Illinois: Pritzker Administration Announces Revenue Figures For First Month Of Adult Use Cannabis

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ILLINOIS: The Illinois Department of Revenue announced that adult-use cannabis sales generated $7,332,058 in cannabis tax revenue during the month of January, with an additional $3,147,928.29 generated in retail sales tax revenue. Governor Pritzker’s recently released budget conservatively estimated the state would collect $28 million in cannabis tax revenue during the remainder of the fiscal year, ending June 30, 2020. Today’s announcement puts the state on track to surpass that estimate.

Once administrative fees are accounted for, 45% of the adult-use cannabis tax revenue will be reinvested in communities disproportionately impacted by the failed war on drugs and used to fund substance abuse and mental health programs. The $3,147,928.29 in sales tax revenue will be divided between the state’s general revenue fund and the local governments where purchases were made.

“Today marks another milestone in the successful launch of Illinois’ legal cannabis industry. Our goal has been to build the nation’s most socially equitable program that includes new opportunities for the communities most harmed by the failed war on drugs. Revenue raised in this first month will soon begin flowing back into those communities to begin repairing the damage done by the failed policies of the past and creating new opportunities for those who have been left behind for far too long,” said Toi Hutchinson, Senior Advisor to Governor Pritzker for Cannabis Control.

The state collects cannabis revenue in two ways: a variable excise rate dependent on THC potency and type of product, and a 7% cultivators excise tax imposed on the sale of cannabis to retailers. Earlier this month, the state announced that over $39 million in adult-use cannabis product was sold at retail stores.

Last Wednesday, Governor Pritzker released his Fiscal Year 2021 budget, which projected cannabis sales would generate $28 million in cannabis tax revenue for the remainder of Fiscal Year 2020 (ending June 30, 2020). As the industry matures, revenues are estimated to grow to $127 million in FY21, of which $46 million will go to General Funds.

Background:

CANNABIS TAX RATES

• Cannabis Cultivation Privilege Tax:

o 7% of the gross receipts from the sale of cannabis by a cultivator or a craft grower to a dispensing organization

• Cannabis Purchaser Excise Tax:

o 10% of the purchase price – Cannabis with a THC level at or below 35%
o 20% of the purchase price – All cannabis infused products
o 25% of the purchase price – Cannabis with a THC level above 35%
o This tax is not imposed on cannabis that is subject to tax under the Compassionate Use of Medical Cannabis Pilot Program Act.

ALLOCATION OF STATE REVENUE

• Minus administrative costs, the remaining state revenue will be allocated as follows:

o 35% for the General Revenue Fund,
o 25% for the Criminal Justice Information Projects Fund to support the R3 program,
o 20% for the Department of Human Services Community Services Fund to address substance abuse and prevention, and mental health concerns,
o 10% for the Budget Stabilization Fund to pay the backlog of unpaid bills,
o 8% for the Local Government Distributive Fund to support crime prevention programs, training, and interdiction efforts, including detection, enforcement, and prevention efforts, relating to the illegal cannabis market and driving under the influence of cannabis, and
o 2% for the Drug Treatment Fund to fund public education campaigns and to support data collection and analysis of the public health impacts of legalizing the recreational use of cannabis.

US Bank Splits With WSLCB; Will No Longer Accept Washington Marijuana Excise Tax Payments

WASHINGTON:  As of October 1, 2016 the Washington State Liquor and Cannabis Board (WSLCB) will be switching financial institutions for marijuana excise tax payments which will have an impact on those licensees using EPay. After the switch the current vendor will no longer be supporting the site, those licensees who have a login with the current vendor (US Bank) are highly encouraged to download any historical payment information needed for record keeping purposes prior to the change to prevent data loss. Licensees will still be able to pay using the traceability system link however some of the functionality on the financial institution side may be different with a new vendor.

What do I need to do?
Those licensees that have historical data with the old vendor are encouraged to download it before the change to prevent data loss. Licensees who do not have historical data or have already downloaded it do not need to do anything. The “Pay Now” function in the free traceability program remains the same.

Why are you switching financial institutions?
The Board’s current vendor, US Bank, has indicated that they no longer intend to accept marijuana excise tax payments.

Why can’t I get my historical data?
Until the change historical data will still be available through the current vendor, after the change the old portal will no longer be supported. Licensees are encouraged to download their historical data prior to the change.

What you need to know about the new portal:

  • The “Pay Now” function in the free traceability program is the same and will continue to be processed through a secure website.
  • Routing and bank account information will be required each time a payment is requested (it will not store this information).
  • Payments are made the same day as posted (cannot be scheduled for a future date).
  • Payments for more than the excise tax obligation amount will be accepted.
  • All transactions will be posted as Pacific Standard Time.
  • The “Pay Now” system is available 24 hours a day except for routine or emergency maintenance. 
  • System notices will be posted when the pay now system is not available and when to try again.
  • Historical payment information will not be available in the new system.

Questions?

Questions regarding the change can be sent to marijuanataxes@lcb.wa.govor you can call the Marijuana Tax line (306) 664-1789.

 

Pioneer Pot States Have Collected More Than $200 Million In Marijuana Taxes

WASHINGTON AND COLORADO: The first two states to legalize recreational marijuana have collectively raked in at least $200 million in marijuana tax revenue, according to the latest tax data — and they’re putting those dollars to good use.

In Colorado, after about a year and a half of legal recreational marijuana sales, the state has collected more than $117 million in excise taxes from both the recreational and medical marijuana markets, according to the most recent data from the Colorado Department of Revenue.

Washington state got a slower start. Its retail shops didn’t begin selling recreational marijuana until July of last year, but they are keeping pace with Colorado’s. About $83 million in excise taxes have already been collected in the year since sales first began, according to the most recent tax data from the Washington State Liquor and Cannabis Board.

 

Feds Propose 50% Marijuana Tax—As A Tax Cut

DISTRICT OF COLUMBIA:  Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question. After all, virtually every business in every country pays tax on net profits, after expenses. But the topsy-turvy rules for marijuana seem to defy logic. And taxes are clearly a big topic these days.

Many have suggested that legalizing marijuana would mean huge tax revenues. As more states legalize it, the cash hauls look ever more alluring. In Colorado, the governor’s office estimated that it would collect $100 million in taxes from the first year of recreational marijuana. In the end, Colorado’s 2014 tax haul for recreational marijuana was $44 million, causing some to say that Colorado’s marijuana money is going up in smoke.

Still, that isn’t bad for the first year. Colorado was first to regulate marijuana production and sale, so other governments are watching. Colorado also collected sales tax on medical marijuana and various fees, for a total of about $76 million. The taxes are significant, but not all the sales are going through legal channels. Perhaps it was silly to think they would.

The 280e Cannabis Conundrum

By  Keith Richards 

If you are in the Cannabis industry and are not already familiar with IRS Code section 280e, then you are likely going to face a rude awakening this tax season.  Even with all the noise about this issue, it is still surprising to find operators that are not paying attention to some basic business principles such as knowing how costs (in this case taxes) will affect their business. It doesn’t mean that you have to become a CPA because the rules are fairly straight forward and there is significant literature addressing the topic.  However, using a trusted advisor to navigate areas of unfamiliarity (taxes and otherwise) would be the most beneficial way to insure that that you don’t go out of business due to the burden of unexpected taxes or worse, end up in jail ala Al Capone.

First, let’s understand the law:

Internal Revenue Code section 280e specifically states “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Whew….what does that mean? The IRS is a group of clever individuals whose job is to maximize revenue to the United States by taxing income.  They are not concerned whether the income was derived legally or illegally, but whether you pay your taxes on the income generated. Federally, Cannabis is still a controlled substance and illegal and therefore falls under the provisions of IRS Code section 280e. Per the provision, unlike “ordinary” companies that are able to deduct expenses in determining taxable income, 280e related entities (Cannabis being one type) cannot deduction normal and ordinary operating expenses.  The result is that a Cannabis related entity will be denied these deductions, will report higher taxable income and of course pay more taxes. This is where many operators are getting themselves in trouble.  They fail to realize and account for the additional tax burden that will be imposed and then either don’t have the cash to pay or simple didn’t know the law and fail under audit. Under 280e Instead of paying a tax rate of 30% or 40% a Cannabis business might end up paying 60% to 90% in taxes.

Second, understand your cost of goods sold:

From a retail standpoint Cost of Goods Sold (COGS) are the costs that a business incurs such as materials, certain labor and the wholesale price of goods purchased that are subsequently retailed.  From a grower standpoint, COGS can include additional components that are directly related to production such as seeds, nutrients, electricity for grow lighting, supplies etc.  COGS is considered an adjustment to revenue as opposed to an expense deduction and as such does not fall under the provisions of 280e.  Consequently, while a Cannabis company cannot deduct operating expenses, it can adjust revenue for cost of goods sold. Therefore, it would be prudent for an operator to have a good understanding all of the components of COGS.

 

Third, develop a strategy:

Given that Cannabis related entities are limited on expense deductions but can adjust for COGS, in order to minimize the tax burden, hiring professional advice is a relatively small expense when compared to the potential exposure.  That being said, here are a few tips that each Cannapreneur should consider and discuss with their trusted advisor:

Diversify your services – consider offering additional services such as Yoga, or meditation, or stress counseling.  You may be able to allocate some of your operating expenses to these other services and take them as deductions against these goods and services.

Use IRS Code 263a to capitalize costs to inventory – Code Section 263a allows an organization to capitalize certain expenses which then become a component of inventory.  Once the inventory is sold and run through COGS these previously disallowed expenses now become an adjustment to revenue (as opposed to a disallowed expense) as a component of inventory and COGS.

Correct legal entity – A regular S-Corp is required to pay a fair wage to the owners and operators of the entity, yet these wages would be considered a non-deductible expense under 280e. On the other hand, a Limited Liability Corporation (LLC) is not required to pay the owner a salary and instead the earnings of the LLC are the owner’s taxable earnings. The owners would report net income allocated as opposed to salary and therefore there is no salary expense that would be disallowed.

Fourth – Stay well informed of potential law changes

In 2011, a bill called “The Small Business Tax Equity Act” was introduced to congress.  Essentially, the bill attempted to resolve the difference between state and federal law allowing for an exemption from section 280e for medical marijuana entrepreneurs as long they were in compliance with State law. The 2011 bill died and was reintroduced in 2013 emphasizing all marijuana businesses but it died as well.  In April 2015, a pair of congressmen (Rep. Earl Blumenauer and Sen. Ron Wyden of Oregon) have reintroduced the bill for a third time. This legislation is gaining widespread support by organizations such as Americans for Tax Reform, the National Cannabis Industry Association, Drug Policy Alliance, Marijuana Policy Project, Americans for Safe Access, and NORML.  Given the amount of attention and support this topic has garnered, there is hope that “third time’s a charm” and marijuana businesses will finally become exempt from 280e.  However, with congress one never really knows.

Finally – change is a constant:

Cannapreneurs need to recognize that the Cannabis industry is going through growing pains in the same way that many other first time industries have developed. There are many factions, special interest groups and profiteers that are each trying to influence the future direction to their benefit and as such the rules to the game are continually changing. For that reason it is important to stay abreast of change and surround yourself with solid professional advice that can help along the way.  Be sure to consult with your tax and legal advisors and make solid informed decisions for the long term.

 

Keith Richards is a successful CEO/COO & CFO.  Currently he is a Partner with the Newport Board Group, a national professional services firm of strategic advisors. He’s also a Director with Integral Edge Partners focusing on high performance leadership transformation and corporate culture development. He is a regular commentator on a variety of business radio programs, keynote speaker and blog author. Keith can be reached at keith.richards@newportboardgroup.com followed on LinkedIn at www.linkedin.com/in/keitharichards and on twitter @KRLeadership.