During 2018, the Maine Legislature passed two Bills dealing with the future of marijuana business in Maine that are to become effective this week. 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 breaks down some of the business, accounting and tax issues surrounding the future of Medical and Adult use marijuana sales in Maine. Part I looked into the impact of the new rules on Dispensaries and Caregivers. Part II reviews the “adult use” market and Part III looks to the future of the cannabis industry.
Part II
This week the Marijuana Legalization Act becomes law. Tasked with helping Legislators through the maze of regulations is newly engaged Los Angeles consulting firm, BOTEC. The Portland Press Herald reported that BOTEC will likely finish writing the rules by the end of April 2019. Once implemented, license applications will be considered for marijuana retail stores, cultivation facilities, product manufacturing, testing facilities and social clubs. Only after the first licenses are issued will seeds be planted for the adult use market.
For now, the Marijuana Legalization Act is law but there is no mechanism for anyone to apply for licenses. The Act, as it exists, does make it clear that the initial owners of marijuana businesses will be residents of Maine, who have approval from local authorities to conduct marijuana business operations. If the business is incorporated, its officers, directors, managers and the majority of its shareholders are required to be Maine residents. All applicants, directors, employees or other closely related individuals will be subject to strict background check provisions ensuring that owners will not have past drug violations, outstanding court-ordered payments and are compliant with federal and state taxing authorities.
Up for grabs, each owner can have:
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- Cultivation facility licenses, up to 3 facilities with total plant canopy not to exceed 30,000 square feet. No single facility can exceed 20,000 sqft.
- Marijuana store licenses, up to 4 stores with direct or indirect financial ownership.
- Testing facility licenses, these owners can have no financial interest in any other type of marijuana establishment.
- Manufacturing licenses, issued for the production, blending, infusing and other preparation, including extraction of cannabis.
So who is in charge? Just about everybody. Under section 104.3 the following have their hands in the mix: The Departments of, Alcoholic Beverages, Agriculture, Health, Labor, Audit and Financial Services and of course the Department of revenue. It is also very clear that none of these licenses will be granted without the approval of local municipalities.
Subchapter 4 of the Act states that when it comes to who licenses are granted to. “…a municipality may regulate marijuana establishments within the municipality…”. As set forth, those approved business owners will be granted a conditional license subject to local authorization.
On the accounting side, even though most transactions are conducted with cash, adult use marijuana licensees are required to keep complete business records that are open to inspection by the State. Seed to sale records must be kept for the current year, plus the two immediately preceding tax years. Like medical marijuana businesses, adult use businesses should pay particular attention as to how they set up their chart of accounts, so that costs of goods sold can be accurately accounted for.
Unlike the rules governing the medical side, which require a financial audit, the adult use licensee may be required to submit to an audit. The auditor would be selected by the Department with all costs billed to the licensee. It is curious to me that caregivers are required to be audited, while adult use business owners may be subject to audit.
Taxes on the adult use market include sales tax of 10% on sales to the consumer. It is made clear that it is the retailers responsibility to collect and remit sales tax. Excise taxes paid by growers will increase the overall cost to consumers with tax of up to $335 per lb. of flowering plant, $90/lb. trim, $1.50 on seedlings and $0.30 on seeds.
Adult use growers and manufacturers should waste no time in applying for sales exemption certificates. (The same sales tax exemptions exist for adult use agriculture and manufacturing operations as described in Part I for dispensaries and caregivers.) Note that courts have concluded that sales taxes should be netted against sales and not reported as an expense, so that they are not considered as part of a 280E adjustment.
Business owners will have to consider what entity type is best. It is likely that some form of corporate ownership will be most advantageous but it will vary depending on individual circumstances. Both the new 21% corporate tax rate and the 199A deduction for sole proprietors and flow through entities are applicable but the benefit of both are reduced by the burdensome impact of 280E. Interestingly enough, for Maine income tax purposes, the adult use market is not allowed to deduct normal operating expenses picked up under code section 280E. Needless to say it is wise to consult with a tax professional to decide which entity type is best and to carefully consider the implications of 280E.
The Act also begins to open a window to the future with provisions that expire in 2021 & 2022. What does the future hold? Will cannabis businesses be overwhelmed by federal restrictions? What impact will the Harborside Health Center US Tax Court ruling have on potential investors? Part III of this series will highlight my thoughts on the impact of these and where the industry is going.
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. He can be reached at 207-873-1603.
