Guest Post: Favorable IRS Ruling – State Excise Tax May Escape 280E Treatment

by Luigi Zamarra, CPA

On July 31, 2015, the IRS released ILM 201531016, concluding that the old Washington State cannabis excise tax may be properly treated as a reduction of gross revenues received. This is a very favorable ruling for our industry as it means that this tax can escape the harsh non-deductibility treatment of IRC Section 280E.

Although this ruling is applicable directly only to old Washington law, it may have far-reaching consequences for cannabis businesses operating in other jurisdictions that also impose special taxes on cannabis business activities.taxbag

As originally enacted, the Washington excise tax is imposed upon all sales of cannabis, at either the producer level, the processor level, or the retail level. As written, the tax is imposed upon each sale. (This law has now been amended so that the tax is imposed only at the retail level.)

The IRS has concluded that businesses may treat this tax as a reduction of Gross Revenues. This treatment is similar to “Returns & Allowances” in that it is a “Revenue Contra Account.” As such, it is not an expense, either above-the-line (Cost of Goods Sold) or below-the-line. Since it may be treated as a reduction of Gross Revenues rather than as an expense, it should escape treatment as non-deductible under IRC Section 280E.

Colorado also imposes a variety of special taxes upon cannabis sales. In California, local cities and counties impose special taxes on cannabis sales too. Although it is not yet clear, it seems there may be opportunities for businesses in these jurisdictions to take advantage of this ruling. This would involve these businesses changing their accounting treatment for these taxes: away from an expense or Cost of Goods Sold treatment and toward a Revenue Contra Account treatment.

Businesses are advised to consult with their CPA for a more in-depth analysis of the application of this ruling to their particular situation.


Luigi Zamarra
Luigi Zamarra, CPA

Luigi Zamarra, CPA, has been a member of NCIA since 2013. Luigi CPA is an accounting firm located in Oakland, CA, that helps all types of businesses and individuals with tax planning, tax compliance, and tax dispute services. Luigi specializes in the medical marijuana industry. He helps these businesses comply with IRC Section 280E so as to balance tax cost against audit examination risk.

*Disclaimer: NCIA does not provide legal or financial services or advice. Any views or opinions presented in this guest blog post are solely those of the author and do not necessarily represent those of the organization. You must not rely on the legal information on our website as an alternative to legal or financial advice from your lawyer or other professional services provider.

Policy Update: Success in the Senate

by Michelle Rutter, Government Relations Coordinator

In the first week of June, the cannabis industry was celebrating its victories in the House of Representatives. At the end of last week, we were celebrating a victory in the US Senate, too.

At the beginning of the month, the U.S. House of Representatives debated the Commerce, Justice, and Science (CJS) Appropriations bill (HR 2578), which funds applicable government agencies for the upcoming FY2016. This year, there were four cannabis-related amendments under consideration in the House: the Rohrabacher-Farr medical marijuana amendment, the McClintock-Polis adult-use marijuana amendment, the Bonamici-Massie industrial hemp amendment, and the Perry CBD oil amendment. You can read about the results of the House votes in this NCIA blog post.capitolblossoms

On June 11, two cannabis-related amendments were brought before the Senate Appropriations Committee. Cannabis champion Sen. Barbara Mikulski (D-MD) offered a medical cannabis amendment, which would ban the Department of Justice from interfering with state-compliant medical cannabis businesses. In addition, Sen. Jon Tester (D-MT) offered a hemp amendment that would protect state industrial hemp laws from the Department of Justice’s interference. These amendments are the Senate companions to the House’s Rohrabacher-Farr and Bonamici-Massie amendments, respectively.

The Senate Appropriations Committee voted with Sen. Mikulski to protect state medical marijuana laws 21-9. Senator Jerry Moran (R-KS) changed his original ‘No’ vote to a ‘Yes’, while presidential contender and Senator Lindsey Graham (R-SC) also attempted to change his ‘No’ vote to a ‘Yes’, but was too late. Sen. Tester’s industrial hemp amendment also passed through the committee via voice-vote.

Victory is sweet, but it’s important to remember that these appropriations amendments only protect states’ medical cannabis and hemp laws for the upcoming fiscal year. As encouraging as the appropriations season has been, it is still imperative that we pass comprehensive cannabis banking and 280E reform bills in order to be treated like every other American business.

Below is the detailed vote breakdown from the Senate committee’s vote on the Mikulski amendment:

Republicans Democrats
Thad Cochran (R-MS): No Barbara Mikulski (D-MD): Yes
Mitch McConnell (R-KY): No Patrick Leahy (D-VT): Yes
Richard Shelby (R-AL): No Patty Murray (D-WA): Yes
Lamar Alexander (R-TN): Yes Dianne Feinstein (D-CA): No
Susan Collins (R-ME): Yes Richard Durbin (D-IL): Yes
Lisa Murkowski (R-AK): Yes Jack Reed (D-RI): Yes
Lindsey Graham (R-SC): No Jon Tester (D-MT): Yes
Mark Kirk (R-IL): No Tom Udall (D-NM): Yes
Roy Blunt (R-MO): Yes Jean Shaheen (D-NH): Yes
Jerry Moran (R-KS): Yes Jeff Merkley (D-OR): Yes
John Hoven (R-ND): No Chris Coons (D-DE): Yes
John Boozman (R-AR): No Brian Schatz (D-HI): Yes
Shelley Moore Capito (R-WV): Yes Tammy Baldwin (D-WI): Yes
Bill Cassidy (R-LA): Yes Chris Murphy (D-CT): Yes
James Lankford (R-OK): No
Steve Daines (R-MT): Yes

Member Spotlight: Pioneer Nuggets

NCIA’s Member Spotlight for the month of May takes us up to Arlington, Washington, to speak with Fitz Couhig, CEO of Pioneer Nuggets, an indoor craft agriculture company that supports the adult retail consumer industry for cannabis in Washington State.

Cannabis Industry Sector:Circle

Cannabis Cultivation

NCIA Member Since:

2014

How do you uniquely serve the cannabis industry?

We focus on the core competency of making a quality flower product for consumers. Focusing on a core competency and providing effective just-in-time inventory services are setting us apart. Our assembly-line work flow and perpetual production that supports our made-to-order inventory management system are unique as well.

Why should customers buy cannabis grown by Pioneer Nuggets?

Black Haze cannabis strain, grown by Pioneer Production and Processing, LLC
Black Haze cannabis strain, grown by Pioneer Production and Processing, LLC

We serve consumers over the age of 21 that enjoy cannabis and visit an adult-use (+21) retail shop in the State of Washington. Adults should go with Pioneer Nuggets because they enjoy cannabis that is smooth and high in flavor profiles.

Can you give us some insight into the cannabis community in Washington, the challenges, upsides, and where you’d like to see it go?

The most unique challenge is being a wholesaler. No other taxed and traded system involves wholesaling and distribution, and we are required to do it without the help of any other organization. Serving retailers is what we do. We would like to see the industry move in the direction that allows retailers, processors, and producers to all thrive. We need tax reform and we need to be treated like normal businesses.

The Pioneer Nuggets team, based in Arlington, WA
The Pioneer Nuggets team, based in Arlington, WA

How many employees do you have and how many customers do you serve?

We have 18 full-time employees and serve around 25 licensed retailers. It takes a lot of great people to continually make sensational products and provide excellent customer service.

Why did you join NCIA?

We joined NCIA for two reasons. One, the organization structure is well designed to develop a quality trade association for the cannabis industry we are a part of. Two, the team of people responsible for the NCIA and supporting its efforts and mission. We believe NCIA will succeed in creating the standards and forums industry professionals need, that our employees need, and that our organization needs.

Contact:

Pioneer Nuggets Website

Pioneer Nuggets Facebook

Pioneer Nuggets Twitter 

Guest Post: Tax Time – Using an LLC To Minimize Section 280E Selling Costs

By Luigi Zamarra, CPA

Are you a distributor or retailer of cannabis products? If so, you incur lots of expenses that could be deemed subject to Section 280E of the federal tax code: all of your sales, advertising and delivery costs. One of the largest categories of these expenses is wages & salaries.

Luigi Zamarra, Luigi CPA
Luigi Zamarra, Luigi CPA

CHOOSING YOUR COMPANY’S LEGAL ENTITY

Although there are many legal considerations when choosing the right type of legal entity for your business, one consideration that is often overlooked is Section 280E. Corporations, including S corporations, are required to pay reasonable salaries to owners and officers working in the business. By “reasonable” in this context we mean a certain minimum salary amount. This requirement is due to Social Security tax issues that are beyond the scope of this article. The point is that owners must draw a salary and if that owner is involved in selling, marketing and/or delivery, then these salaries are subject to disallowance under 280E.

IS A LIMITED LIABILITY COMPANY RIGHT FOR MY BUSINESS?

A Limited Liability Company is different in this regard. There is no requirement to pay a salary to the business owner who works the business. Instead the net profit of the business is the income reported by the owner. (This applies to both single-member LLCs as well as to multi-member LLCs that are taxed like partnerships.) When owners report net income rather than salary, then they have no salary expense to be disallowed under Section 280E.

CONSULT YOUR CPA

Note that this benefit does not have to be limited only to the founder-LLC member. It is possible, with proper advice and planning, to create an LLC structure whereby all of the workers get treated as LLC members. Such a structure could substantially reduce your 280E expenses and give you the competitive advantage you need to succeed.


Want to learn how to navigate the complex tax & legal landscape of the growing cannabis industry? 
Join us for NCIA’s first Cannabis Tax And Law Symposium on January 21-22, 2015 in San Diego, CA, offering CPE and/or MCLE credits to attorneys or accountants that attend to learn more about these important topics! Register today.

Luigi Zamarra, CPA, has been a member of NCIA since 2013. Luigi CPA is an accounting firm located in Oakland, CA, that helps all types of businesses and individuals with tax planning, tax compliance, and tax dispute services. Luigi specializes in the medical marijuana industry. He helps these businesses comply with IRC Section 280E so as to balance tax cost against audit examination risk.

*Disclaimer: NCIA does not provide legal or financial services or advice. Any views or opinions presented in this guest blog post are solely those of the author and do not necessarily represent those of the organization. You must not rely on the legal information on our website as an alternative to legal or financial advice from your lawyer or other professional services provider.

D.C. UPDATE: The November Election, What Comes Next, and Welcoming a New Staffer

By Michael Correia, NCIA Director of Government Affairs

As we come up on Halloween, I can’t think of a more fitting holiday to give a DC update (as most things coming out of Congress tends to scare us all!)

The election is just around the corner and, in addition to determining the make-up of Congress, there are four very important marijuana ballot initiatives voters will be deciding on. Voters in Alaska, Oregon, and Washington, D.C. will be voting on some form of an adult-use, tax-and-regulate structure (similar to Colorado), and Florida voters will decide on legalizing medicinal marijuana. The passage of all four, in addition to being positive developments in the states, would certainly help our work in D.C. Members of Congress are self-interested and they care about their states and their districts. When more states legalize marijuana, it makes my job easier, as it forces more members of Congress to address the issue.

After the election, Congress will come back for a very short (two week) “lame-duck” session. In that time, they will vote on party leadership posts and determine committee chairs, in addition to funding the government. Because the two issues NCIA members care most about are 280E tax reform and resolving the banking issue, the committees of jurisdiction in the House are the Ways and Means Committee and the Financial Services Committee. In the House, it’s a near certainty Republicans will stay in control; so for Ways and Means, it’s looking like Congressman Paul Ryan of Wisconsin will be Chair, and for Financial Services, it’s looking like Congressman Jeb Hensarling of Texas will be Chair (although both will be challenged by other members). Neither of them have been supporters of marijuana policy reform in the past and have voted in opposition to our amendments when they were on the House Floor earlier this year.

Control of the Senate is still up in the air, and it will come down to 3 competitive seats. The results should be known soon after polling places close, but in Louisiana, if no candidate receives over 50%, then a run off election is held in December. So it is conceivable that control of the Senate may not be determined until December 7. Exciting times indeed! The committees of jurisdiction in the Senate are the Banking Committee and the Finance Committee, and Senate Chairmen are picked based on Committee seniority.

Halloween also happens to be my one-year anniversary with NCIA! And what a year it’s been. I feel as if so much has been done in the past year, but there is so much more to do. I look forward to the upcoming year and am even happier to say that our DC operation is expanding. NCIA has hired Michelle Rutter as our new government affairs coordinator. Having her on board will make me more efficient and effective in my job and will allow me to focus more on strategy, fundraising, advocacy, and taking NCIA to new levels.

Prior to working for NCIA, Michelle was a Research Analyst at a government affairs firm in Washington, DC, where she analyzed and tracked legislation on numerous issues. Michelle graduated from James Madison University in 2012, receiving her Bachelor of Arts degree in Political Science with a minor in History. During her studies, she held a year-long internship with Virginia House of Delegates member Tony Wilt. There, she communicated with constituents, businesses, and government officials alike, facilitating meaningful conversations. Michelle was also a member of a pre-law fraternity where she planned events and hosted social functions that sought to encourage long-lasting professional and personal relationships with members. A native Virginian, Michelle currently resides in the Washington, DC, suburb of Alexandria, VA.

D.C. Update: Congress Takes a Minimalist Approach on Marijuana (and Everything Else)

U.S. Capitol DomeAs Congress starts winding down what many pundits have described as the least effective Congress in history, marijuana proponents can still celebrate modest successes this year and look forward to carrying our positive momentum into 2015.

For the first time in history, the House of Representatives passed pro-marijuana legislation. Unfortunately, the Senate will not take up the legislation, due to inter-party bickering. And although lawmakers just returned from thirty-seven days of recess, they are expected to be in session for as little as seven legislative days before going home for the November midterm elections. In those few days, Congress is expected to pass a spending bill that will fund the government until December, but is not expected to vote on any issues related to marijuana legislation. They are expected to convene after the election for a “lame-duck” session in November, and depending on the schedule, NCIA is planning to hold events in D.C. at this time.

This midterm election is anticipated to have low voter turnout, and it is expected that the House of Representatives will stay in Republican control for the next two years, while it is highly likely that the Senate will change hands and become Republican-led as well. Although our policy positions tend to be supported more by Democrats, we have many members of both parties supporting our issues, and we continue to make inroads with Republican offices.

Now is the perfect time for our industry to lay the groundwork and start building goodwill into next year, as marijuana issues are on the ballot in Alaska, Oregon, and Florida. Marijuana policies have not traditionally been high on politicians’ radars, but this year has seen a tremendous spike in attention and recognition of our issues. That means it’s imperative for our industry to continue becoming more politically engaged. It also means that we must continue to be active in our communities and show our neighbors and leaders the positive public face of the industry.

With two months to go before the elections, many politicians will be back in their districts doing campaign events, and all NCIA members should use this link to find their Members of Congress and attend any local events they are hosting. If your elected officials are supportive of our issues, make donations to their campaigns and help them get re-elected by volunteering on their efforts. If they are opposed to our issues, work for their opponents. We are right on the policies, but the reality is politicians need to get re-elected, and the people who help make that happen are much more likely to get a positive response in D.C.

I plan to do the same thing here in D.C. In fact, once I finish writing these words, I’ll be off to attend a fundraiser for Senator Mark Udall of Colorado and Senator Mark Begich of Alaska.

Michael Correia is NCIA’s director of government relations, based in Washington, D.C. Find out more about NCIA’s federal policy objectives.

NCIA Board Plans Future for Industry’s Trade Association

By Aaron Smith, NCIA executive director

Troy Dayton in SeattleThe National Cannabis Industry Association’s newly-elected Board of Directors met last week in Seattle to receive presentations from staff and provide strategic direction for the organization’s core efforts.

One of the primary responsibilities of the board is to oversee NCIA’s financial affairs, which are very healthy as membership rolls have reached nearly 700 cannabis businesses midway through the year. NCIA’s revenues are 10% over the projections for Q1 and Q2 and spending is on target. The success of our national conference and growth in membership have allowed NCIA to hire an additional events coordinator who will assist the organization in building out a robust agenda of educational and networking events for members.

The board also received presentations from Deputy Director Taylor West and Director of Government Relations Michael Correia on NCIA’s communications and lobbying efforts, respectively. NCIA and the cannabis industry have garnered more media attention in 2014 than ever before, raising awareness of the positive contribution responsible cannabis businesses make to the national economy and growing public support for the federal and state policy reforms needed to advance the regulated industry across the country.

The addition of a full-time staff lobbyist at the end of last year has allowed us to provide more political representation in Washington, DC than ever before. NCIA’s director of government relations has already made contact with every congressional office and has personally met with over 200 House offices and 30 Senate offices to build support for amending the 280E provision of the tax code as well as reforms to banking regulations so that the cannabis providers will someday (hopefully soon) have access to basic financial services all other industry’s take for granted.

A former Republican Hill staffer himself, Michael Correia, has focused primarily on building relationships with conservative members of Congress and appealing to them on issues of states’ rights and limited government. This effort helped lead to the Republican-controlled House of Representatives voting for the first time to block federal resources from to be used to undermine state medical marijuana laws or penalize financial institutions for doing business with state-legal cannabis providers.

The board  also collectively donated over $8,000 to NCIA’s federal PAC during the meeting so that the industry can further support candidates that support our issues in the months ahead.

Before concluding the meeting, board members re-elected Ean Seeb of Denver Relief as the board chairman and elected John Davis of Northwest Patient Resource Center as vice-chair.

The future is bright for the cannabis industry and its trade association but there is still a lot of work that needs to be done before our members are treated fairly under federal law. As NCIA grows, we will continue to dedicate resources to important government and public relations work as well as building a culture of responsibility and political engagement within the industry.

Guest Post: Starting a conversation on 280E reform

By Hank Levy, Bridge West, LLC

This is the first of a series of blog posts that Jim Marty and I will do for NCIA. We will attempt to talk about our latest thoughts on the highly technical subject of 280E tax reform without boring you.

The latest development, of course, is that a new case just went up to the U.S. Tax Court. This was for the Canna Care Dispensary in the Del Paso Heights of Sacramento, California. Those of us experienced in the cannabis taxation field are extremely nervous about this case. None of us know Canna Care’s lawyer or their tax preparer. They are using religious beliefs as a defense against tax law (difficult!). And the judge is the same as in the Olive v. Commissioner of Internal Revenue case, which went very badly for the medical marijuana industry. The decision probably won’t be rendered for at least six months. As the Canna Care proprietors might say, let’s pray for the best.

Is there hope?  In future posts, we are going to discuss some ideas we have about 280E:

  • The definition of trafficking, and seeing if this can help us.
  • How other “criminal activity” is handled in tax law.
  • The role of counseling and education in reducing the 280E problem.
  • How the new FINCEN regulations on banking may give us some ways to maneuver around 280E

So, stay tuned.

Hank Levy is the owner of a CPA/Consulting Firm in the Rockridge section of Oakland California, in existence since 1990. The firm specializes in income tax planning and tax compliance for individuals, corporations, partnerships, LLCs, trusts, estates and non-profit clients. It also does training/consulting on QuickBooks as well as prepares financial disclosure reports for political campaigns. Hank and his partner Jim Marty make up Bridge West, LLC, a firm providing expert business & tax consulting for the legalized marijuana industry.

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