Cannabis and CPAs: The business opportunities and risks
Hosted by Neil Amato
- An explanation of the difference between cannabis, hemp, and marijuana.
- More on the cannabis-specific guidance for accountants offered by the AICPA and the National Association of State Boards of Accountancy.
- The professional risks to consider before adding clients from cannabis-related industries.
- The COVID-19 pandemic’s effect on cannabis businesses.
- Why legalization in some states does not mean those states become cannabis epicenters.
- How legislation could change the landscape for cannabis businesses.
Play the episode below or read the edited transcript:
To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.
(Editor’s note: This conversation was recorded in July and has been edited for clarity)
Neil Amato: Joined on the podcast by Ron Seigneur of Seigneur Gustafson LLP in Colorado, we’re talking today on the topic of cannabis, which is a growing opportunity for accountants. Ron, thank you for being on the podcast.
Ron Seigneur: Absolutely. Happy to do it.
Amato: Let’s first define some terms, so we’re clear. What is cannabis? How is it different from marijuana or pot or hemp?
Seigneur: That’s a great place to start, Neil. If a cannabis plant has high THC content, it’s marijuana. If it has low THC content, it’s hemp. And there’s a lot of things that have happened over the last several years in terms of the 2014 and 2018 federal farm bills that have defined what agricultural-grade hemp is. So they both come from the cannabis plant. And there’s a lot of confusion because when people say cannabis, most of the time they’re thinking of THC marijuana cannabis. So they’re kind of used interchangeably.
Amato: Gotcha, thank you for that. Spending on legal cannabis products in the U.S. in particular, what’s the trend, so we can help listeners gauge the opportunity that’s out there.
Seigneur: Great question. First, I’m going to call it cannabis. Unless I say otherwise, I’m referring to legal, regulated marijuana, the THC cannabis. And let’s just maybe, if you don’t mind, THC is tetrahydrocannabinol, one of the cannabinoids that’s in the cannabis plant. It’s the one cannabinoid that has hallucinogenic properties.
And so I think we’re talking about kind of what’s the trend on spending for cannabis that has THC in it. It’s growing. The social acceptance of cannabis is growing, not just in the U.S. but around the globe. There are studies that are done. Arcview is a very well-recognized data analytics company in the cannabis space. And they’re projecting that legal, regulated cannabis will be about a $10 billion industry for the medical segment — this is in the domestic U.S. — in 2022.
And the recreational or adult use, kind of used interchangeably, will be about $10 billion, maybe about $11 billion. But the illicit market is projected to be $28 billion. So while legal, regulated cannabis, both in medical and adult use, is growing, partly because of the additional states that are coming online, the illicit market is also continuing to grow. So overall cannabis is a growing segment, both the legal, regulated side and the illicit side.
Amato: And we’ll talk just a bit more about kind of the trend, and maybe how there are some pandemic-specific trends going on. But first, could you sum up the highlights of guidance, as far as it relates to accountants and from state boards of accountancy. For example, I guess in January 2019, 14 state boards had issued specific guidance. How has that changed, if any, over the past 18 months or so?
Seigneur: In anticipation of that question, I was out looking around the last few days to see if I could find any additional states that have issued some sort of position statement or guidance. The most recent thing I could find is the paper that’s produced by the AICPA and NASBA, the National Association of State Boards of Accountancy, a January 2019 paper titled Providing Services to Businesses in the Marijuana Industry.
And it lists all of the states where state boards of accountancy have issued some sort of a position on licensed CPAs in that particular jurisdiction working with cannabis clients. And I’m a licensed CPA in Colorado. Colorado issued a position statement, I think in November of 2015, that I think is pretty consistent with most of the other state boards that basically says we are OK with licensed CPAs in our jurisdiction working with legal, regulated cannabis businesses as long as you follow all professional standards, including the code of conduct. That you still have to use due care and adequate supervision and sufficient relevant evidence and all of those tenets that kind of [are under] the umbrella over being a CPA in public practice. But it also is pretty clear that it doesn’t give us a get-out-of-jail-free card if the feds come knocking at some point.
So that’s still the elephant that people need to understand needs to be up on the table if they’re considering working on the cannabis space, that it’s still deemed illegal under the Controlled Substances Act, which was passed during the Nixon administration in the 1970s. And in the Controlled Substances Act, marijuana is a Schedule 1 substance, similar to heroin and LSD.
And if you are involved in that, you can be accused of aiding and abetting. So lawyers, accountants, advisers still have the specter of the Controlled Substances Act kind of raising its head at some point. Right now I think there’s a fairly low risk. But that’s the rub that’s out there that people need to be aware of.
Amato: You mentioned that AICPA and NASBA document, and you touched on codes of conduct. So, are the state boards — how much cannabis specifics are they putting in these codes of conduct, if any?
Seigneur: And I have to just use Colorado as my point of reference, because that’s where I practice and that’s where I hold my license. But in talking with other colleagues in other jurisdictions, I don’t think there’s a whole lot of attention being given to it. The key is, it’s a growing industry on the legal side. It’s arguably the biggest states’ rights issue in front of us today.
I mean, there’s immigration and all the other things. But the conflict between states like Colorado, where the voters said we want to allow access to cannabis by vote of the citizens, where it’s legal under state law and still illegal under federal law, has created, frankly, a space where some practitioners may choose to say, “I’m not willing to go there yet, until the federal law is resolved.”
I haven’t seen a whole lot, other than the position statements that each state has issued for CPAs practicing in their particular jurisdiction, I haven’t seen a whole lot of other activity.
Amato: On the legislative side, either state-wise, federally, any movement? What would you say is the state of things on the legislative side?
Seigneur: There are two pieces of legislation at the federal level that are very significant to be aware of. And the most prominent is the SAFE [Secure and Fair Enforcement] Banking bill that would allow federal approval of banking to the legal cannabis industry that was held up in the Ways and Means Committee of the House for a long period. Finally went to the floor of the House of Representatives and passed last September, 421–103, by a larger margin than anybody had anticipated.
It’s now stuck on the desk of Mike Crapo, the senator from Idaho who is the chair of the Senate Banking Committee. And Idaho is one of the four states that wants nothing to do with not only marijuana, but with hemp and CBD, and he controls when the SAFE Banking bill would get to the floor of the Senate.
We were briefed by Rand Paul a couple of months ago, a senator from Kentucky, who told a trade group here at the National Cannabis Industry Association, which is based here in Denver, and it’s arguably the most well-respected nonprofit trade group representing the profession. And Sen. Paul was there for a fundraiser. And he said that if the SAFE Banking bill got to the floor of the Senate, he predicted it would pass also by a wide margin. And he said the Trump administration has already signaled that they would sign it.
So if that SAFE Banking bill gets to the floor of the Senate, it will pass and most likely be signed into law by the White House, would allow federal banking. And you would see Wells Fargo and Chase and Citibank being able to get into cannabis banking. And I think, as do many of my colleagues that work in this space, that that itself would push the federal government to resolve the rest. If we’re going to let Wells Fargo bank cannabis, let’s fix the Controlled Substances Act and figure out whether it’s legal federally or not, as opposed to it’s kind of a chess game right now.
The other piece of legislation is called the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. That’s a piece of legislation that is also stuck in committee in Washington.
The STATES Act would allow states that have passed legal cannabis, like California and Washington State, Colorado and Illinois, if that would pass, they would be out from underneath the Controlled Substances Act. But states like South Dakota and Idaho and Nebraska that aren’t there yet would still be able to enforce the Controlled Substances Act.
So that’s an interesting piece of federal legislation that is, more and more people are saying, you know, maybe once we get past the November election, there might be some movement on that. But that said, I don’t think we’re going to see anything move on either of those bills until we get past November.
Amato: How has the coronavirus pandemic affected cannabis-related businesses?
Seigneur: Incredibly. The phrase that I keep seeing kicked around is cannabis has gone from illicit to essential. In most every state that has access to marijuana, it’s been deemed an essential service and allowed to stay open, with some changes in how they stay open. So it’s gone from being deemed illicit to being deemed essential. And that’s been taken advantage of.
But what’s happened is, each jurisdiction, each state, and each municipality defined what access is, where you can have a dispensary and what hours the dispensary can be open. And most initially said you can’t go inside. So, the first thing that happened is we saw the advent of curbside delivery of the essential service of cannabis.
All the dispensaries in Colorado had drive-through lanes with the bud-tenders. Those are the people like a bank teller, the people actually sell you the cannabis and check your ID. They were doing it at car windows, under rules and protocols that were prescribed by the local jurisdictions. That was very common in most other jurisdictions. But the thing that I think is fascinating is home delivery has taken off in some communities.
Nevada, when the pandemic hit, they closed all the dispensaries, but they said, we’re going to let you deliver 24 hours a day, seven days a week, home delivery. So you go onto the website, you order what you want, and they drive it out to your house or your hotel, and they deliver it like they would a pizza. There’s a dispensary called Planet 13 that’s based in Las Vegas that has 100 delivery drivers in 30 vehicles and they’re planning to add another 20 vehicles that are delivering cannabis, you know, all day every day. And that wouldn’t have happened but for the pandemic implications.
Just as another example, Neil, Los Angeles — California’s had legal access to cannabis longer than any other state, but only roughly 30% of the municipalities throughout the whole state have passed ordinances at the municipal level to allow dispensaries to do business. And one of the places that has had very limited access to legal regulated cannabis is the city of Los Angeles. And there’s a big issue going on with social equity, and we can talk about that a bit.
But they’re in the process right now of awarding 60 what they call nonstorefront dispensary licenses, meaning 60 new licenses in the L.A. area that will just be delivery only. They don’t even have a storefront where you can go purchase it. They’re just licensed to do delivery of cannabis — 60. I think that’s pretty incredible in and of itself.
Amato: That’s a good point. I read a New York Times article. Oh, and I’ll say that we’re recording in mid-July, but the recent to this recording New York Times article talked about the growing sales of cannabis edibles in particular. And it was, as you said, and I’ll read a little bit from the article: “More than a dozen states declared cannabis stores and medical marijuana dispensaries as essential businesses, alongside pharmacies and grocery stores.”
So yeah, it is something that is, you know, people are finding ways to get it, to deliver it. Is the cash or cashless change affecting the business at all? I understand, I may not be correct, that a lot of cannabis dispensaries are cash only? Or were?
Seigneur: Most of them are cash only. Colorado has banking for the most part for cannabis through state-chartered credit unions and community banks that are outside the big federal banks. It’s expensive, but it allows access. Those banks and credit unions have access to move money through the Federal Reserve System, so you can deposit your marijuana proceeds and write checks and electronically submit your payroll.
But you don’t have access to conventional loans like you normally would as a business bank customer. And you don’t have access to credit cards. The industry does not accept credit cards. And I’m not aware of anyplace yet that is accepting credit cards. There’s some experimentation going on with debit cards for marijuana purchases. But most everything is cash.
But even that’s changing. I shop at Kroger, at King Soopers here in Denver. But as of Sunday they no longer, anywhere in the Kroger grocery chain, they don’t give out change anymore. No change is kept in the cash registers at the grocery store. So if you pay for your groceries with cash and you get the bills back, but the change is put onto your Kroger card because they don’t want the cashiers handling change. And I just say that over here because I think things are changing because of the pandemic that are going to implicate how cannabis transactions are done and vice versa.
But for the most part it’s a cash business. It’s incredible how much cash is moved through the cannabis industry. Colorado, it’s a billion-dollar industry, just the regulated, legal side is a billion-dollar-a-year industry. And with cash, I’m surprised there hasn’t been more violent crime chasing big bundles of cash that are moved around. There’s security services like Brinks that are tailored to the cannabis industry that come by and pick up the cash from the dispensary and take it to safe houses or they take it right to the Federal Reserve and drop it off to try to at least get the cash off the streets, so to speak.
Amato: The professional concerns for those working in cannabis-related businesses obviously are numerous. We’ve kind of touched on some of those. But could you go over what’s emerging on the risk front besides the ones that we’ve already discussed?
Seigneur: Yeah, well, our firm does tax compliance work for selected cannabis companies. And again, I’m legal, regulated. We want to make sure that if we take a cannabis client that they are properly licensed under the state. It’s called the Marijuana Enforcement Division (MED), which is part of the Colorado Department of Revenue. It’s a model that has been emulated in other states, in other countries, as a matter of fact. Uruguay legalized cannabis throughout the whole country, and they sent 100 people to Colorado to study the framework that’s used here to regulate cannabis.
There’s a whole system, it’s called METRC, which is an acronym for kind of a point-of-sale system that whenever you’re on the legal side, every transaction, whether you’re growing it, harvesting it, processing it, or retailing it, gets input into METRC every day and reported to the MED. So there’s some really serious protocols to track the regulated sales of cannabis. So, you know, if you’re working in a space, you want to know what’s going on in your jurisdiction.
You know, and I’m using Colorado as an example, but if you’re a CPA in Michigan or Massachusetts or Washington state, find out how it’s regulated. Find out kind of what the license requirements are. Find out who you’re working with, because you want to work with the people that are trying to do it right. Beyond that, check with your malpractice insurance carrier. We use CAMICO. And we’ve interacted with them, and they are, they’re good with it. They have an individual there.
We do a lot of valuation- and damages-related work. That’s kind of what my emphasis is. But you know, it’s, I mean, check with your other partners. Make sure that you consider the impact on other clients, because there’s still a segment of the population that’s like, “I’m not good with cannabis because it’s illegal federally, and it’s just morally not acceptable to me.” So you want to make sure that you go into it with your eyes open.
But I’ll tell you, it’s a $20 billion-a-year industry on the regulated legal side. And they need help. You know, they’re paying a lot of taxes. Some states, like Arizona and Michigan, require audited financials at least once a year if you’re a license holder. So they need CPAs that can do attestation work.
I’ll just mention before I lose the thought, there’s an issue right now that’s emerging. It’s Internal Revenue Code Section 471(c), that allows businesses that are under $25 million in sales to deduct all of their cost of goods sold and not keep any inventory.
And that’s a general provision that came with the Tax Cuts and Jobs Act that was passed into law on Jan. 1, 2018. Many people are looking at the implications of that in cannabis, because of the implications of what’s called Section 280E that limits certain deductions, and saying that there’s an opportunity under this provision to increase some deductions in cannabis space.
And frankly, we just had a big call with a cannabis law attorney yesterday, trying to sort out where we stand on that because our cannabis tax plans are kind of, we don’t want to miss something for them and then be held responsible because we didn’t take advantage of them. But that’s just an example of how things are moving around.
Amato: Right, and those are really good, real examples. This is a big election year. You’ve touched on elections and potential effect. But depending on those outcomes, how much of an inflection point could this be for the cannabis industry?
Seigneur: I think it’s becoming one of those areas where, as we get into the debates and we get closer to the actual elections, more and more candidates are going to be asked, “Where do you stand on legal cannabis?” Much like where do you stand on immigration and where do you stand on other things. It’s a big issue. The framework that Joe Biden just announced, that incorporates what Bernie Sanders has, would legalize cannabis as one of their stated objectives.
The current White House has indicated that, under the proper protocols, they’re willing to legalize cannabis. So I think both parties are kind of moving in that direction. And I’m trying to be totally apolitical. But it’s an issue right now. It’s an issue. Where do you stand on this? And I think more and more people are looking at the — Gallup does a survey and the last one I saw, which is maybe about a year old, 65% of Americans say cannabis is morally acceptable. Whether or not they use it, they say it’s OK if others do.
And I’ll sum it up this way, Neil. I chaired a cannabis law symposium for the Colorado Bar Association. And our keynote was Jason Dunn, who’s the U.S. Attorney for Colorado, the chief federal law enforcement officer for the state under the federal government. And he made a statement, he said, “Look, folks, we tried prohibition and that didn’t work so well.” And he said with cannabis, it’s not going away.
I think everybody agrees it’s going to be here, whether it’s the guy on the corner, you know, that you buy from on a Friday or you go to a licensed dispensary. He said if people are going to buy it, we ought to tax it, test it, and control access to it. So he’s saying, you know, if people are going to be using it, we ought to make sure that they’re buying product that doesn’t have pesticides or fentanyl in it. We ought to tax it, like we do alcohol. And we need to control access to it.
And I think that’s what’s happening in a lot of states. It’s interesting to watch. We’ve got cases now in Nevada, Illinois, Virginia — a medical project we did there. Massachusetts. Watching the states kind of roll out their access to cannabis is kind of fascinating.
Amato: Can you explain the cannabis industry supply chain and the different types of entities throughout that chain, and what opportunities there are for accountants to work with the various players within that ecosystem?
Seigneur: Yeah, absolutely. There are some larger entities that use the term “seed to sale.” That they’re involved in seeds and clones and genetics of growing the different strains of cannabis, cultivating it, harvesting it, processing it, and branding it and retailing it. Those are kind of the sectors, if you will. And each one could use its own discussion. But there are companies that are really good at being vertically integrated. They grow their own product from their own strains and stock, and they process their product, and I’ll talk about processing in a minute.
And they package it and brand it and sell it in their own dispensaries and sell it to other dispensaries. There are others that are saying, “We’re just really good growing it, and we’re just going to be cultivators. And we’re going to sell it wholesale to others and let them do what they do.” There are others, especially in the edibles, that are just saying, “We’re going to be really good at making the best chocolate-infused cannabis or tinctures or drinks.”
And others that are just saying, “We’re just going to retail it. We’re going to buy product from others, and we have a great location, and we’re just going to be retailers.” So it’s fascinating to see kind of the bifurcation that’s going on, both in terms of kind of saying, “Let’s just cultivate,” “let’s just process,” “let’s just retail” and the ones that are saying, “Let’s do it all.” And we’re doing it so well in Colorado, there’s a couple of big-name brands here that are expanding in other states.
So, if you’re a CPA working, it’s like, kind of know those different segments. And let’s just talk for a second about the processing. Because when you grow cannabis, it grows, you know, and you have trim and flower. And in the old days you trim the flower off and dry it out, and you’d sell that. People would take it. They’d smoke it in a pipe or roll it into joints. And the trim was kind of a byproduct that was processed into THC oil.
And now the edibles have become so popular that there’s a movement towards taking whole plants and running them through an extraction process, which in and of itself is fascinating. Because the technology of extraction is changing so quickly, and there are people getting into it because they want to be the best extractor and getting the full spectrum, full entourage, THC that has all the terpenes and essential oils because that’s what people think are the holistic health parts of it.
So there’s just a whole lot of stuff going on in each of those different segments that I think as a CPA you need to kind of understand, “OK, I’m going to be working with a cannabis client, and where are they in that overall spectrum?” Plus, all the ancillary services. All the support services of, we have a client that does nothing but produce the childproof caps and bags and stuff that you put the pot in when you sell it at a dispensary, that are based on local rules.
You know, you can’t sell it to somebody without it being put in some sort of a childproof container, because it’s a drug. And so, all they do is sell the specially designed bags and childproof cap-type stuff. So, just as an example. Software. I mean, there’s a whole bunch of changes going on with the technology of point of sale and that type of stuff.
Amato: For those in public accounting who are in the industry, in the cannabis industry, I mean, what are the best or most common routes to expansion of their service lines, or making it more profitable?
Seigneur: Well, if you’re already in it, I guess you first need to look at kind of where are you in it. Look at the jurisdiction and whether it’s a relatively mature market versus one that’s just kind of kicking off. I would say Colorado’s rather mature, you know? And there’s a lot of people here that are really good at legal issues and bookkeeping issues and the kinds of things we do.
Oklahoma, for example, has just allowed medical cannabis, and it costs $250 to get a license to grow medical cannabis in Oklahoma. And I read that there are 2,500 license holders that are all growing small plots of cannabis. And a lot of people are heading to Oklahoma because they want to be cannabis farmers. But it’s kind of like, be careful, because at some point, Oklahoma can’t support 2,500 cannabis growers.
So, just be careful. There’s a shakeout coming, too, and the consolidation is underway in terms of the smaller operators having a hard time competing with the vertically integrated people that kind of, you know, have it down.
Amato: That’s a good point about Oklahoma. You’re right, probably, because these products can’t go across state lines, that’s correct?
Seigneur: Oh, I’m glad you made that point. Because if we see a change in the Controlled Substances Act, maybe because of SAFE Banking being passed into law — right now you’re correct that if you produce cannabis in Colorado or Nevada or California, you can’t take it across state lines legally. But if those barriers came down and there was interstate commerce, it would have major implications on the industry.
California has an area called the Emerald Triangle, which is the three northernmost counties: Humboldt, Trinity, and Mendocino. They cover about 10,000 square miles. And there have actually been television series on the Emerald Triangle. Murder Mountain was one that was on Netflix. They’ve been growing pot there since the ’50s and ’60s. And estimates are they grow about 12 to 14 million pounds of high-grade cannabis a year in the Emerald Triangle, and 80% of it leaves California illegally and comes to other areas.
So there’s not only the specter of legal interstate commerce happening, but there’s also the specter of the feds starting to crack down more on these illegal grows. People are amazed that there hasn’t been more attention given to southern Oregon and northern California, but the whole economy up there is dependent on it. You create kind of a social crisis if you put those illegal growers out of business. And that’s part of why there’s a $28 billion illegal industry continuing to thrive and grow.
Amato: Ron, thank you. This has been excellent. Anything quickly to say in closing?
Seigneur: Neil, I hope this podcast is helpful for folks. I appreciate the opportunity to do this interview.