During 2018, the Maine Legislature passed two Bills dealing with the future of the marijuana business in Maine that are to become effective this December. Both are designed to end the wild west nature of the industry but they have very burdensome tax and operating rules. This three-part series will breakdown some of the business, accounting and tax issues surrounding the future of Medical and Adult use marijuana sales in Maine. Part I looks into the impact of the new rules on Dispensaries and Caregivers. Part II will review the “adult use” market and Part III looks to the future of the cannabis industry.
Part I: Dispensaries & Caregivers
The Act to Amend Maine’s Medical Marijuana Law allows both dispensaries and caregivers to continue to supply marijuana to registered “cardholding” patients. New rules increase the number of existing medical dispensaries from 8 to 14 and allow dispensary ownership to be set up as for-profit entities.
Registered Caregivers will be able to cultivate a total of 30 mature plants, 60 immature plants and unlimited seedlings, rather than have a dedicated amount of plants per patient as the old rules dictated. These caregivers may also transfer 30% of the mature plants grown during the year to other registered caregivers or dispensaries in wholesale transactions. The new law also allows caregivers to share a building with others, using separate and dedicated grow space, but it prohibits consortiums. (Multiple growers working together to grow co-owned crops). Caregivers will be allowed to manufacture marijuana products and concentrate for medical use, except that a caregiver may not manufacture food unless licensed to do so.
Both medical marijuana groups will face increased reporting requirements. Under section 2430-G 1.A.(3), registered caregivers, dispensaries, testing facilities and manufacturers will be required to undergo an annual audit of business transactions conducted by an independent 3rd party. At this point it is not clear if the legislature used the term “audit” loosely, or if they are actually requiring an independent CPA to issue an audit report on the company’s financial statements. If the latter is true, auditors will be partially hamstrung by the vast majority of cash transactions that are conducted. In addition to gaining an understanding of the seed to sale product tracking software, I anticipate that auditors will likely employ creative strategies, like testing cannabis production against fertilizer usage or energy consumption in order to issue an opinion.
From a tax perspective, dispensary and caregiver sales are subject to sales tax at rates of 5.5% for marijuana, topicals and paraphernalia, and 8% for prepared food products or “medibles”. Readers should be aware that the Maine sales tax bulletin #60 is a good resource for determining sales/use tax industry specifics and for highlighting that agriculture and manufacturing exemptions do exist. Once applied for, these exemptions can save thousands of dollars by reducing or eliminating sales taxes on fertilizer, grow lights, airflow systems, equipment, utility bills and other direct cultivation and manufacturing expenses.
Other highlights of the Medical Marijuana law include, a 7-year record keeping requirement, and a deduction for Maine income tax purposes of the amount disallowed by the IRS under Federal 280E for both individuals and corporations. Dispensaries no longer need to be a Maine Not-for-profit corporation taxed as a C corporation. This opens the door for other types of entity formations (S-Corp, LLC etc), provided that all officers or directors are residents of ME.
The future of the Maine medical cannabis may well float on the implementation of the adult use market. Part II of my report will outline the Maine adult use market.
James Boulette, CPA has been advising medial cannabis dispensaries in ME and MA since laws were enacted allowing for legal sales. He is one of New England’s leading experts in the application of 280E.