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In late April 2023, shortly after the opening of the first cannabis dispensary in the Capital Region, the Albany Business Review hosted a discussion with industry leaders on what the future holds for adult-use cannabis in New York State. Partner Matthew VanDerbeck was invited to speak during the roundtable as one of the leading partners for UHY’s cannabis practice in New York.
What types of corporate structures have you seen work? And what are some of the common concerns or questions that arise from clients?
MATTHEW VANDERBECK: A number of questions have been coming, partly due to the nature of how the licenses are being awarded. There are cultivators who are in situations where they have existing hemp farm businesses and are transitioning to the THC business and are incurring a number of costs at the prospect of generating income and revenue as a THC-licensed business going forward in 2023.
In most cases, these farmers have been in a pretty simple structure, whether it be an LLC, a single member LLC or an individual business that’s been preparing a Schedule F on their tax return. Others have had multiple partners. They have questions around structuring and how to separate the former business that was not subject to 280E requirements, with the new business that will be subject to 280E in 2023.
There are also questions around, “Okay, what do I do with my existing business?” as well as making sure they properly evaluate and protect their real estate assets and understanding the interplay of those assets with the new, licensed business.
In some cases, those businesses are remaining LLCs. In other situations, we’re recommending they consider converting to a C corporation. It depends on each individual circumstance and the investors involved, but we are seeing a lot of structures that include a C corporation in the cannabis industry.
It’s really just taking a fresh look at the objectives and ensuring your attorney and CPA are reviewing everything to ensure you’re evaluating all the tax consequences based on your choices.
What is New York’s tax structure? And how does it compare to other states?
VANDERBECK: There have been senate bills and assembly bills that very recently moved forward to try to get the potency tax eliminated, and then increase the 9% excise tax on the retail sale to 16%. With the 16% plus the 4% local tax, you end up at 20% tax.
In Massachusetts, they do not have a potency tax, but their taxes are very similar. They add up to about 20% but are slightly different. There’s a 6.25% sales tax, a 10.75% excise tax on retail transactions and up to 3% of local tax. It looks like they’re trying to make things pretty consistent, given the fact that we’re neighboring states.
The other thing to remember is that if you’re selling non-THC sales in New York, you’re still subject to the typical sales tax. That means the customers, clients or license holders will have to make sure they’re filing normal sales tax requirements – as they would have in any other business. They need to ensure they’re filing these excise tax returns, which are done quarterly. And even if there are no sales, they’re required to file them. It’s form MT-222, which is for adult-use cannabis products tax, which you can file through their website.
How important is it early on to model out cash flow aligning with the business plan?
VANDERBECK: It should be a priority. Whenever I look at a business opportunity or talk with clients, one of the first questions I ask is, “Well, how are you going to make money? How will you ensure you have the appropriate cash flow to make this business successful?” There’s such a focus on the investment that has to take place in the beginning, to get things up and running that they lose sight of the cash flow needed to operate the business because you’re not necessarily going to make money right away.
If you don’t factor in cash flow, you could easily be in a position where you think you’re making money, and then when it comes time to pay your taxes, you don’t have the funds to pay them. You also have investor expectations, depending on underlying agreements, and the return on equity and whatever the expectations are for those who’ve contributed to the business. You need to make sure you’re satisfying them.
Lastly, sometimes people are more optimistic than reality. They need to have scenarios and understand that the price of cannabis is volatile and could be subject to change. It’s a good opportunity to understand the risks as well.
What are some of the key differences between the cannabis business and traditional agriculture or retail business?
VANDERBECK: Bookkeeping, in particular, is a challenge in trying to find the right resources and people who have capabilities in the region. You have certain businesses that are transitioning from an existing business or people that are starting new businesses, and you need to have the right systems in place to ensure that you can track everything efficiently. It’s also important to make sure the systems are designed in a way that allows you to provide the information on the output side.
One of the differences between a traditional business and a cannabis business is the extra layer of cannabis monitoring that needs to be complied with. You will need to have someone take a full, integrated look at everything that you have and make sure it’s designed as efficiently as possible.
From a banking standpoint, what should I be doing now as a licensed vs. a non-licensed cannabis business? In other words, whether I’m touching plant or not?
VANDERBECK: If you’re a license holder I would suggest speaking with your bank to gauge their appetite for banking you as a customer. In addition, I would reach out to your professional contacts to lead you into other banking opportunities that are cannabis-friendly.
You need to be clear with your bank about what type of business activity you’re carrying out. It is required for the bank to know their customer and to file certain Bank Secrecy Act filings.
If you’re a non-license holder or indirectly related to the cannabis business, I recommend communicating that with your bank. Because the bank has to decide whether or not you are considered ancillary to the cannabis activity, that is the activity that they need to be concerned with from a banking perspective. Banks and credit unions are becoming more open-minded in working with their customers, and it’s important to put as much as possible on the table and communicate.
What is IRS Form 8300? And why might it be relevant to me?
VANDERBECK: IRS Form 8300 is a form relevant to the cannabis space because cannabis businesses deal in a lot of cash. If you make a deposit over $10,000, the bank usually needs to understand certain things and report them as part of their reporting as a banking institution. For a cannabis company and other companies who also deal in cash, it accumulates information about money that’s being collected greater than $10,000 within a 24-hour period. There are certain rules that apply to that, along with a requirement to file this form and time requirements.
Not everyone is aware of this requirement, and there are significant penalties if you’re intentionally not reporting or if you have a willful disregard. The suggestion is to make sure that you’re aware of the form, the requirements, and again, as part of your procedures and training, that this is covered as part of your procedures whereby if something is missed, at least you can fall back to the fact that you have policies and procedures in place and you’re doing your best efforts to comply.
How can the Capital Region benefit from the cannabis industry?
VANDERBECK: From a business development standpoint, being a new industry is far-reaching as to whom it touches. It’s something new and an opportunity to get people involved. The Capital Region is a pretty stable area, and things don’t change very often too quickly. Cannabis is something that brings excitement, job opportunities, business investments, and hopefully, more economic development.
Read the full interview published by Albany Business Review.
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