in the aforementioned three states also had wide-scale problems with misreporting their income or wrongly deducting business expenses for tax purposes where they were not permitted to under the federal tax rules known as 280E, according to the report.
These rules state that the federal government simultaneously considers cannabis to be an illegal controlled substance while imposing businesses taxes on anyone who cultivates, processes, or retails it.
More than half of nearly 250 cannabis businesses examined by the inspector general in California, Washington, and Oregon, for example, likely would require “adjustments” to their tax forms worth hundreds of millions of dollars if they underwent IRS auditing. Understand, the IRS is in place to make sure that proper revenue is collected for all entities and persons operating within the country.
“This forecast represents only a portion of the tax noncompliance related to 280E in that it only included three out of 33 states and the District of Columbia that allow for either medical and/or recreational use of marijuana and does not consider the growth in the industry since tax year 2016,” according to the report.
Worse yet, the inspector general found that federal tax enforcers have created virtually no instructions that tax professionals and cannabis businesses can rely upon to understand how to achieve compliance under 280E. “No references to marijuana businesses can be found in IRS publications.”
For the purposes of the report, the inspector general created a hypothetical cannabis business with a gross annual income of $500,000. A coffee shop with the same gross income would then calculate the cost of goods sold, as well as business expenses like utilities and rent. This reduces the reported net income of the business on tax forms, and thus, lowers the amount in taxes that the coffee shop owes to the government.
Where these calculations would result in a taxable net income of $100,000 for the coffee shop, a cannabis business barred from taking the same deductions under 280E must state its taxable net income as $250,000.
As a result, the cannabis business finds itself shelling out $80,000 in taxes to the federal government on $100,000 in net income while the coffee shop would pay vastly less.
And all of that occurs before the dizzying array of special taxes that state and local governments have imposed on cannabis businesses as a condition for simply operating.
When combined with the fact that many cannabis entrepreneurs don’t know or care to file business taxes with the federal government in the first place, late fines, penalties, and assessments resulting from an audit could be more than enough to sink an entrepreneur permanently.
Tax matters have grown so bad for cannabis businesses, in fact, that Oregon Democratic Sen. Jeff Merkely -- with cameras rolling -- accompanied one of his constituents last year as he drove to the Oregon Department of Revenue to deliver $70,000 in cash to cover a state tax bill.
In another example, a Seattle-based dispensary called the Northwest Patient Resource Center generated just $53,000 in profits for itself during 2014. It then worked vigorously to comply with all aspects of 280E, but after doing so, it wound up owing $46,000 in taxes.
“It hurt, and it hurt bad,” the owner told the New York Times. “Everyone thinks you’re just rolling in dough. That may be the case if you’re not being compliant.”
Understand, this is not the drug business that you see on Netflix or on the news. This is a real, legitimate business with its hands tied by antiquated tax code. As states legalize cannabis, Federal tax codes hold these business’ profits hostage.
The owner of five dispensary locations in Denver wrote a check to the federal government for $275,000 following the 2014 tax season. In another case from the area, a dispensary owner with gross income of $1.7 million wound up with a tax bill of $866,000, which it sought to renegotiate with the IRS.
The report also acknowledges that cannabis entrepreneurs still struggle to locate banking services they need to pay taxes, vendors, landlords, and others electronically like a standard business instead of in dangerously large amounts of hard currency.
While the number of banks willing to do business with cannabis companies has grown in recent years to over 700 nationally as of last summer, according to the Financial Crimes Enforcement Network, many financial institutions simply choose not to take the risk or determine it’s too costly and time-consuming.
“To the extent that government laws and regulations discourage banking for marijuana businesses (and to the extent they encourage cash-only transactions), they also may indirectly and unintentionally encourage tax noncompliance,” the inspector general concluded.
Banks and credit unions that do business with cannabis companies must file a so-called suspicious activity report if they have reason to believe a transaction of $5,000 or greater involves illegal activity or is an attempt to disguise illegal transactions.
Those who do business with cannabis companies, as a result, often charge exorbitant fees to entrepreneurs. In one example cited by the inspector general, a California credit union charged an initial fee to cannabis businesses of $10,000, plus $5,000 to $7,500 per month.
In another example, a small credit union in Oregon testified to Congress that it had submitted 13,500 suspicious activity reports over two years for 500 cannabis businesses.
If you need help with a tax strategy for your cannabis business, then please reach out to us today.
There are tons of articles out there detailing the cannabis licensing processes, the high valuations of cannabis companies, and the astronomical costs associated with getting started in this industry. As an entrepreneur new to this space, you may read blog posts and see videos about how licenses are probably one of the most expensive costs of the business.
Some even call cannabis business licenses the golden ticket to the industry. But in most cases, it couldn’t be further from the truth.
Our experts field plenty of phone calls from clients and prospective clients who are very uninformed about the value of their license – and sometimes, even about the value of their business. The key issue is that most people don’t know the difference between owning a license and owning an actual cannabis business operating with positive cash flow. The difference between these two assets could not be bigger.
The failure rate of new cannabis companies is high, even in a country where 20% of all small businesses fail in their first year. We’ve seen an ongoing trend of entrepreneurs shelling out a ton of money to get started in this space, only to bleed cash and ultimately close their doors.
In this post, we’ll cover some considerations you should make before you spend big on a cannabis license or a cannabis business, and explain what the difference is between buying a license and buying an actual business.
Consider this post a healthy dose of reality: by the end, you may want to buy into a laundromat business instead of diving headfirst into cannabis.
Is Your Market Ready for New Entrants?
The first question you must ask before investing in either a cannabis license or a cannabis business is whether or not the market is ready. Consider the maturity of the medical cannabis market that you are getting into. That will weigh heavily into whether or not you even want to try to compete for a license or buy a business.
The oldest medical cannabis market in the country is California. Despite the fact that this market has been around for 20 years, there are still plenty of quirks that can make doing business difficult. For instance, a long-existing medical cannabis market usually means an equally thriving black market exists. This means that the local cannabis businesses, both legal and illegal, have been building relationships with their customers and cementing their place in the market for years. The longer that a medical cannabis market has been around, the smaller the incremental bump will in sales be when your state allows recreational cannabis.
Case-in-point: when California opened up the market for recreational cannabis, there was no flood of new customers flocking to licensed shops. There was a relatively small new group of consumers (an incremental bump in demand), and the black market still is thriving nearly three years later.
Bottom line: the younger the medical cannabis market, the better the business opportunity.
Buy a cannabis license, or buy a cannabis business?
If you believe the market is ready for your investment, then the next step is to decide whether you will pay for a cannabis business license, or buy an existing business. We want to preface this with one thing...there is no answer to this question. It depends on many factors including your risk tolerance, your experience, growth/exit plans and much more!
A license, in most cases, is just a checkbox; a green light by the powers that be, authorizing you to open a business. A license says you can go ahead with the next steps to starting a cannabis business, but it doesn’t ensure that you win customers or make a profit.
The process of getting a license is incredibly costly and there is no guarantee that you will actually get it. Once you do, the clock starts ticking for you to build a valuable business.
There are two good reasons to buy a cannabis license:
When looking for licenses to purchase, especially retail licenses, make sure that the market makes sense and you’re not just getting overzealous about having a cannabis license. Make sure this license will unlock some type of financial benefit for your current business. Cannabis cultivators, manufacturers, and distributors can be more flexible because you can drive to get to your clients, so you need to make sure you look at the financials behind operating the business and find the cheapest cost of doing business.
On the other hand, businesses are sets of processes, people, and property that create value. If you’re looking to buy a business, the most valuable ones are obviously those that are already profitable. Look for cannabis companies that have strong SOPs, amazing staff and repeatable success built-in. This goes for retail businesses and all other cannabis verticals. If you don’t look beyond profit, you risk taking on tons of liability with a company that doesn’t have the right compliance measures and documentation procedures in place.
And one last point on buying a business is that you MUST have self-awareness as to whether or not you can actually operate a business. There is a significant difference between being an owner and an operator. Just because you own a business doesn’t mean that you will be able to run it well. Operators have a multi-disciplinary skill set that allows them to handle the many facets of running a business from HR, to finance, to supply chain and everything else that comes with it. This is where the power of having a team is important. If you know you are not an operator then you have two options:
The “Green Rush” Myth
The media loves to write headlines about the so-called “green rush.” The green rush refers to the spread of legal recreational cannabis across the US, alluding to the Gold Rush of the 1800s and the money-making potential of this industry.
In reality, the green rush is mostly hype. It’s a storyline pushed by the media that’s become ingrained in cannabis lore, only to be proven wrong at every turn. From our experience, don’t let these news stories or crazy high valuations of public cannabis companies trick you into thinking that cannabis is going to make you rich. Most of the time, it won’t. Once you look at real numbers and the amount of added complexity from working in this highly-regulated industry, you’ll see that making it in cannabis isn’t as simple as digging for gold.
Tips for getting started in the cannabis industry
If you’re still considering investing in the cannabis market, then we strongly recommend making your decision as rationally as possible. Do your research, think about the cash expenditure required, and calculate how much you stand to earn on that cash. This is above all a financial decision, not an emotional one.
Before you buy a cannabis business, do a very thorough analysis of the financials and the opportunity that you’re buying into. Don’t let the green rush narrative cloud your judgment. You are making a financial decision. Ask yourself, what will this investment yield?
In most instances, businesses are a more valuable investment opportunity than licenses, especially if they are break-even or profitable, have an aggressive tax strategy and have a stable set of clients.
Budgeting for Your Investment
Now that you know the difference between the value of a license and an operating business, think about your budget.
If you have less than $100,000 in cash, you’re going to have an extremely hard time getting directly into the licensed cannabis business as a sole owner. The only market that you could reasonably get into with a budget of that size is in Oklahoma. At this time, this state has a much lower cost for licensing. The cost of doing business in Oklahoma is also lower. However, you need to be an Oklahoman resident for two years to get approved.
If you’re not an OK resident, you may want to find partners to pool funds together. Buy into part of a business or create an ancillary business that helps cannabis businesses succeed. For example, can you get into the waste removal business, set up security cameras, or start an electrical or construction firm that specializes in cannabis cultivation operations.
If your budget is around $200,000-500,000, you’re in the range of being able to take over and turnaround a struggling cannabis business. Recognize that just because someone owns a cannabis business now, doesn’t mean that they are good at running it. There are many great opportunities out there to take a business and run it profitably. Early cannabis operators were excited, got into the industry and really have no idea how to build a business to profitability. Their inexperience is now your opportunity to get into the market.
At this level of investment, we don’t recommend starting from zero and going through the entire licensing process, paying rent that entire time. If you do get approved, you will need to build out a business facility, stock it and then have enough operating capital to run it – and that’s a big IF.
If your budget is in the $500k-$1.5MM range, then you have many more options. Consider buying an existing business and using that cash flow to finance the rest of your enterprise. It may need a bit of a turnaround, but that cash can float the rest of your business.
When buying a business (and sellers, pay attention) you need to make sure that the valuation that you’re buying the business at is reasonable. Many operators think that their business is worth more than five times their existing revenue. The green rush causes some owners to over-value their business at a multi-million dollar price tag, but if there isn’t any bite to back up that bark, then the business isn’t worth much. Check out our M&A videos/posts for more info on how to value a business.
If you need help with evaluating your deals and bringing financial sense to your next M&A prospect, then please reach out to us today.
An employee handbook, like any standard operating procedure (SOP), is useful for a variety of reasons. It can help you onboard new employees and train them on your company culture; it can create a common bond for cannabis dispensaries with multiple locations; and, worst-case scenario, it covers you in legal matters in the event you need to fire someone.
What few cannabis operators know is that there are actually some tax advantages to having a well-thought-out employee handbook. Here are some ways that having a great employee handbook at your cannabis business can save you money.
Benefit 1: Reasonable methodology to claim employee hours for CoGS
The 280E tax code makes it impossible for cannabis operators to claim certain expenses other businesses would otherwise be able to deduct from their tax return.
Because cannabis remains a Schedule I classified substance, the only thing that cannabis operators are able to deduct from their taxes is CoGS – the cost of goods sold. CoGS refers to all costs involved in creating a product: for example, packaging, labeling, and raw materials.
The IRS doesn’t define the way to allocate CoGS. As a result, cannabis operators must come up with their own system. Very sophisticated companies adopt technology and filing systems. They implement job codes for each task, tracked hours and even have a check-in and check out function for each room that employees are in.
For a startup cannabis company, the employee handbook and job description serves as sufficient for developing a reasonable methodology for allocating employee time to CoGS.
In the employee handbook or job description, list out all of the different expectations for each employee’s role. One of those requirements will delineate how an employee will be spending their time. For instance:
If you ever experience an audit, which is likely in cannabis, then you will have these documents, which we call audit additives. Triangulate your employee handbook with your CoGS allocations with respect to payroll expenses to justify your tax deductions.
Benefit 2: Gross negligence protection
Cannabis businesses are cash-heavy. It’s imperative that you set and follow a large amount of SOPs around the movement of money and what you’re reporting to your accounting department and the government.
As we witnessed in the Alterman Case, a cannabis operator was given an accuracy-related penalty because they showed gross negligence in not keeping accurate records of cash movement within the company. In Alterman v. Commissioner, T.C. Memo 2018-83 a cannabis operator attempted to argue for a higher CoGS, but didn’t have a system in place to justify those claims. Instead, the court sided with the IRS’s narrow description of CoGS as “purchase costs plus production costs, and leaves out beginning inventory and ending inventory.”
These same gross negligence problems can arise with investors: most operating agreements detail expectations on how accounting and reporting must happen within the company. Failing to follow the agreed-upon guidelines could end up with you being kicked out of a company. Do you want to really be kicked out for something that you can easily prevent?
This is where your employee handbook plays a role. In the handbook, lay out the procedures that an employee will follow for various tasks that the IRS and investors will be looking at, including:
Of course, accidents happen, and something will come up because no organization is perfect. If you get audited, use the employee handbook and any relevant checks and balances you’ve installed. This shows that you have established policies and procedures and that employees knew what those policies and procedures were.
This is the best you can do. In addition, make sure you’re conducting regular internal audits so these critical cash handling and accounting procedures are actually being followed.
Benefit 3: Help with compliance and the employee/employer relationship
Hiring and firing employees are part of the job when you own a business. Having an employee handbook and job description can help make this part a bit more cut and dry. It sets a clear expectation and performance standard.
An employee handbook is more than just a reference manual for managers. “It explains expectations for everyone and mentions the consequences of violating these rules. By explaining workplace ethics and expected behavior with colleagues and the management, an employee handbook minimizes workplace disputes,” writes one HR expert.
There are plenty of federal and state regulations around hiring and firing practices and avoiding discrimination. An employee handbook is a useful tool to consolidate those regulations in one place and lay them out in clear terms to protect your business. Have set guidelines for the steps to take if an employee is underperforming: are they placed on leave? Do they get a probationary period? Do they get put on a performance plan, and if so, what does that look like?
Not only that, but it can save your HR team (if you have one) time from answering questions and onboarding new employees. Include information like:
Make sure your handbook is thorough and also easy to use. Once you have it in good shape, it can be used to guide your business for many years.
If you need help with creating a cannabis business employee handbook, then please reach out to our team today!
Cannabis operators have been known to be incredibly creative in their quest to protect their cash and reduce their tax liability. From management company structures, packaging markup deals, and even multi-entity setups, we’ve seen it all. But, there are instances where setting up a multi-entity structure can alleviate some of the tax burden caused by the 280E regulation. And let’s be honest, you want to be able to take some money out of your company and not get hammered on taxes at a personal level too.
In this article, we’ll walk you through an example of how a cannabis cultivation company has their business set up under one entity and their premises is owned by a secondary entity, and illustrate why this type of arrangement can be beneficial and what you need to consider.
Owning property as a cannabis operator
In this illustrative scenario, a cannabis cultivator leases the building in which their grow operation is based. The building is owned by a separate property business entity to protect the asset in case anything happens to or on the property.
So the first question we will answer is how do you set that building entity up, and who should own it?
In most cases, you would establish an LLC as the property management company. An LLC is an appealing option because it creates a simple tax relationship: it is a pass-through entity with pass-through income. Compare this to an S-Corp election, which complicates things with respect to tax filings. Speak to a legal expert for your particular situation: there are some limitations to your liability as an LLC, and each operator has different needs.
For this scenario, we’ll stick with an LLC structure for the property management company.
The Property LLC offers a long-term lease to the cannabis cultivation business. Since it’s a rental property, and the income is considered passive, there will be no payroll tax on the property entity.
Now, the more that you increase the rent, the more money you can take out of the cannabis cultivation operation to lessen your tax burden. Here’s how that works.
Managing and moving cash between separate entities
For this set-up to work, there has to be “reasonable rent.” Reasonable rent is indicated by the market rate for a similar building and an arm’s length transaction. This essentially means that the property company and the cannabis cultivation business will act in their own self-interest to try to get the best deal they can and be reasonable at the same time. For instance, if the property charges $100/sq ft per month, that’s not considered “reasonable” – no cultivator would pay that rate.
Now here is a nuance that you need to consider. In the cannabis industry, due to green zoning regulations, there’s some wiggle room in what is considered “reasonable”; typically, cannabis businesses are forced to pay a markup due to high competition for relatively few compliantly zoned properties. That can equate to 1.5-3.5x normal market rents.
The arrangement of one business paying the other is key for lowering your tax responsibility. Cash is taxed differently between the two businesses.
LLCs are taxed differently than S-Corps or C-Corps, which is the typical entity structure chosen for cultivators. But, as a processing or cultivation business, you can take advantage of IRC 1-471. This regulation allows the cannabis business to write off that reasonable rent if it’s used for the production of the product. This rent cost goes right into your COGS. As a cultivator, this would likely be 90-95% of your rent that can be written off on your tax return. That rental income is then pass-through income to the property business ‘owners’ and tax is only paid on a personal level.
Aside from only having to pay personal tax on the passive rental income, another tax strategy that the property business can take advantage of is bonus depreciation or a cost segregation study.
A cost segregation study classifies certain leasehold improvements as equipment which allows you to use a shorter useful life to calculate depreciation. This means you can take bigger deductions faster as a property company. This can’t be done haphazardly; a cost segregation study must be conducted by a specialized team of engineers and CPAs. The result of this study helps limit the amount of tax that is assessed on the pass-through income. For example, if you have $500,000 in bonus depreciation for this year from the cost segregation study and $800,000 in rental income for this year, you will only be taxed on the $300,000 difference.
Finally, as an added bonus for breaking costs into separate entities, M&A transactions become much easier. In the event that you wish to sell the building, you no longer have to worry about causing complications with your cannabis license.
What entity should you choose as a cannabis cultivator?
A critical question to this whole arrangement is what type of business entity you should select for your cannabis cultivation business. There are a few different aspects you need to consider, including things like income levels, other streams of revenue, exit plans, risk tolerance, and more. We suggest that you speak to one of our CPAs for a complete analysis of your situation and the best way forward.
For illustrative purposes, let’s just talk about a few considerations you should keep in mind.
First and foremost, remember that as a cannabis-touching company you are bound by the 280E tax code. This makes it difficult to create a good tax strategy and take money out of any cannabis business.
S-Corps and C-Corps are two of the most common business entities so let’s look at considerations for each.
In a C-Corps, you are taxed at a flat 21% thanks to the Tax Cuts and Jobs Act. Also, you can take money out of the business in two ways:
An S-Corp is a pass-through entity so there are no corporate taxes, but it does require a reasonable wage for each owner. If you choose to set up an S-Corps, then your goal is to keep this reasonable wage as low as possible to help mitigate self-employment tax on that wage at a personal level. Self-employment tax is a little over 15%; you could consider this as an additional tax.
Here is a quick example: imagine your $100 in reasonable wage is first taxed at self-employment rate which is 15.3%, and THEN the remaining money ($84.70) is then taxed at a federal income tax bracket level. The cannabis business could potentially write off some of this reasonable wage if it qualifies as COGS, but the self-employment tax could eat away at a personal level. The good news? The pass-through income of an S-Corp is not subject to self-employment tax.
And lastly, you want to make sure that there is some clear delineation between the two or more entities. As we witnessed in the case of Alternative Health Care Advocates vs. the Commissioner of Internal Revenue, courts are not lenient in letting cannabis operators use “management companies” to mitigate their tax burden when they so closely intertwined with each other. Operators are trying to employ a multi-entity strategy to include certain business expenses on their tax return, and getting penalized for their efforts. Consider having different owners or managers for each business.
What's the best multi-entity cannabis setup?
In short, there is no one-size-fits-all answer to creating a multi-entity tax structure. There are many considerations that you need to account for, and you should work with your CPA and a lawyer to figure out the best entity structure that will work for your business set up.
If you need help with this type of situation, we can run a financial model for you to help understand the implications of each strategy and choose the one that fits best for your situation. And, as circumstances change, your business may need to collaborate with us again to work out if any adjustments to the entity structure needs to be changed.
Contact us today to get started.
The cannabis market is kind of like the Wild West. As more states approve adult-use cannabis, companies are scrambling to adhere to regulations, be the first to reach new customers, and stake their claim in the market. In the process, many cannabis operators enter into vendor agreements or partnerships that may not serve them in the long-term.
Our experts frequently work with cannabis operators who are seeking to remedy – and, more likely, exit – contracts that have gone sour. Here are your options if you’re stuck in a bad contract that doesn’t work for your cannabis business.
What’s a bad contract?
There are a few scenarios in which a contract goes bad. The most common instance is when you aren’t being compensated fairly. Your effort, energy, and resources are not being compensated for their actual relative worth to finishing a project or deal successfully. This can happen when a new cannabis operator doesn’t know their value.
Other common scenarios are when the other party is not performing their agreed-upon responsibilities; they fail to hold up their end of the contract. Or, some cannabis operators enter into contracts and end up not being able to perform their assigned duties. Many distributors find themselves in bad contracts due to vague terms with the supplier, or a non-exclusivity agreement with a certain product line.
No matter what your bad contract scenario, the goal is to find a win-win between all the parties in the contract. Work toward aligning incentives as much as possible so everyone rallies around the same end result. And, if you can, try to mitigate a contract that’s going south before it gets worse.
When you notice a contractual relationship heading south, document the instances of non-compliance. Often, in the scenario of a partner’s performance not being to the standard set forth in the contract, the other party can’t substantiate the issues they’re having. Document each and every instance of insufficient performance. You must have concrete examples to demonstrate your case if you wish to withdraw from an agreement early – especially if the disagreement becomes litigious.
Whether it’s a supply agreement, a lease, or any other contract, make sure you document everything and consult your lawyer or an outside attorney. Get situation-specific guidance from an expert before making any definitive moves to exit a contract early. They can help you minimize the litigation risk you face in getting out of a bad contract.
How to get out of a bad contract
Follow the agreement terms
It’s common that an agreement will have a termination provision, so that those in the agreement can exit so long as they follow the guidelines. Check your contract to see if there’s anything that gives you instructions as to how to quit the contract, such as by providing written notice to the other party within a certain window of time. Follow these instructions carefully: for example, providing verbal notice that you intend to exit the contract is not the same as written confirmation. These details make the difference between an organized, amicable procedure and a lawsuit.
Ask for a renegotiation
In many, if not most cases, a few simple uncomfortable conversations can lead to better, more equitable deal terms. Experts suggest that you start by pointing out that the deal is inequitable for your company. “Because most people have an innate desire to be fair, the other party may be willing to reopen a discussion before the end of your contract period, especially if you back up your request with convincing evidence,” write the experts at Harvard. Show that the economics make no sense for your company and that you’re seeking to remedy an unfair deal.
Here’s an example. Imagine a scenario in which you’re a distribution company that sells and distributes products for brands. Your payment terms to the brand are on units delivered to a retailer – and not on units collected. Essentially, you are paying the brand before you get paid. Now, what if the retailers start getting a lot of refunds from clients, or maybe they pay their bills late or not at all? Then you’re left floating payments, and could quickly run out of cash.
Show your brand partners that this is not financially responsible and that you want to pay them out on units collected on, and not by units delivered to the dispensary. Point out to the retailer that you’ll be unable to distribute their product if you go bankrupt. Essentially, if the economics don’t work, then the contract means nothing because you will not be able to perform. It’s important to show your reasoning for each deal term and why it does or does not work for you.
There may be ways that you can mitigate a bad contract without having to litigate or cause conflict. For example, if you’re in a bad real estate contract, consider subleasing. Usually, your lease will say whether or not you can sublease. If permitted, take the time to find a viable tenant to take over your space. If subleasing is not permitted, speak to with the lessor and see if they will remove you from the lease if you can help them find a new tenant.
Real estate is one of the biggest expenses for a cannabis operator and therefore can cause some of the most complicated cash flow issues. In a scenario where you get a lease the intent of getting a cannabis business license, there’s the risk that you won’t get the license or won’t want to be stuck in the lease for the full term. See if you can sublease to new tenants or read what the provisions are to walk away from the lease. In some cases, it may even be less expensive to break the lease and walk away. Speak to one of our experts to weigh the financial costs and benefits.
Claim impossibility of performance
Last, there’s a legal provision called “impossibility of performance” that you may be able to claim to get out of a contract. Impossibility of performance is “grounds for contract termination because circumstances beyond the control of the contractual party prevent performance. Death or incapacity of a key player involved in the contract can cause such an impossibility.” Natural disasters or other acts of God are considered eligible reasons for ending the contract due to circumstances beyond your control.
Other ways to claim the impossibility of performance include:
If you’re caught in a bad contract, reach out to our team today and we can help you get in touch with a cannabis legal expert who can help you find a way out.
The cannabis market in California is expected to reach $5.1 billion in market value.
As cannabis companies begin to grow and the industry becomes more mature, this sector looks more and more appealing, even to risk-averse investors. There are many investment opportunities still available; but how can investors evaluate which opportunities are winners and which are bad bets?
Our experts have a clear line into what an investor must evaluate before working with a cannabis operator. As the cannabis market stabilizes, here are the three main areas and some other factors to consider when investing in a cannabis company: the team, financials and the product.
Some companies will be pre-operational, or in the startup phase. Others will have some financial results and market traction, which you can use to assess their proof of concept and revenue growth.
The best way to assess the viability of either a pre-operational company or an existing cannabis operation is to perform due diligence into investment, its offerings, and the company behind the offering. Broadly, this means learning more about the team, the financial health of the company, and the product or service they’re offering.
Here’s what to look for when investing in the cannabis market.
Who’s on the Team?
The employees, managers, and owners of the cannabis company can tell you a lot about thstrength of the operation. If the business is pre-operational, find out more about the team’s previous business experience. Have they had any major exits? What industry do their leaders come from, and how does that experience help them succeed in the cannabis industry?
Look at their open roles and the roles they’ve already hired for. What key positions have been filled, and where are there skill gaps? Are those gaps absolutely necessary for success? Do the current team members have too many overlapping competencies?
The ideal cannabis business will have staff members who bring a range of skills and a depth of experience, both in managing a startup and in working in the cannabis industry.
Next, get a sense of how the team works together. Do they have a good rapport? Are they a group of friends, or a team cobbled together from a networking event? Is there a clearly defined leader? Too many start-ups fail because there are no clear lines of leadership and too many cooks in the kitchen. The person in charge must be empowered to make decisions – and have the experience and skillset to help them make the right decisions in a business setting.
If the company has decided to split the leadership role, how have they divided equity? A potential red flag is when the leadership team divides ownership equally: it shows that not much effort was made to calculate the value each person truly brings to the company. If the equity is not split equally, take a closer look at how they decided to divide shares.
If you’re seeking to merge two cannabis companies under one entity, it’s important to understand the people and work cultures that will be impacted by this process. Success in the cannabis industry depends largely on relationship building. Make sure you’re finding the right, well-connected leaders and experts in the field who can ensure your investment delivers the right ROI.
[Read more: Mergers & Acquisitions in the Cannabis Industry - Business Combination & Integration]
There are other employee-related things to factor in for cannabis companies that have already been operational for some time. Meet with the team members individually to see how they talk about each other. How well do they know each other? Do they believe there’s room for improvement or skills missing? Are there gaps in the team that they don’t realize? Learn more about their hiring plan and success rate. Have there been any bad firings, and what went wrong?
If the team passes your initial overview, then move onto the financials.
How is the Financial Health of the Company?
When a company is pre-operational, it’s difficult to discern if it’s financially viable. The cannabis operation may be seeking your investment for this very reason. In order to become operational, they may need a quick injection in cash. And, if you ever want to see that money again, do your due diligence to make sure they’re using your money for the right expenses.
Look at the company’s Pro Formas and financial projections. How reasonable and detailed are they? Where did they base their estimates from? Ask the founders of the company to speak intelligently about their inputs, the resulting metrics, and how results may change if some inputs change due to evolving market conditions. What is their business model, and how much funding do they need? What will they do with that funding?
[Read more: What ROI should investors expect in the cannabis market?]
For operational cannabis companies, you will get the chance to review some early financial results. Look at their revenue to see how much is recurring revenue v. one-time revenue. What are the growth rates, and how are those explained by the team? There are a number of factors that can impact growth rates, such as marketing campaigns, external factors (like the annual 4/20 holiday), and internal factors.
Another major factor to question is the cannabis operation’s tax strategy. Taxes can stifle even the most enterprising cannabis operation. How is the business mitigating the impact of federal, local, and state taxes?
Lastly, take a deep dive into the business’s cash flow. This goes hand-in-hand with how they will use your cannabis investment. What will the cannabis business use your funds to accomplish? Where have they used funding in the past? Are they cash flow positive?
Also, check their key metrics:
What’s their accounts receivable, and how aged are they? Is anything causing AR to age poorly?
[Read more: best practices for managing cash on hand
Last but not least, look at the cannabis business’s inventory turnover. Inventory management is important for staying compliant with cannabis regulations and can have a big impact on the business’s bottom line. How quickly is inventory turning over? Is the cannabis operator using track-and-trace properly, if required to do so? Do they have a plan for a worst-case scenario?
What Are They Selling?
The last set of factors to evaluate when assessing an investment opportunity have to do with the actual product or service the cannabis company offers. The market is crowded – in California alone, there are nearly 6,000 operational cannabis licenses – and there are many opportunities out there for investors.
If a company is pre-operational, learn more about what problem they are solving for their customers. Is the cannabis company addressing a true market need, or just trying to get a quick cash grab from this lucrative industry? If you determine they are solving a legitimate problem, does their solution actually work? Does the cannabis operator have a go-to-market strategy? Who is their target customer, and how detailed is this profile? Some cannabis companies think they will sell to everyone: this is a mistake. Savvy cannabis founders will have considered macro market trends and leveraged competitive research to narrow down their target audience to a specific customer.
For existing, operational companies, learn more about how the product or service has changed since it launched. If they’ve pivoted, why? What’s their product mix? Do they offer different flavors, sizes, or types of product? What opportunities are there to upsell or cross-sell? Are any products over-indexing for success, and if so, why?
Final Considerations for Investing
Every investment is a risk, but managing your risk could be the difference between making your money make money—or not. These few final factors to consider for each investment opportunity should not be discounted in comparison to the ones outlined above.
For pre-operational companies, evaluate their competitive landscape. What is their competitive advantage, and is it truly unique? Opening a cannabis business is not a novel idea, but their competitive advantage can make them stand out as a winning investment. Why are they joining the cannabis industry: for love of the product, or for cash?
For those companies already doing business, look at how well they execute their standard operating procedures. Are they compliant with local and state regulations? Do they have the necessary business and cannabis licenses? Finally, are they consistently passing lab tests?
Should cannabis turn out to be too big a risk, there are other sectors related to cannabis that are seeing growth:
Another option is to look into opportunity zone credits as a way to invest in the cannabis market and also gain some tax benefits. You can also get started with a partnership opportunity to learn more about a specific investment opportunity at a lower risk profile.
Our cannabis tax experts are here to answer all of your investment questions: get in touch by clicking the "Get Started" button below.
Cannabis delivery is legal thanks to California’s new permanent regulations passed earlier this year.
The state-wide legislation makes it possible for cannabis operators to deliver to a customer, even when they live in a municipality that prohibits cannabis. Non-storefront delivery companies are able to serve these “cannabis deserts,” adding a lucrative new revenue stream to their business.
Adding delivery and online shopping can be a great way to reach new customers, increase your revenue, and build your business. But, it’s important to price your delivery service profitably – otherwise, your delivery service can easily drain your cash flow and make it difficult to sustain other parts of your business.
Here’s what you need to know about cannabis delivery pricing.
Pricing Cannabis Product for Profit
Delivery pricing comes down to a three-step approach. The first step is to look at the market and understand the current landscape.
You need to answer these questions:
We suggest that you do some competitive analysis to research the going rate in your area and put all of your research information into a spreadsheet.
Things to track would be:
You can read more about pricing cannabis products in our guide, but the basic goal is to take into account the unit price, as well as the overhead and fixed costs per unit.
Remember, product is just one of your expenses: you also have costs associated with gas, vehicle insurance, paying your team, and licensing fees. Factoring in these extra expenses gives you a breakeven point when your sales exactly cover your expenses.
Before we continue, let’s take a moment to understand what you’re learning about your company during this process.
Gross Profit Margin v. Contribution Margin
As a business owner in a competitive industry, it’s likely that you’re familiar with gross profit margin. This is a calculation of (total sales revenue - total direct costs of goods sold)/total sales revenue. This number “establishes the relationship between production costs and total sales revenue.”
Contribution margin is calculated as (revenue from sales of an item - production costs for the item ) ÷ revenue from sales of the item. This number tells you “how profitable one item in a product line is in comparison with another.” It lets you critically assess how your different products are performing; what we’re essentially doing is breaking out delivery as its own separate product line to assess if it’s a worthwhile investment.
Calculating the Contribution Margin
Calculate your contribution margin by subtracting variable costs from your sales. Obviously, this point is important because the goal is not to break even on delivery but to make a profit. Include all your cost of goods sold, employee wages, and taxes. Taxes are part of your variable costs, and you must include them in this calculation.
Then you will need to figure out how many units you will need to sell at a specific price point and contribution margin to breakeven and then be profitable.
So what you’ll you need to consider is your capacity and working capital.
First, ask yourself, how long will it take to get to the capacity to hit that target number of units?
Then consider, how much working capital do you need to last until getting to capacity?
Once you understand those two numbers, you will know your working capital needs and then can begin testing your assumptions.
Price Testing Cannabis Delivery
The third and final step is testing.
A big advantage of delivery is that it’s easy to test your pricing scheme quickly. E-commerce has a quick feedback loop, meaning you can perform A/B testing on your website and with different customer segments to zero in on the right pricing scheme for your business.
A/B testing is a way to compare two versions of a pricing model against each other to determine which one performs better. In the experiment, two variants are shown to user groups at random, and then statistical analysis is performed to show which option leads to better profit.
To perform A/B testing, first separate your customers into new and existing customers.
The “A” section of your test will be your control group: customers who exist with the same current margin.
Your test group B will receive new pricing wherein you test different margins. Use a few different cohorts at different markups to see how your customers respond to the new pricing changes.
For example, analyze each test group of customer’s purchase frequency and average spend per transaction to see if higher price points discourage shorter times between purchase. Compare to see where you can squeeze more margin without turning away your best customers.
Here’s an example of how to host a pricing A/B test. Pretend your customers, on average, order every 14 days. For two months you run a delivery pricing test where for one group of existing customers, you bump your price margin by 2.5-5%. Will they visit less frequently? Will they spend less per visit?
In parallel, you run a test on your new customers. You are able to perform an A/B test using two landing pages or sets or products. The first landing page is your existing, standard e-commerce website with your normal pricing. The second page tests a higher price margin – similar to the margins being trialed on your existing customers. Which landing page or product has a higher conversion rate?
Getting the Most of Your Delivery Test
How can you make sure to make the most of your pricing test?
Amplify your reach with ads, using flyers, Weedmaps, and more to make sure to get the word out.
Check out our guide on cannabis marketing to understand what you can and cannot do in your advertising campaigns. What’s great about delivery, though, is that a customer comes through your website, giving you full control over the check-out experience.
You’re able to gain insight into how their payments play out: will a customer use cash, debit, or credit?
Pro-tip: our experts recommend limiting how many credit cards you accept to lower your risk of money laundering issues.
You also get solid metadata including:
Learn more about profitable pricing by getting in touch with our experts at the button below.
As the cannabis industry attracts more entrepreneurs, those same people are looking to raise capital.
In this blog post, we will walk you through four main points on preparing yourself to speak and collaborate with investors.
These topics include:
Let’s get started!
Cannabis Industry Context
Let’s discuss the mindset you need to have and understanding the landscape that you will be competing in as a cannabis entrepreneur.
First, it’s imperative that you know that it will take A LOT of money to create a successful cannabis business for a few reasons.
It’s a highly regulated industry, just like the liquor business or airlines. That means a lot of compliance related issues that you will need to hire experienced professionals to manage for you such as lawyers to handle licensing and CPAs to handle your taxes.
Most businesses fail because they run out of cash...plain and simple. Whether that’s cash for payroll, to solve marketing problems, or to solve legal issues; without it, you have no oxygen for your business.
Next, running a cannabis business, especially a dispensary is an incredibly hard daily operation. You are running a public-facing pharmacy that is helping patients and legal adults learn and obtain their cannabis. It takes a high-level of skill and tolerance to work with the public day in and day out. It could be 8, 12, maybe even 18 hours days to make sure your operation is running smoothly.
Another point that we need to stress is that you can’t do it all by yourself. You need to build a team to over all of the main functions of your business; especially the ones you don’t like to do.
We suggest starting to look for people to cover:
Understanding the California Cannabis Market
Now let’s review and understand the Los Angeles and California cannabis market a bit deeper.
California is the BIGGEST legal cannabis market in the world, and Los Angeles is the epicenter for it all boasting 10 million potential patients and a very accepting cannabis culture.
But don’t forget, there is a huge black market right now and it’s not going anywhere. Even five years into legal cannabis, Colorado is still dealing with a proliferating black market. To build on that, the Bureau of Cannabis Control is way understaffed. And one last point is that bad actors are slippery; getting busted is built into their business plan which makes it difficult to beat them.
Currently in Los Angeles, there are about 182 dispensary licenses, and about 900 in California overall and that number is increasing every month. In LA, there will be about 400 dispensaries in the next 12-24 months.
So yes, a dispensary is relatively scarce now, but what about in 7 years? What about when Rite Aid and CVS start to become licensed cannabis businesses? How will that affect the valuations of cannabis businesses?
We believe there will be a huge run up in the amount of cannabis businesses, but then an inevitable collapse will happen similar to the late 90’s tech bubble. This collapse will then lead to a consolidation of the licenses and businesses into the hands of smart operators who know how to survive in competitive landscapes.
If you want to survive, you will have two things to lean on:
With brand, you want people to ask for your shop, product or service by name.
Once Alexa, Siri and Google Home start to dominate how we interact with the world of information, having a brand that people know will be one of the most valuable assets ANY business can have. Or else you will be at the mercy of paying these platforms to own the word “dispensary” or “vape pen”...and it won’t be cheap.
Now that you have a bit of context around the cannabis industry and the California market, let’s dive into aspects of raising capital for your cannabis business.
Let’s start with a 30,000 foot look at the entire process.
It’s a long and tiring process to put on the capital raising roadshow, so be prepared to focus solely on this until it’s complete.
And don’t clap for yourself too much once you actually do raise the money. Raising capital is just one check box, one step in the entire scheme of building a business. Yes, it’s a gate, but the execution of your plans, finding product market fit, and creating value is most important. When you get the money, the clock starts ticking, so don’t let that time pass too fast.
When you take money from investors at any level, it’s like a marriage, but with tougher contracts and more strict controls on your actions. You’re attached to these people for life, or until you sell your business, buy them out, or fail in your business.
But one thing to really understand is that investors are betting on the jockey and not the horse. This means they are betting on you and your team to figure out the best way to execute your plans. They are investing in a relationship, because to be quite honest, opening a cannabis dispensary is not that novel of an idea.
One piece of advice is to be honest with what you don’t know and ask for help from investors when you need it. They are vested in your success and you already got the check, so no need to worry about scaring them off. Further, don’t let pride hold you back from success and be open to feedback...you may actually learn a thing or two.
It’s also important to know that institutional investors are guessing when placing their money. Investors don’t know how everything will play out, but they are making bets...and many of them. They know that one homerun will pay off the 47 strikeouts that go to 0.
Lastly, don’t think that you’re their only option to get into the industry. Investors have many options to get exposure to the cannabis industry including investing in companies like yours, into stocks of larger companies, or even contributing to larger funds that place bets for them. Stay humble.
Knowing that there are many options, you should really take the time to consider what makes you special. Ask yourself:
Types of Investments
There are many ways to raise capital for your cannabis business and those are:
Traditional Fundraising Journey
Now let’s explore the stages of a typical investment journey.
It is highly recommended that you self-fund to start out, but if you can’t then it’s time to look elsewhere.
First is friends and family. These are usually smaller and easier to close, and the terms should be simple and favorable for them to get in on the next round.
Then you have Series A which should hopefully be someone local who understands the context of your market. These should be relatively easy as well, especially if you have some traction. At this stage, valuation is not everything...you also need to see what smart money you are aligning yourself with, and we will get to that later.
Then you have Series B which is usually some of the hardest money to raise, and it takes time and lots of patience. It’s hard because investors will continue to ask, why are you not cash flow positive yet? It doesn’t take a hero to lose money every month, but it takes a savvy operator to take cash and turn it into long-term value.
Finally you have Series C and beyond. This is all about traction and product market fit. Usually you’re going out to raise this round because there is fierce competition between you and other brands, and the person with the biggest war chest (and great deployment of capital) will likely come out on top.
Another potential capital raise is a Line of Credit (LOC) which is largely non-dilutive capital that is collateralized by your assets such as Accounts Receivable. You may see these also called bridge loans.
Evolution of the Cap Table
Above is an illustration that shows how the capitalization table changes over the different parts of your fundraising journey.
As you can see, at the beginning or formation of your business, it starts out with you owning everything. Then as you build your team, you need to split things in some reasonable way.
Now, as you start to take on capital, you need to break off equity for your outside investors if you’re not self-funding your business. And with each successive round of raising capital or hiring new key team members, you continue to get diluted down and own less and less equity than when you started.
It’s important to know that you won’t always own a huge chunk of your business (or maybe you will), but you give up equity in exchange for capital that helps you make your company more valuable. While your percent ownership may go down, your total value could (and should) go up over time.
Understanding the Financials of This Transaction
Before you take on capital you need to run the numbers to see if you really like the position you’re putting yourself in.
You will need to do a financial analysis and produce Pro Forma financial statements which will help you quantify how much capital you ACTUALLY need and how you will use those funds. It also helps you answer the question: Does this even make financial sense to take on capital? Some businesses raise too much money and end up giving away too big of a chunk of the business only to lose their motivation for growing the company.
Once you know more about the financial nuts and bolts of the capital raise, you then need to look at your exit potential. What can you really get?
In the dispensary market and cannabis as a whole industry, we are seeing multiple land everywhere from 2x to 12x, but more toward the 3x for dispensaries. But note, more and more dispensaries are opening every month which will eventually drive these multiple down.
The multiples are typically based on Net Income instead of gross because of the extreme tax burdens that cannabis companies have. If you don’t have a good 280e mitigation strategy, then you will surely see a lower valuation compared to someone who has gone with an offensive tax strategy.
Now once you know the total exit value, you need to factor in your percentage of that exit.
Let’s look at an example.
Gross Revenue = $2.5MM
CoGS = $1.5MM
Gross Revenue/Margin = $1MM/40%
Additional Expenses and Taxes = $725,000
Net Income = $275,000
Multiple = 4x
Total Business Value = $1.1MM
Your ownership = 51%
You get $561,000 at sale of business
Smart Money vs. Dumb Money
You may have heard the term smart money or dumb money, but I want to explain it.
Smart money is someone who brings you more than just cash. You need to ask yourself, if I take money from this person, WHAT ELSE can they offer or provide to me and my business?
Some examples include:
Dumb money is simply someone who can write you a check, but provide little to nothing else...other than a headache when they keep asking you when they will be getting their return back on their investment.
But, dumb money can be smart money if you know exactly what to do to execute at a high level and they give you the space you need to grow your business.
It’s a balance, but we suggest always going for smart money, especially in cannabis. It’s quite a clicky industry and you need to have someone be your evangelist to get you into the inner circles.
Where to Find Cannabis Investors
Once you have a business plan, pro formas and pitch deck, now you need to find investors.
You can start by researching prior deals in the cannabis space and reaching out to those investors. Crunchbase is a great place to find many of the institutional deal details as well as contact information for the investors.
You can also go to meetups or get involved in the local cannabis community. Another idea is going to alumni associations if you went to university or reach out to other existing networks; maybe even reaching out to your local church!
There are angel networks out there and you can even look at AngelList.com to find potential cannabis investors. We’ve also seen a few investors on LeafWire.
You can start to prospect and make connections on LinkedIn, and then produce content around your capital raising journey. Even reaching out to connections directly and asking if they want to see your abbreviated pitch deck is a potential way to engage investors.
Lastly, one type of deal we’ve been seeing more of is Joint Ventures. This is where an existing dispensary owner, grower or manufacturer would invest into your new businesses because they see some synergies between the two operations. This is quite creative because it can also give access to their licenses, operations knowledge, real estate and cash flow.
You just need to go hard and hit everyone and anyone up. You never know where that first check will come from, and it may come from the most unlikely meeting at a happy hour, a wedding or even on the train back from your day job.
Aspects of Predatory Financing and Investing
One thing you see often in this stage of the industry is predatory financing or investing where more sophisticated investors take advantage of desperate startup founders.
While most of these tactics are not illegal, they can surely screw you over in the long-term so you need to keep your eyes open for these tactics.
Pitching Your Cannabis Business
Once you find potential investors, your job now is to pitch them your business and the investment opportunity.
The fundraising process is quite long, but if you prepare it could be about 4-5 months from prep work to closing the entire round.
Here are some basics of how to prepare for your pitch:
Let’s also cover some miscellaneous tips around fundraising.
Again, BE PREPARED. Practice your little heart out so that you could go into your pitch at a moments notice.
Time kills all deals, so create urgency when meeting with investors. You don’t want to keep them on ice and think it will keep the deal fresh. They have options and want to feed off your excitement.
Get solid advisors who can introduce you to investors and guide you through the process. It’s tough to do this alone, and having someone by your side will give you extra confidence in the room.
Search for investors locally first. This makes it easier to meet with them in person because travel cost will be low, but also in cannabis, this is still a local endeavor...at minimum a state by state game until cannabis is rescheduled.
Go for the “No” as fast as you can. Don’t let investors string you along saying maybe or that they need to take to more people. Put pressure on them and show that you’re serious about your time and your business.
Rejection is part of the process. Once you get the first “no”, don’t let it crush your confidence. If you’re doing this right, you’re talking to 100-500 people and most of them will tell you no, so grow some thick skin and keep moving forward.
Try not to use an agent which is someone who takes a percent of the money you raise in lieu of making introductions for you. This is different than an advisor and agents may pressure you to take deals that are not in your best interest just so that they can make a commission.
Lastly, get a lawyer to review and make sense of all the terms and deal language. Your job is to get investors to the point of yes, and then you hand the deal off to the lawyers to hash out before you sign the dotted line. If you sign a deal without fully understanding every clause, you may be shooting yourself in the foot before the race actually starts.
Preparing a Business Plan and Pitch Deck
When meeting with investors, you will need to create a business plan and pitch deck. We don’t want to write too much about it here, so instead you should review the video below which will walk you through EVERY detail about what to include, how to make it interesting and what to avoid.
Shorter decks are better. Don’t create an entire book about every detail!
The potential slides you will include in your pitch deck are:
Negotiating Your Deal
After you pitch an investor and they say yes, the next step is negotiating a deal for your company.
You should understand upfront that negotiating is an art, not a science. It’s ok to adjust your style to best fit who you’re negotiating with. There is no one method that is best for every situation.
Let’s review a few of the items that are actually up for negotiation.
The purpose of any negotiation should be to create a win-win for all involved parties. It’s okay to leave money on the table because your goal should be to create a long-term business relationship. It’s important that as you negotiate certain terms that you are setting precedents for future deals so fully understand every aspect of the deal!
To prepare for your negotiation, you should know where you want to end up before you start. That means knowing how much you want to raise, at what valuation and every other term in the list above. If you’re doing a deal that you’re unfamiliar with, then research other deals in the space before you start negotiating.
If possible, learn something about the person with whom you’re negotiating so that you can build common ground with them. People negotiate with other people...this is not a mechanical process, so don’t be scared to create that human connection.
Also, be prepared for the negotiation to be turned over to someone else once you reach a certain point such as getting your term sheet. When you reach this point of the deal, it usually gets handed over to lawyers to make hash out the details and make the deal ready for each party to sign.
Negotiating Tools & Techniques
When engaging in a negotiation, you should start high, but be reasonable. This will give you room to ‘give up’ things and make the other party feel like they have won something. It’s a bit of psychology, but if done correctly, you will land at or near your intended targets.
Next, understand the opposing party’s position so you can logically argue against it. You need to ask yourself and find proper reasoning behind why you should get something they have potentially NEVER given to other deals.
Don’t be so stiff in negotiating. It’s okay to use humor to break tense moments. People want to work with people that make them feel good, and humor can be that emotional bridge that ties the two parties together.
Use shared language so that you seem similar to them. People really want to work with others that are similar to them in as many aspects as possible, so take the time to learn the lingo of your industry and of financials so you can create even more common ground.
Don’t bluff because you will likely get your card pulled. This is simple. If you bluff and they call you out, it will destroy your deal and potentially your credibility. To build on this, negotiate with a positive attitude and in good faith. If the other party senses that you are trying to pull one over on them, it will sour negotiations and potentially kill your deal.
Ask questions during the negotiation to get as much color and context to what the other party is thinking and where they stand at on any deal points you haven’t agreed on yet.
Don’t negotiate for the other side. Try to shoot your shot and see what happens. Don’t just come in low on something to try and “make the deal a no-brainer” from the get go. Make sure you actually negotiate and show that you are confident in your abilities.
Lastly, have patience. These deals can be emotionally intense. Think about it...you’re asking someone to believe in your idea and give you a million dollars. That’s a big sum of money and they aren’t going to just give it away freely.
Get to Work
We have walked you through four key aspects of becoming investor ready, and hopefully this has helped you gain the confidence necessary to secure funding for your cannabis business.
If you need help with preparing your business plan or pro forma financial statements, then please reach out to us today to get started.
In a previous article, we discussed some of the tax implications of offering free cannabis samples to your customers. As a cannabis dispensary operator, it’s tempting to stand out from the competition by letting your product speak for itself. Some dispensaries give out free cannabis by letting their customer “spin the wheel” to see what their prize is – in many cases a free joint or an edible.
Giving away free cannabis as a buy-one get-one promotion or a fun marketing tactic works for diversifying your customer base and driving repeat business. But what are your tax responsibilities when you offer free samples of cannabis products? This post will take a deeper dive into your financial and compliance obligations from giving away free cannabis.
COGS and Free Cannabis
There are two scenarios that have different tax implications for cannabis dispensary owners.
Scenario 1: Samples
In the first, let’s work with the example of a dispensary offering a free joint that a customer can win by spinning a wheel. Ultimately, the value of the cannabis you offer as a free sample will be calculated into your cost of goods sold (COGS).
When calculating COGS, you will use this formula: Beginning Inventory + Purchases - Ending Inventory = COGS.
In this scenario, let’s say you started out the period with $10k in product (beginning inventory). Then, you add in the purchases of products you made, including those free joints you gave away as samples. That results in $100k in purchases.
At the end of the period, you calculate your ending inventory is $20k.
According to the math: $10,000 + $100,000 - $20,000 = $90,000 COGS. In this instance, you have no additional tax obligations, since the samples are rolled into your COGS.
Scenario 2: BOGO Deals
Alternately, in a second scenario, the cannabis dispensary owner offers a buy-one get-one deal for pre-roll joint packs. Instead of 2 joints for $20, the dispensary offers 4 for $20. This is considered a discount, in this case, a 50% discount.
How does that impact your taxes? In this scenario, the promotion differs from the first example in that the dispensary is not offering a FREE joint, but a DISCOUNT. The full transaction amount goes into sales: meaning you will pay taxes on the full $40 value, even though the customer did not pay you $40 in cash.
The issue with this second scenario is that if your deal becomes incredibly popular, you will be exposed to a much larger tax liability – with not enough income to offset your taxes.
Cannabis Tax Implications
Here’s an extreme example of the BOGO deal and what can go wrong with your California state taxes. Imagine you are an LLC. In CA, you have a minimum tax payment of $800 even if you have no sales. Further, in California you may be liable for more franchise taxes if you have additional gross sales above $250k. As a dispensary, it’s highly likely you will meet this threshold.
For this example, let’s say you had gross sales of $300k, $60k in BOGO discounts, and after all other expenses you ended the year with HUGE loss of $50k. For the sake of this exercise, we’ll disregard some of the complicated 280E calculations and consider this as pure gross profit and loss.
With a loss of $50,000, the good news is that there will be no federal tax due. Neither will there be taxes due to the state of California.
The bad news, however, is that you still need to file a form 568. This is the franchise tax return, and that’s where the $300k in gross sales will come back into play – and where those BOGO deals can negatively impact you. Check this table to see what your additional taxes would be.
To calculate your Franchise Tax Return, you will have:
That’s a pretty big tax burden for a cannabis company that operated at a loss this year!
Considerations for Free Cannabis
Samples are used to get business and are not a part of taxable gross revenue. However, buy-one get-one deals do have tax calculated, since they are considered discounted and included in gross revenue.
So, if you were to have “given” $60,000 as free samples rather than discounts, you would not be liable for the additional $900 in taxes.
Consider speaking with your operations manager to tweak your offerings and deals so that you can decrease your potential tax liability.
And, if you have additional questions, reach out to GreenGrowth CPAs so that they can help you plan out the most effective tax strategy while improving the customer experience at your dispensary.
Click the "Get Started" button below to request a cannabis tax consultation.
As you know, cannabis operators have to pay many different taxes.
From sales tax to excise tax, the system is quite complex; and once your cannabis company starts to thrive, the tax system becomes even more complicated.
California’s sales tax is a great example of where successful cannabis entrepreneurs get tripped up with being compliant while maximizing their profit.
California’s state sales tax for cannabis operators is 7.25% – 6% state tax, plus a 1.25% mandatory local tax. Depending on where your business is located, the local tax may be an additional 3% to well over 10%.
For cannabis operators who are achieving a certain amount of sales each month, you will be required to pay the sales tax monthly, rather than quarterly.
Here’s how the process works, and how our experts can help you manage your tax burden more effectively.
Why is proper tax reporting important?
As the saying goes, there are two things certain in life: death and taxes.
Taxes are the number one reason why most cannabis companies fail; the IRS is not shy about auditing cannabis operators, and the 280E is one of the primary tools the government uses to penalize cannabis ventures.
This burdensome 280E regulation makes a lot of money for the IRS in the form of fees and fines; so much so that Colorado is able to fix roads that aren’t even broken because they have so much tax revenue.
It’s important to protect you business as much as possible from the tax authorities; and the first step is to understanding cannabis sales tax and commit to paying your taxes monthly.
As a side note: having a CPA prepare your taxes is best because they will use an accepted methodology for their calculations that can then be used as exhibits during a potential audit.
What is cannabis sales tax?
As previously mentioned, the state sales tax rate varies slightly depending on where you are. Most cannabis organizations can expect to pay 8% - 10% of sales. Sales tax is charged at the cannabis dispensary on top of the sales price and the cannabis business tax. Here is a breakdown of cannabis tax calculations for California.
Cannabis sales tax in California is paid to the CDTFA. When you apply for a sales tax permit, the Administration will ask you a series of questions to see what your payment schedule should be.
Typically, most companies pay their taxes quarterly – meaning that taxes are due April 30, July 31, October 31, and January 31 for the periods Q1, Q2, Q3, and Q4 (respectively). If you have low sales volume (meaning less than $5,000 in sales), the CDTFA may put you on an annual payment schedule.
For successful, high sales organizations, it’s likely that you will be asked to pay sales tax monthly to the city and state. Here’s what that process looks like and why it’s best to have an experienced CPA calculate your payments for you.
How to calculate sales tax for the state
In our experience, some clients are asked to pre-pay sales tax every single month because they have such high cannabis sales. How does this work?
In this instance, the cannabis operator must pay estimated payments for month one and month two of the quarter. Then, when the quarterly return is filed, the CPA firm squares up discrepancies from the first two months of the quarter into the third month’s payment.
How do we estimate your month one and two sales?
The GreenGrowth CPAs usually look at your POS software on the 20th day of the month to see your current run rate, and in addition compare that rate to the past year for the month we are evaluating.
From there, we create an estimate of the monthly of ABC$$ to the CDTFA, thereby covering your state taxes.
The CDTFA will now let you know that you are subject to pre-payments or any changes to the frequency of your payments.
If you don’t make payments on time, then penalties and interest will be assessed. Note that these penalties are compounding – so if you are faced with a fine, pay it right away.
How to calculate sales tax for your local jurisdiction
In addition to paying your state sales tax, cannabis operators must also pay city sales tax. This rate and due date varies depending on your location.
For example, if you are based in the city of Vallejo, you are required to file a monthly return based on gross receipts, rather than sales. These are due by the 20th or 25th of the following month. Get in touch with our experts or the local tax authority to make sure you know the deadline and cannabis sales tax rate you are responsible for.
There’s a lot of confusion and grey area when preparing for your tax payments to the city – mostly because cannabis is an all-cash industry, and most cities aren’t equipped to process monthly payments of cash.
Most cities have self-reporting taxes with no audits required (yet). It’s likely, however, that California cities are missing out on major tax revenue, and as a result will insist on proper reporting and auditing in the future. It’s best to be rigorous about your tax payments to make sure there are no issues down the road.
How can you make sure you’re paying the right amount?
Make sure you’re instituting great cash-handling practices and create strong SOPs. Despite having little to no access to a bank account, manage your cash responsibly to make sure everything balances correctly.
Plan ahead: if you're looking at your cash or bank account, start setting up an account or repository for taxes. Put money aside each week so that you’re not forced to come up with a large sum of cash all at once.
To give yourself total peace of mind, engage an accountant with specific cannabis-industry experience who can give you monthly guidance and be by your side in the event that you get audited by the city, state or federal government. Click the button below to get started with one of our experts.
The recreational cannabis industry is considered a high-growth market, with the potential to grow to $66.3 billion by 2025.
However, despite the massive amount of cash pouring into the industry, operators are limited by the Cole Memorandum and federal regulations prohibiting banks from working with cannabis companies.
Lack of access to the banking system causes many problems for legal cannabis businesses – especially when it comes to paying taxes.
Federal regulations force cannabis operators to pay their taxes in cash (in most cases). There are a lot of cannabis taxes to be accounted for; the US government is estimated to have collected $4.7 billion in taxes from cannabis companies in 2017. That’s not to mention the state and local taxes cannabis operators are subject to – which can be at rates as high as 15% in some areas.
Cannabis operators want to pay their taxes, but the rules regarding how to submit payment make it a headache.
The transfer of cash is not only frustrating and difficult, but often risky. Handling that much cash presents a big personal safety risk for cannabis business owners and the agencies collecting the cash.
So the question remains, how can cannabis operators better navigate the tax return process given federal banking restrictions?
Let's explore the process...
EFTPS and Federal Taxes
Generally speaking, ordinary corporations and C-Corps pay the IRS through EFTPS.
EFTPS is a secure website that is linked to the IRS. It is a payment system through which business owners upload everything in a very secure way – and it’s a vast improvement on the previous system. Payments no longer get lost in the mail or counted incorrectly due to human error.
EFTPS is easy to set up a profile and link your bank account; plus, an added security measure allows business owners to set up a second authentication method through a PIN number sent through the mail.
Most traditional businesses use EFTPS for payroll tax deposits. Through EFTPS, the employer collects taxes and then sends them on the employee’s behalf, every pay period, which makes it easy for everyone involved.
Though, for cannabis operators, it is extremely difficult but not impossible to open a business bank account; therefore, EFTPS is not an option for cannabis companies. Cash can’t be transferred through EFTPS.
So as a cannabis operator, how can you pay federal taxes?
Federal Taxes for Cannabis Operators
Here’s how cannabis operators can pay their federal taxes in cash.
The first step is to find the location of your nearest IRS office. In California, there are IRS offices located across the state. Maybe 40% of the offices accept cash. We suggest that you call ahead to make an appointment and make sure that your nearest office accepts cash.
Give yourself plenty of lead time as there are few IRS offices and they have very few appointments available. And they will not give you a 'break' just because you couldn't get an appointment in time for the deadline, so plan way far ahead.
Once you secure an appointment, pack your cash and travel to the office.
We recommend you share the appointment day, time, and place with as few people as possible to mitigate the security risk. You will be traveling with a large amount of cash, so don’t increase your chances of being a target.
When you go to the office and make a payment, know ahead of time that the IRS office may limit the amount you can pay per appointment. If you’re paying $250,000 in taxes (which is not that uncommon), you will likely need to make many appointments. The reason for this is security; the IRS doesn’t want to take the risk of having a huge amount of cash on the premises.
One other thing, make sure you get a receipt each time you pay an installment on your taxes, just in case there’s ever a question down the road.
Alternately, some cannabis companies pay their taxes through the business owner’s personal account, and then have the cannabis company reimburse the business owner. This is a work-around that can save a lot of frustration, but also places a financial burden on one individual.
Workaround for Small Tax Payments
Some operators may just be getting started and not have a huge tax liability, so here's another method to pay your taxes in cash.
If there’s no IRS office near you that accepts cash, you can pay your taxes in cash at a participating retail store like 7-Eleven. The IRS has a program called PayNearMe that allows you to make a cash payment after being verified.
Note that payments are limited to up to $1,000 per day, and can take up to 5 to 7 business days to transmit. Verification also can take two to three business days.
Allow yourself plenty of time and review the limitations before committing to this option.
Paying State Cannabis Taxes in Cash
The steps for paying your state cannabis taxes in cash are similar to the process for paying your federal taxes.
The agency is different – in California, you will make payments to the franchise tax board – but you will need to find a location near you and set up an appointment. Most offices in California accept cash, but some will even take cashiers checks. Make sure to phone ahead and know what the limitations are before you go.
Overall, paying your taxes in cash as a cannabis operators is a burdensome and frustrating process.
We can help you strategize and make the most of the limited tax deductions available to cannabis operators. Get in touch with our team by clicking the get started button below.
In Part 1 of our guide to starting a hemp farm in California, we outlined the process for registering as a hemp farmer with the CDFA, as well as the difference between seed breeders and cultivators. This second part of our hemp farm guidance series will provide detail about the importation and movement of industrial hemp; details on manufacturing, processing, and selling industrial hemp; and tips on how to get started in this new market.
Hemp Importation Guidelines from the CDFA
Obviously, the first step in starting a hemp farm (after registering with the CDFA) is to procure hemp seeds. Remember, there are some conflicting laws at the federal level in regards to the legality of growing hemp. It’s not possible to import seeds from outside the US to California, per federal regulation from the USDA. However, California state law does not have any restrictions to the importation of industrial hemp seeds or plants from other states into California.
The CDFA requires all industrial hemp seeds and plants to pass plant pest quarantines, and may inspect your hemp seeds further at their discretion. Likewise, the California Food and Agriculture code requires that registered growers and seed breeders only grow hemp varieties from an approved list of seed cultivars. Of course, this regulation does not apply to seed breeders developing new seed cultivars.
Selling Hemp in California
Where can you sell the hemp you grow on your farm? It’s possible to sell hemp through the California Farmers’ Market (CFM) Program. You must first be certified as producer through the CDFA's CFM Program. You may also be able to sell hemp in a licensed cannabis retail store; however, cannabis retailers are governed by the Bureau of Cannabis Control (not the CDFA). Therefore, you should get in touch with the BCC to be sure you meet the cannabis industry’s strict regulations before adding hemp to a cannabis dispensary.
Starting a Hemp Farm in California
By some estimates, more than 25,000 products can be made from hemp. Hemp is used in everything from the automotive industry to personal care products. California is a leader in the hemp market: California companies earn 77% of nationwide sales of hemp food and personal care products.
Hemp is a plant that thrives in California’s environment. It does well in warm weather, and grows best in well-drained, highly organic soil. Experts recommend planting hemp seeds directly in the ground, rather than starting the plants in a pot and transplanting them later on. You will need a lot of space: for hemp to be profitable, you must plant at least 50 acres. Besides space, hemp has relatively few other needs. It’s resistant to pests and diseases, and grows fast and tall, minimizing the need for hand cultivation. Estimates from a recent Cornell University analysis found that hemp profits ranged from $130 to $730 per acre.
A good way to get started in California’s hemp industry is to go to a workshop by the California Hemp Association to learn about the constantly changing forms, fees, and regulations and other information coming from the CDFA and the USDA.
You should also speak to our experts about the registration process and to get your taxes in order before entering this new market. Click the button below to get started.
The CDFA recently released guidance concerning the industrial hemp market in California.
There has been a lot of confusion surrounding the regulations of this plant.
In this two part series, we’ll break down the state’s policy regarding hemp, as well as give you some insider tips for entering this new market successfully.
What is the difference between hemp and cannabis?
To begin, it’s important to establish the key difference between cannabis and hemp.
Cannabis is a “family of plants with two classifications – Indica and Sativa.” Hemp is a member of the Cannabis Sativa family.
As a result, hemp contains a very low concentration of THC. Marijuana, which is considered a member of either the Indica or Sativa families, has concentrations of THC between 15% - 40%.
The state of California has a very specific definition of what qualifies as hemp vs. cannabis.
According to the CDFA:
“Industrial hemp" means a crop that is limited to types of the plant Cannabis sativa L. having no more than three-tenths of 1 percent tetrahydrocannabinol (THC) contained in the dried flowering tops, whether growing or not; the seeds of the plant; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin produced therefrom.”
Why should you start a hemp farm?
Unlike cannabis, which is still classified as a Federal Schedule I Controlled Substance (subject to the 280E regulation), hemp is not federally regulated. The Agricultural Improvement Act of 2018 went into effect at the beginning of this year, thereby removing hemp from the list of federally controlled substances. This is a new market that isn’t subject to the same strict financial and tax codes of the cannabis market.
Simultaneously, in September, 2018, Governor Jerry Brown signed and approved Senate Bill 1409 which permits the cultivation of industrial hemp by California growers. Before this bill was signed into law, only growers who qualified under the state’s pilot program and the Agricultural Act of 2014 could cultivate industrial hemp.
The cannabis market is a tightly regulated, highly competitive space. Licensing limits and zoning restrictions make it expensive and difficult for new entrants to gain traction in this billion dollar market. Industrial hemp, however, presents an alternative opportunity for cultivators to participate in the cannabis market without the high barriers to entry.
Commercial Cultivation of Hemp in California
California state law as it relates to hemp cultivation is a little hard to parse. The reason for this is the state regulations don’t align perfectly with the federal regulations that deregulate hemp as a controlled substance.
California may allow for commercial hemp cultivation, but conflicting articles in the 2018 and 2014 Farm Bill do not.
The previous 2014 Farm Bill does not permit the cultivation of hemp for “purely commercial” reasons. However, the 2018 Farm Bill deregulates commercial hemp provided that states submit “hemp production plans” to the USDA.
So, in theory, California’s state plan must be reviewed and approved by the USDA – which would impact hemp cultivators down the road.
In the meantime, California has begun the process of accepting hemp cultivation registration applications – here’s what you must fill out and confirm to begin planting hemp in California.
How to Register as a Hemp Farmer in California
If you wish to become a grower of industrial hemp, the first step is to be approved by your county agricultural commissioner. You can find your county ag commissioner’s office on this map provided by the CDFA.
Unlike the commercial cannabis market, there is no state registration required to grow industrial hemp. Prospective growers only need to complete a county registration to grow industrial hemp. Applications for both seed breeders and growers can be found on the CDFA Industrial Hemp Program website. The registration fee is $900 and registration is valid for one year.
Applications for commercial cultivation and seed breeding don’t vary dramatically. Generally speaking, you will be asked to provide basic information about the business owner, the cultivation site, your business plan, GPS coordinates, and other site information.
Some counties are not accepting hemp applications. These counties include: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbara, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba.
Hemp Seed Breeders v. Cultivators
There are two potential ways to participate in California’s hemp market: as a hemp seed breeder or as a hemp cultivator.
If you plan to cultivate hemp for commercial purposes, you should fill out the application for growers. If you plan to cultivate industrial hemp for seed development or production, you should complete the application for breeders. If you wish to do both, complete both applications.
In Part 2 of our Guide on How to Start a Hemp Farm in California, we’ll outline more detail about the importation and movement of industrial hemp; details on manufacturing, processing, and selling industrial hemp; and tips on how to establish your hemp business and get started in this market successfully.
To speak to one of our experts with any questions regarding the hemp industry, click the button below to get started.
As we mentioned in this week’s cannabis update, today, April 8 is the first day Marina, California will be accepting cannabis license applications.
Here’s what you need to know about the process and how to submit a cannabis application in Marina.
Application Period and Submission Details
Marina’s City Council has a 60-day application period, from April 8 to June 3, 2019. The following number of licenses will be issued:
Dispensary Application Details and Requirements
Prospective cannabis dispensary owners can find the application details and documents on the Marina city website. Only complete applications will be considered by the city; you must include the following documents:
Phase 1: Determination of Eligibility
Businesses in Phase 1 must pay a fee of $8,000 with their Dispensary Permit Application. These fees will go toward background checks and staff time, and any unused fees will be returned to candidates who don’t make it through all three phases.
When submitting your Phase 1 application, provide all materials in 2 (duplicate) three-ring binder and one flash drive, with everything in PDF format. Create a separate tab for each section of the application (e.g. Business Plan, Security Plan, etc.). Payment can be made in the form of personal check, certified check, cashiers check, or money order – no cash or credit cards.
Your application must include the following sections:
Phase 2 and Phase 3
Phase 1 applicants must meet the eligibility criteria by demonstrating how they will operate in compliance with local laws and regulations. If you can show that you have read and understood the cannabis restrictions, then you will move to Phase 2. Phase 2 applicants are evaluated on their Live Scan results, completeness of their application, proposed location, and two key documents:
Finally, Phase 4 is the Final Ranking and Issuance of Cannabis Dispensary Application Conditional Use Permits, and Cannabis Business Licenses. Operators who are through to this round must pay a second fee of $7000 and be able to apply for an Cannabis Dispensary Application Conditional Use Permit and license to engage in a commercial cannabis business. Qualified applicants from the initial ranking may amend and combine their applications to optimize their scores.
Non-Dispensary Application Details and Requirements
Non-dispensary commercial cannabis businesses are also eligible to apply for permits during this window. Like dispensaries, these businesses will be evaluated in four phases which includes the following criteria and fees.
Phase 1: Determination of Eligibility
Businesses in Phase 1 must pay a fee of $8,000 with their Non-Dispensary Permit Application. These fees will go toward background checks and staff time, and any unused fees will be returned to candidates who don’t make it through all three phases.
When submitting your Phase 1 application, provide all materials in 2 (duplicate) three-ring binder and one flash drive, with everything in PDF format. Create a separate tab for each section of the application (e.g. Business Plan, Security Plan, etc.). Payment can be made in the form of personal check, certified check, cashiers check, or money order – no cash or credit cards.
Your application must include the following sections:
Phase 2 and Phase 3
Phase 1 applicants must meet the eligibility criteria by demonstrating how they will operate in compliance with local laws and regulations. If you can show that you have read and understood the cannabis restrictions, then you will move to Phase 2.
Phase 2 applicants are evaluated on their Live Scan results, completeness of their application, proposed location, and two key documents:
Finally, Phase 4 is the Final Ranking and Issuance of Cannabis Non-Retail Application Administrative Use Permits. Operators who are through to this round must pay a second fee of $3000 and be able to apply for an Administrative Use Permit. “The top applicants equal to the number of licenses available will be eligible for a Cannabis Non-Retail Application Administrative Use Permit and license to engage in a commercial cannabis business.”
Cannabis Zoning Verification Letter
Applicants must obtain an approved Cannabis Zoning Verification Letter (CZVL) from the Planning Division of the Community Development Department in City Hall located at 209 Cypress Avenue, Marina, CA 93933 prior to submitting a CCB application. This letter verifies that your proposed business location meets the city’s requirements. You must send a written request; CZVL’s will not be completed over the counter to allow time for research and review.
Plan ahead to get the CZVL: Marina’s review process takes approximately 15 working days. A CZVL costs $200.00 and payment is due at the time a CZVL is requested.
Get Help Today
While three months seems like enough time to complete a cannabis application, time is of the essence.
Get in touch with our experts by clicking the button below and we can assist you in putting together a strong application in Marina, California.
Each week, our experts get lots of questions about California’s seller’s permit. How do you get one? Who needs one? What does the application ask for? Is it separate from every other permit and license? There seems to be a lot of confusion out there surrounding the seller’s permit, which is required not just for cannabis operators. With this guide, we hope to answer many of these questions and provide some insight into how the CDTFA evaluates the cannabis seller’s permit.
California Seller’s Permit: Required Information
If you are doing business in California and intend to sell or lease tangible personal property subject to sales tax sold at retail, you are required to have a seller's permit. Likewise, you have to prominently display your permit at your place of business. Basically, anyone working in the cannabis market in California needs a seller’s permit.
For a California state seller’s permit, you must apply online with the following details:
As a cannabis operator, you also need to submit:
If you have a business partner or if your cannabis operation is managed by corporate officers or limited liability company managers or partners, you will be asked to include some of their information in addition to your own.
The seller’s permit is different from your cannabis tax permit or cannabis business license. If you are a distributor of cannabis and cannabis products, you must obtain a SEPARATE cannabis tax permit in addition to your seller’s permit.
You can apply for your seller’s permit on an open basis. There is no deadline or application window to apply for your seller’s permit. The online system guides you through the whole process and lets you know what documents you need to submit. There are also a handful of field offices you can visit where the CDTFA will walk you through the application process. If you go in-person, you get your permit right when you finish applying. Unlike the cannabis licenses, you are not being ranked against other cannabis companies.
However, you must apply for a cannabis business permit before attaining your seller’s permit. The seller’s permit application will ask you for a cannabis license number. Start with your state and local licenses before spending the time and resources to obtain your seller’s permit.
For help with any licensing matter, get in touch with our experts.
Last week, we covered some key findings for cultivators, distributors, and retailers released in the California Cannabis Advisory Committee 2018 Annual Report. The CAC provides recommendations o the California’s cannabis licensing authorities, and helps set forth priorities when it comes to the standards and regulations of the cannabis market.
Today, we’ll outline what the CAC recommended for Manufacturers, Licensing Applications, Microbusiness and Enforcement. It’s important to keep an eye on this committee, as they can have direct impact on the regulatory environment for your cannabis operation. Here’s what the committee accomplished last year.
CAC Subcommittee for Manufacturers
Last year, the Advisory Council’s Subcommittee on Manufacturers made a total of four recommendations. The licensing authorities moved forward to implement two of these recommendations, partially implemented a third, and declined to implement one.
Please note that the CDPH website has been updated to include more than 20 FAQs on packaging and labeling as well as some additional checklists to come. The CDPH intends to release a revised set of checklists, updated FAQs and an illustrative guide after adoption of the permanent regulations.
CAC Subcommittee for Licensing Applications
This subcommittee specifically addressed the risk of large, consolidated cannabis operators dominating California’s nascent cannabis market. The Subcommittee for Licensing Applications was primarily concerned with adding transparency to the licensing process; offering financial relief and lowering barriers to entry for new applicants; encouraging marketing stability; and protecting the health and safety of workers in the cannabis industry. As a result, the Subcommittee had four recommendations which were adopted by the committee, of which two were implemented, one was partially implemented, and not implemented one.
CAC Subcommittee for Microbusinesses
Cannabis microbusinesses are operators that meet a minimum of three out of four of these allowed commercial cannabis activities:
The Subcommittee for Microbusiness offered four recommendations, of which one was partially implemented and three were not implemented.
CAC Subcommittee on Enforcement
Last, but not least, the Subcommittee on Enforcement is dedicated to improving public safety and protecting the business interests of the cannabis operator. They strive to “ensure that there is a balance between allowing for the feasible operation of cannabis businesses while deterring illegal and criminal activities.”
The Subcommittee adopted five recommendations; in response, the licensing authorities implemented two, partially implemented one, and declined to implement two.
If you have any questions about the CAC or their policy recommendations, please get in touch with our experts. You can also read the full 2018 Annual Report, which covers every Subcommittee statement, to see more about how the regulations in California continue to evolve.
California’s Cannabis Advisory Committee (CAC) released their 2018 Annual Report earlier this month. Within the annual report are recommendations and suggestions for policy related to the adult-use cannabis market.
The CAC provides recommendations and advice to the California state cannabis licensing authorities. The committee gives feedback which directly informs the standards and regulations for the state’s cannabis market. The stated goal of the CAC is to reduce and eliminate the cannabis black market, so this advisory group should be advising the state with your business interests in mind. It’s important to pay attention to what this group advises, given that they will have a direct impact on the growth of adult-use cannabis in California.
CAC has established 10 subcommittees related to specific parts of the cannabis market. The subcommittees include: Cultivators, Distributors, Enforcement, Equity, Licensing Application, Manufacturers, Microbusiness, Public Health and Youth, Retailers, and Testing Laboratories. In 2018, the subcommittees made 79 subcommittee recommendations, 47 of which were adopted by the CAC.
We’ll cover the subcommittee recommendations which were adopted by CAC in a three-part series. This first part includes adopted recommendations by Cultivators, Distributors, and Retailers.
CAC Subcommittee for Cultivators
The Subcommittee for Cultivators made five recommendations this year, two of which were fully implemented by the California state cannabis authorities. One has been partially adopted. The recommendations included:
CAC Subcommittee for Distributors
The Subcommittee on Distributors had four adopted by the CAC committee at large. Of the adopted recommendations, the licensing authorities have implemented two. These were the recommendations the Subcommittee for Distributors made this year.
CAC Subcommittee for Retailers
Last but not least, the Subcommittee on Retailers made a total of nine recommendations. Of these, one was adopted by the committee and has been partially implemented by California’s state licensing authorities.
That recommendation was related to methods of delivery. The Subcommittee asked to clarify and simplify methods of delivery, including:
This ask was only partially implemented by the Bureau.
Overall, it’s important to know that the California Cannabis Advisory Committee has your business interests in mind when making policy recommendations to state regulators. They’ve made some significant changes to the original adult-use cannabis regulatory environment. If you have feedback for them, you can contact the CAC through the Bureau of Cannabis Control or talk to one of our experts by clicking to get started. Stay tuned for Part 2 of our coverage of the 2018 CAC Annual Report.
Carson City, California has once again opened the application window for commercial cannabis business permits. Applications are due on February 14, 2019 at 5PM.
Carson City uses a slightly different permit process than many other California cities. The City intends to issue four licenses for “cannabis centers,” which could hold multiple licenses for cannabis cultivation, manufacturing, testing and distribution. A cannabis center may host multiple cannabis operators – and when you prepare your application you must include all cannabis operators in one “parcel,” or permit application. Each operator must also submit separate supplemental application materials depending on their type of cannabis operation (distribution, testing, cultivation, etc.).
Given all the moving parts involved in gathering your application materials (which are extensive), filling out the supplemental forms, and making sure all your operators are in compliance with the City’s regulations, we suggest working with an outside firm to give your application the best chance of approval. Don’t be fooled: February 14 will be here before you know it!
Here’s what’s new in the Carson City, California cannabis center permit application.
Carson City Cannabis Licensing Process
Carson City’s main cannabis licensing application can be found here. The city has also issued a set of application instructions that you can refer to here. The instructions provide a sample breakdown of what your application should include, as well as some scoring guidelines which may prove helpful in putting together a thorough submission.
In addition to the main application, cannabis operators must submit separate supplemental material depending on their role in the cannabis industry:
Applicants must also submit the following additional forms:
Main Cannabis Application
There are 13 suggested sections the City will evaluate in the main cannabis application. The city has assigned a maximum possible points they will use to score each section. This should help guide you in putting together the strongest possible submission. Read the main application and supplemental materials carefully to be sure you are meeting the requirements under each section.
Section 1: Application and Documents
Section 2: Operation Plan (400 pts)
Section 3: Security Plan (300 pts)
Section 4: Health and Safety Plan (300 pts)
Section 5: Impact on the Environment (150 pts)
The application should state and describe the extent to which the Cannabis Business will engage in “green” business practices. Describe practices designed with a focus towards renewable energy techniques, water and power conservation measures and environmentally responsible waste management.
Section 6: Neighborhood Compatibility (200 pts)
The application should state and describe the extent to which the Cannabis Business will be managed to avoid becoming a nuisance or creating negative impacts on its neighbors and the surrounding community. Describe measures designed to create good neighbor policies, public relations techniques and nuisance mitigation.
Section 7: Employment Opportunities for City of Carson Residents (150 pts)
The application should state and describe the extent to which the Cannabis Business will be a locally managed enterprise whose owners and/or employees reside within the Carson and/or South Bay area.
Section 8: Economic Benefits (150 pts)
The application should state and describe the extent to which the Cannabis Business will be a direct and/or indirect economic benefit to the City of Carson.
Section 9: Community Benefits (150 pts)
The application should state and describe the extent to which the Cannabis Business seeks
to be an integral part of the City of Carson. Describe how the Cannabis Business proposes to develop and maintain community engagement through programs and economic incentives. For help on this section, check out our recent guide to strengthening your community benefits section.
Section 10: Experience of the Operators, Managers, and Employees (200 pts)
The application should include information concerning any special business or professional
qualification or licenses of Owners that would add to the number or quality of services that the
business would provide, especially (if applicable) in areas related to medicinal cannabis. Describe background of operators, managers and employees, as well as, if applicable,
industry specific training and experience.
Section 11: Capitalization of the Business (100 pts)
Section 12: Educational Plans (100 pts)
The application should state and describe the extent to which the Cannabis Business will develop and maintain community focused educational opportunities, possibly including general health risks associated with cannabis use, youth addiction and drug prevention programs, and measures to reduce risks associated with minors.
Section 13: Promotion of Equitable Business Ownership and Employment Opportunities (100 pts)
The application should include a proposed plan to develop a social equity program designed to ensure the Cannabis Business is diverse and inclusive. Describe how the Cannabis Business will engage in proactive efforts to hire partners and employees from marginalized communities and /or rehabilitated persons.
This is obviously a ton of information to compile – in addition to the supplemental application material found in Appendix A – so start this process sooner rather than later!
Carson City Application Review and Assessment
Once you submit your application, the Carson City staff will have a 90 day review period. The first review is to determine that your application complies with the Carson Municipal Code. If you are found compliant, your application will move to the Cannabis Permit Committee.
If your application is not compliant, within 60 days you will receive notice that your application is missing some required information. You may be given 30 days to resubmit; if your resubmission continues to be non-compliant, or you fail to meet the new 30 day deadline, your application will be “deemed abandoned” and you may start over.
Then, a Cannabis Permit Committee review the application for merit (based on the scoring outlined above). The Merit List is submitted to the City Council, who will then review the recommendations at a public meeting. The City Council makes the decision on whether to issue a Cannabis Center a permit based on Merit List criteria. If you do receive a permit, then your cannabis operation will enter a Development Agreement with the city planning council.
Carson City Cannabis Application Fees
The initial application deposit is $20,000. This is down from last year’s initial deposit of $25,000.
Need help preparing your application? Get advice from our licensing and finance experts who have helped dozens of cannabis operators in California.
Two laws were passed in 2018 related to California’s cannabis industry that go into effect this month (January 2019). Assembly Bill 1793 and AB 3067 are two recent regulations that cannabis entrepreneurs in this growing market need to know about to protect their business interests.
Assembly Bill 1793
This bill adjusts existing legislation related to the identification, review, and notification of anyone who might be able to have a prior cannabis-related conviction dismissed. Under AB1793, the California Department of Justice must comply with a timeline for reviewing records and past convictions for those eligible for a dismissal or re-designation. In addition, there is a deadline of July 1, 2020 by which the DOJ will be automatically required to reduce or dismiss certain cannabis-related charges or convictions.
For your cannabis business, this can have an impact on how/who you hire, the competitive landscape, and the social equity programs available in Los Angeles and other cities.
Assembly Bill 3067
AB 3067 has a more direct impact on your day to day business operations as a cannabis business owner. When Prop 64 was passed, it included protections for individuals under 21 and prevented companies from marketing directly to those underage. However, the provision included a loophole. The regulation restricted marketing on broadcast, cable, radio, print, and digital advertising of cannabis, but not all cannabis products.
AB 3067 adds to this regulation “any cannabis, cannabis product, cannabis business, or any instrument or paraphernalia that is designed for the smoking or ingestion of cannabis to the list of products and services subject to the Privacy Rights for California Minors in the Digital World (PRCMDC).”
Previously using an images of minors under 18 in your marketing was not allowed. Now, images of anyone under the age of 21 are not allowed. Likewise, cannabis operators are not permitted to disclose a minor’s information to a third party for marketing purposes. This makes it harder for advertisers of cannabis and cannabis products to reach internet and app users under the age of 21.
If you have questions about either of these regulations, please get in touch with our experts.
The Bureau of Cannabis Control (BCC) has, on several occasions, released guidelines regarding required cannabis testing. This means that if you are legally operating a cannabis business, you need to adhere to these guidelines in order to meet state requirements. Per the BCC’s guidelines, there are three categories that cannabis and cannabis products fall under: inhalable cannabis, inhalable cannabis products, and other cannabis and cannabis products.
Cannabis Operator Responsibility
It is every responsible commercial cannabis business operator’s duty to ensure that all their cannabis and cannabis products are tested, and, if sold, have passed these tests. Cultivators must have their product tested through their distribution partners, and retailers must ensure the products they are selling to the public have passed all quality control tests. Providing the patients and customers with safe, effective, potent, and high-quality cannabis and cannabis products should be every operator’s number one priority. Lifting the stigma of cannabis can be done with responsible cultivation, manufacturing, distribution, sale and administration of safe and effective cannabis and cannabis products.
Roll Out Dates
Since the roll out date for all legal cannabis facilities and business was January 1, 2018, the BCC provided three phases for various test types that all cannabis and cannabis products must undergo. The first phase covers all cannabis and cannabis products that were harvested and manufactured beginning January 1, 2018. The second phase began on July 1, 2018, and the third phase will begin on December 31, 2018. The third phase will require that all three cannabis and cannabis product categories to undergo the comprehensive battery of tests in order to comply with state regulations.
As we come to the end of 2018, please make sure you are compliant with the BCC testing regulations. Since annual state licenses will be the focus of the BCC activity in 2019, we expect little to no changes to their existing testing requirements.
To recap, the comprehensive battery of cannabis and cannabis product test types have been spread out over three phases as follows:
Phase I: January 1, 2018
Moisture Content Testing
Category II Residual Solvents and Processing Chemicals Testing
Category I Residual Pesticides Testing
Microbial Impurities Testing (A. fumigatus, A. flavus, A. niger, and A. terreus)
Microbial Impurities Testing (Escherichia coli and Salmonella spp.)
Homogeneity Testing of Edible Cannabis Products
Phase II: July 1, 2018
Category I Residual Solvents and Processing Chemicals Testing
Category II Residual Pesticides Testing
Foreign Material Testing
Phase III: December 31, 2018
Heavy Metals Testing
Water Activity Testing of Solid or Semi-Solid Edibles
Inhalable Cannabis Products
Other Cannabis and Cannabis Products
If your cannabis and/or cannabis products fail to pass the required testing and cannot be remedied, then, according to State Regulations, the entire batch must be destroyed. This obviously has an impact on your bottom line: cutting losses means implementing industry best practices. We recommend you continually engage the services of testing laboratories at fundamentally significant steps in the cultivation and manufacturing process. This could potentially save your cannabis and cannabis products from failing tests and destruction.
If you are a commercial cannabis operator and need assistance and/or guidance with compliance, contact a team member today. Part of every operator’s responsibility is to meet state regulations and incorporate best industry practices into your operations.
What does it take to get your California cannabis cultivation license? In this extremely competitive licensing environment, knowing the full process for getting a cannabis cultivation license is important. Here’s a summary of the licensing requirements for cultivation.
Who issues the annual state cultivation licenses?
There are three distinct agencies involved in issuing the California annual cultivation license. They are:
Each of these agencies oversees various aspects necessary for the issuance of an annual license. CalCannabis actually grants the license, but there are essential requirements an applicant needs to secure from the other two agencies to submit a complete application with the Department of Food and Agriculture.
.Processor: Conducts only trimming, drying, curing, grading, or packaging of cannabis and non-manufactured cannabis products
Nursery: No size limit defined in statute (no canopy.
*Large licenses will not be issued until 2023. Note that greenhouses with dirt floors are considered Outdoor Facilities.
How do you apply for a license?
You may submit an application for a cultivation license at any time. Here are some of the general requirements for the California cultivation license application:
Other things you may need to submit include:
Applicants must submit to the Department of Fish and Wildlife any final lake or streambed alteration agreement or a written verification from CDFW that an agreement is not required.
When you are granted a license, you will be required to train your team to use the California Cannabis Track and Trace System within 10 days of receiving your license. Licensees are also required to order UID tags from the Department of Food and Agriculture within five days of completing their CCTT training.
For more resources and help applying for the cultivation license, read this guide and get in touch with our experts.
California’s permanent cannabis regulations were reportedly finalized on Monday, December 3, although operators may not be privy to the new regulations until January 2019. State officials have decided not to make the rules public until the Office of Administrative Law (OAL) has finished conducting its review.
The news is frustrating, but it also makes it hard to prepare your business for the potential impact of the permanent cannabis regulations. Here’s what we know about the most recent draft of California’s permanent marijuana business regulations – and how you can prepare for 2019.
What are California’s permanent cannabis business regulations?
The permanent business regulations related to the cannabis industry are joint effort of California’s Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health. The regulations cover a variety of issues related to cannabis, including delivery, packaging, and events.
Experts who have studied the proposed regulations warn that these rules will hurt current operators. Here are a few of the key changes that may affect your business.
End to Contract Manufacturing
All licensed companies could be barred from doing business with a commercial cannabis company lacking a license.
Contract manufacturing, commonly known as white labeling or co-packaging, is a way for licensed manufacturers to produce and package products for those businesses that are still unlicensed. We see this partnership commonly with celebrity-endorsed brands or an established cannabis company that has a production facility located in a municipality which does not allow for commercial cannabis. This is simply the best way to do business for many operators who are hamstrung by the varied cannabis allowances from county to county. If this rule ends up as part of the final regulations, it could put many contract manufacturers out of business.
New Delivery Regulations
The proposed rules reduce the amount of cannabis product a single delivery vehicle can transport from $10,000 to $5,000.
The economics of this rule change could have big implications for licensed cannabis operators. Currently, the $10,000 limit allows for drivers to leave for their delivery window with one order for $100 and $9,900 in additional product to fulfill orders as they come in. However, the rule change forces drivers to leave with at least $2,000 in product designated for orders already placed. This leaves just $3,000 available for fulfilling orders while on the go.
Obviously, this severely restricts the sales opportunities for delivery operators and damages the customer experience. Slower service is bad for business, and the higher overhead of making more trips to and from the delivery hub could put some companies in the red.
New Disclosures for Business Owners
If you have a cannabis business license or own a financial stake in a cannabis venture in California, you will be reclassified as a “salesperson” or “consultant” under the proposed California cannabis business regulations. Why is this important?
The key to this rule is the part where any employee who has a say in what the business should sell, manufacture, or cultivate will be considered an owner. More individuals will therefore have to file state disclosure paperwork. Logistically, this becomes a bureaucratic nightmare. What’s even more concerning is this provision could amount to a ban on silent partners, with big implications for those ventures still seeking funding.
How to Prepare for California’s New Regulations
Until January, we won’t know which of these proposed regulatory changes made it into the permanent bill. However, it’s prudent to start preparing your business now. Talk to your silent investors to make sure they’re aware of the changes in disclosures. If you need to find a new investor for your cannabis business, it’s better to start now.
If you run a delivery service, take a look at your operating budget to see if you have space to hire extra vehicles and drivers. You can also prepare your customers by asking for minimum orders or changing up the checkout process in incremental changes. Minimize the disruption to the user experience by making small adjustments to your delivery service ahead of time.
Finally, if you’re working with a contract manufacturer, protect your business by seeking a plan B partner. Lock up relationships with other licensed operators now, as competition is only going to get steep.
For more on the proposed regulations, get in touch with our experts today.
At the polls earlier this month, voters across the US weighed in on a number of measures related to cannabis. For California voters, midterm results were overwhelmingly in favor of the new adult-use cannabis industry, a good sign for anyone hoping to grow their business venture.
There were about 50 tax measures across the California’s ballots, the majority of which were approved by voters. While more taxes may not necessarily seem like a positive thing to budding entrepreneurs, this is a sign that local governments intend to welcome the cannabis industry and help it grow. It’s to their benefit for businesses to do well, as a local municipality can benefit from the resulting tax revenue.
As we go into 2019, here are the new cannabis taxes that companies in California need to pay to stay compliant with state and local laws.
San Francisco: Proposition D
In San Francisco, voters approved Proposition D, the Marijuana Business Tax Increase. This measure will impose taxes on cannabis ventures that do business in the city, regardless of whether or not their physical site is located there. The tax rates are:
These taxes go into effect in January, 2021 and do not apply to the first $500,000 of recreational cannabis gross receipts. Medical cannabis retail sales are also exempt from this tax. Revenue from this particular tax is expected to reach $5 - $12 million, money which will go into the city’s general use fund.
Emeryville: Measure S
Emeryville, California voters passed Measure S, a Marijuana Business Tax similar to the one in San Francisco. The business tax measure levies a cannabis business tax of up to 6% of gross receipts. The goal is to generate $2 million in revenue for unrestricted governmental use. This is quite a big leap for Emeryville, as previously cannabis companies paid 0.10% of annual gross receipts, or $25, whichever was greater. The ballot measure does not say when this increased tax rate will go into effect.
Oakland: Measure V
Oakland, California went in a bit of a different direction when it came to voting on cannabis taxes this November. Voters decided to lower their existing cannabis business tax – though the municipality previously had one of the highest tax rates in the state. Recreational cannabis was taxed at 10%, while medical cannabis companies had a 5% tax rate. Small operators were having a hard time competing in the market with cities nearby charging lower taxes.
Measure V was approved by voters to give the Oakland City Council the authority to lower cannabis tax rates through a forthcoming ordinance. The measure also allows cannabis companies to deduct the cost of raw materials from their gross receipts. On the federal level the 280E regulation prevents cannabis companies from doing this on their tax returns.
Lastly, this ballot measure allows local cannabis businesses to pay their taxes on a quarterly basis, instead of one annual payment at the beginning of the year. From a tax perspective, Oakland is looking more attractive than ever to entrepreneurs looking to enter the cannabis industry.
Lake County: Measure K
Lake County’s Measure K Marijuana Business Tax was approved by a majority vote this November. This measure goes into effect January 1, 2021 and changes the following taxes:
Read the full text of the measure to determine where you call in the two tax brackets.
Mountain View: Measure Q
Mountain View’s Measure Q applies to the maximum of four cannabis businesses allowed to operate in Mountain View, per their permitting regulations. This approved ballot measure imposes up to 9% tax on gross receipts of cannabis businesses. The money will go into a fund for “general city purposes,” estimated to grow to $1 million in annual revenue.
Lompoc: Measure D
2018 Lompoc, California voters approved Measure D2018 with the following tax rates to cannabis companies:
Riverbank: Measure B
Last but not least, Riverbank voters approved Measure B. This is an interesting step for a municipality that does not currently permit cannabis businesses to operate within their jurisdiction. But, by passing this ballot measure, voters have indicated they are open to allowing adult-use cannabis businesses to operate in the future. Measure B permits Riverbank’s City Council to issue a tax of up to 10% of gross receipts on cannabis businesses operating in the future. Built into the tax are incentives which give the city a cut of any illegal cannabis business earnings. Despite this relatively high tax rate, keep an eye on Riverbank in the future for indications that they may be open to permitting recreational cannabis businesses to operate.
If you have any questions about these tax related measures, get in touch with our experts.
Updated December 6, 2018
Last September 30, 2018, Governor Jerry Brown signed and approved Senate Bill 1409 which permits the cultivation of industrial hemp by California growers. Prior to its approval, only growers that qualified in the Pilot Program, and the Agricultural Act of 2014, could cultivate Industrial Hemp.
With SB 1409, starting January 1, 2019, individuals interested to grow industrial hemp are able to do so under the following conditions:
Research and development will be permitted in developing a new cultivar that must be certified by a seed certifying agency. The Department will require research and developers to outline and implement security and anti-diversion measures to prevent the unlawful use of industrial hemp or seed cultivars, as well as procedures for maintenance of records documenting the development of new seed cultivars.
Industrial hemp is used to produce more than 25,000 products. This means that it could be an alternative resource for products we use on a daily basis—that has a smaller impact on the environment.
If you want to know more about industrial hemp, its uses, and how to become a grower in California, contact a team member today!
Recently, California joined the growing list of states that have passed some level of pro-hemp legislation in the past few years. Bill SB 1409 was passed to open the doors to growing the state’s industrial hemp industry. Here’s what you need to know about the legislation – as well as three things to do now to start making money on hemp.
What is the Hemp Bill SB 1409?
California’s Hemp Bill, SB 1409, was signed into law by Governor Brown to go into effect on January 1, 2019. This bill adds an industrial hemp pilot program to the state’s legal cannabis industry. As it stands right now, the cultivation of hemp is regulated because of its classification as a “fiber or oilseed crop” under the California Uniform Controlled Substances Act that can only be grown by approved hemp seed cultivators. The list of approved cultivators hasn’t been added to since January 1, 2013. Every year, growers of industrial hemp register with a county agricultural commissioner and pay a renewal fee.
SB 1409 opens the possibility of becoming an industrial hemp seed cultivator to others who haven’t been certified before January 1, 2013. Industrial hemp is no longer going to be considered a fiber or oilseed crop. This doesn’t necessarily mean CBD food products can be sold; in fact, a recent release from the California Department of Public Health banned the sale of CBD food products. We’re still waiting to see how hemp will be regulated as we approach 2019.
Interestingly, SB 1409 also authorizes the California Department of Food and Agriculture to begin an “agricultural or academic research” pilot program for industrial hemp. Colorado and Oregon have carried out similar programs to help inform and structure their regulatory systems. Hemp remains illegal at the federal level, yet more than 30 states have passed some kind of pro-hemp legislation to date.
How to Make Money on Hemp
Obviously, there are still a lot of unknowns when it comes to California’s future regulation of industrial hemp. In addition, seed cultivator applicants won’t be permitted to submit a license request until January 2019. However, here are three things you can do now to get a first slice of California’s legal industrial hemp industry.
Find your niche.
Hemp has a wide range of uses: over 25,000 known uses, to be exact. It can be used in building materials, fabric and textiles, ink, skin lotion, and shoes, and the seeds are a great source of nutrition. If you want to make money off hemp products, the first course of action is to zero in on how you want to use hemp. Hemp-based consumer products, food/nutrition products, and pharmaceuticals are the most common industries, and probably the most accessible for new entrepreneurs. Hemp seeds are very nutritious: they contain a big dose of omega-3 fatty acids and are a better source of good protein than chia seeds or flax seeds. Hemp seeds are also known to contain a good portion of vitamin E and minerals like potassium, magnesium, calcium, iron, and zinc.
Keep in mind that with food product, pharmaceuticals, or beauty products, you may have to comply with FDA or FTC regulations in addition to California state compliance laws. Do your consumer research now to see whether your hemp fortune lies in nutrition or nail polish.
Start creating distribution channels.
Just because you can’t start growing hemp in 2018 doesn’t mean you can’t start creating your own distribution channels. Start to recruit customers for your niche product by building a brand presence online. Pick a topic, make a website, and start promoting or endorsing hemp products that already (legally) exist on the market. Becoming an expert in all things hemp will serve you well both on the customer and supplier side. Customers want someone they can trust to help them navigate the new hemp market. Hemp farmers want help recruiting customers to their product. It’s a win win for you and your suppliers.
Look for land.
If you do intend to become an independent hemp farmer, you will need a lot of space. Though hemp is relatively easy to grow, it’s not easy to be profitable without planting at least 50 acres. Now is the time to start your search for the space you need in January; competition for land will only get tougher as the January 1 deadline approaches.
For more tips on getting started in the cannabis (and soon to be hemp) industry, get in touch with one of our experts.