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How to Navigate Maryland's Adult-Use Landscape

How to Navigate Maryland's Adult-Use Landscape

While cannabis taxes and banking present challenges, Maryland's new market offers many opportunities as well.

From the moment that Maryland’s voters approved the adult-use of marijuana in convincing fashion, attention turned to Annapolis, where state lawmakers were tasked with finalizing the ground rules of the new market.

Current and prospective entrepreneurs in the industry need to consider the tax implications brought about by the Cannabis Reform Act, the state’s new law establishing a legal adult-use marketplace.

Which tax structure is right for you?

For cannabis businesses, a C-Corp is an attractive tax structure approach, despite the double taxation brought about by the 21% corporate tax rate and taxes incurred through dividends paid out to shareholders. With this approach, potential increases to corporate tax rates would need to be considered.

It is also important to consider the role of IRS scrutiny on the industry – and all that entails. LLCs, while providing flexibility, may cause self-employment tax issues and could open up a member’s personal income tax return to IRS scrutiny from the passthrough.

In addition, the cannabis industry is still illegal at the federal level, as it is classified under Schedule I of the Controlled Substances Act. Businesses engaging in the sale of cannabis are subject to IRS code section 280E, which prohibits the deduction of business expenses (outside of cost of goods sold) for cannabis companies. In practical terms, this could amount to hundreds of thousands of dollars that businesses are unable to deduct. When assessing the potential tax bill for your cannabis business, the impact of 280E can be very significant.

An appropriate multi-entity structure and a diversity of product lines and revenue streams may provide some relief from the severe impact of IRS code 280E. Growers have an inherent advantage over dispensaries in calculating cost of goods sold, but ultimately federal rescheduling of cannabis in the Controlled Substances Act is needed.

It is worth acknowledging that the Cannabis Reform Act sets a cannabis sales tax rate of 9%, which is lower than the rate set in many other states’ cannabis markets.

Additionally, local governments cannot impose additional taxes, nor could they prohibit existing medical cannabis businesses that convert to dual licenses from operating in their area.

What challenges await my business upon market entry?

Clearly, taxation is a challenge for businesses and entrepreneurs operating in the cannabis market, but banking is an additional challenge that should not be overlooked.

Cannabis remains a cash-heavy industry, as banks are greatly limited in their ability to bank with a product deemed illegal at the federal level. Banks have begun to work with cannabis businesses, but federal constraints make the transition from a cash system to traditional banking service a slow-moving process.

New businesses and entrepreneurs need to consider the timing laid out in the new market, especially given the order in which licenses will be granted. For the first six months, existing medical cannabis licensees who pay a conversion fee have access to market participation. The second round of licenses will be granted to “social equity” applicants, meaning those who meet the state’s criteria for residence in areas disproportionately subjected to marijuana arrests or those who attended a college where at least 40% of applicants were eligible for Pell grants.

Expectations should be adjusted accordingly, especially for businesses and entrepreneurs who do not meet the above categories.

Another consideration is the mandatory recreational license that cannabis businesses must purchase upon entering the adult-use market, whether they previously held a medical license or not. While the fee structure associated with these licenses is lower than initial drafts of the legislation indicated, this cost is surely worth factoring into any business plan.

Which opportunities are available?

For medical cannabis businesses in particular, the state’s social equity partnership is an attractive opportunity. Not only does the partnership pursue much-needed equity for Marylanders disproportionately impacted by marijuana convictions, it also can help offset the conversion fee for medical businesses.

Through this program, Maryland’s governor’s office will grant $5 million annually for businesses that provide social equity licensees mentorship, training, and/or shared space or equipment.

Medical cannabis businesses have the advantage of established market presence in Maryland, but this new bill shows clear commitment to expanding opportunities for microgrowers and microprocessors. Per the bill, 100 micro grower and microprocessor licenses are set to be issued, alongside 75 standard grower licenses, 100 processor licenses, and 300 brick-and-mortar dispensary licenses.

It is no secret that medical dispensaries and larger companies are well-positioned, but other prospective entrants into the market should view this bill as an enticing framework.


Written by Dan Ensor. Originally published by Green Market Report.

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