With cannabis now medically legal in 38 states, and fully legal in 18, a multibillion-dollar market has emerged, and with it a new class of specialized accountants devoted to servicing this burgeoning industry. Yet professionals in this space complain the software used for this purpose remains at least a generation behind what one would expect, lacking many of the features and integrations that accountants in other industries take for granted.
Consider sales taxes. Today, for most industries and businesses, tax software can import client data and automatically calculate sales tax liability in multiple jurisdictions at once because of both the sophistication of the software itself and its ability to integrate with other applications to pass along information. By contrast, trying to do the same thing for the cannabis industry is a more complicated affair, according to Mike Goral, who leads the cannabis practice at Armanino, a Top 100 Firm.
“You don’t have that same capability when it comes to cannabis because you not only have state taxes to be concerned about, but specialized taxes only for cannabis [like the cultivation tax in California and the THC tax in New York]. So it’s very difficult to administer, and unfortunately when you get into these excise taxes, a lot of it is done on Excel spreadsheets,” he said.
A big reason is lack of integration with other accounting systems, which already have powerful automation and analytics capabilities. This lack of integration means data becomes more difficult to process and understand, and drains time and resources due to the use of manual processes to compensate, according to Naomi Granger, founder of the National Association of Cannabis Accounting and Tax Professionals.
“We have to pull out the data and really manipulate the data, but a lot of these [cannabis] systems don’t talk to the accounting systems, so you just don’t have these systems where there’s a direct feed with all your sales and inventory and everything,” she said.
Not helping matters is the fact that some of that software is state-mandated, such as seed-to-sale tracking systems like METRC that are meant to ensure inventory does not wind up on the black market. Andrew Hunzicker, founder and partner of the Dope CFO, said there are “endless issues” in these programs, with data integrity a particularly prominent one.
“We go into METRC and say, wow, you transferred eight pounds to Dispensary A, and then we go to the dispensary and their METRC says they received two pounds. Huh. We find these kind of things all day. We do a lot of inventory counts to make sure there’s no theft or fraud, and so we count 28 plants. And then we see METRC and it says 26 plants. And our accounting system says 24 plants. What’s the truth? The truth is what you counted, it’s what’s there. So we do a lot of reconciliations,” he said.
In this respect, he said, professionals might actually be wary of integrations with the wider accounting system because the data may not be reliable, and they won’t want that data to flow into their other programs.
Granger noted that these issues with data integrity aren’t restricted to seed-to-sale systems, saying there are problems with point-of-sale software as well. Due to the nature of the industry, she said, cannabis industry retailers aren’t always allowed to use more conventional point-of-sale systems, or even Square or Stripe, so they generally need to use software developed specifically for the industry. This software, she said, does not always give consistent data. She mentioned a recent incident where she and a teammate in another city both pulled down the same report, but got two different results.
“There’s a report saying $150,000 in sales, but mine says $100,000 in sales. Which one is right? Our parameters were the same and we were looking at the same period,” she said.
They eventually found the problem: They were in two different times zones, which affected the periods from which the system drew data — one report included data from a prior day, while the other did not. But she noted it took two months for the developer to look into the issue and respond, which isn’t convenient for accounting professionals.
“How can we move forward? We have to do our accounting,” she said. “We have to report things to the state, we have to report things to our bankers, to different regulators, on a monthly and quarterly basis, and if your reporting is not accurate from the point-of-sale system, we can’t do these reports to keep our bank accounts open, to keep our licenses, to pay our state sales taxes. If it takes two months to even get the proper numbers, we’re going to be behind.”
Go straight to the source
Working with the software providers themselves is one way practitioners have addressed these issues, with the best developers able to respond quickly and effectively versus, say, in two months. Armanino’s Goral said his firm is in regular communications with developers who can provide software patches for their needs.
“We work with developers and say this is what we’re seeing in the market and there needs to be a solution to help remedy this problem,” he said.
But this isn’t a perfect answer. Besides the time it takes to communicate with developers, Granger noted they don’t always understand accounting, so even if they want to help a practitioner, they may not necessarily understand what they’re being asked for.
“[In such cases], the dev team was very responsive, and wherever I said, ‘Hey, this isn’t working, we need an update,’ they would implement it right away. So it’s nice to have their ear, and they can implement updates quickly. But a lot of times, they don’t fully understand what exactly I need and I’ll be, ‘This is not really it,’ or they’ll break something else or take away something else and then you kind of feel like you’re asking for too much. But you just want to figure out how to make this report work,” she said.
Failing this, Goral said practitioners will sometimes modify their own programs to make them do what they want, however imperfectly.
“People are taking existing software, modifying it as best they can, to basically fit a square peg into a round hole,” he said. “You’ve got financial reporting systems not talking with each other [because] it’s in a different software language. It would be like a French person talking to Americans.”
Developers are aware of these issues and are working to improve, but Goral said the pressure is growing, because cannabis clients are starting to demand more sophistication in their professional services as the industry grows.
“[Clients] are bringing with them needs and demands for data analytics, to look at this item and say, ‘Hey, this is selling very well — we need to order more,’ or ‘This item is not selling well — maybe we priced it too high and we need to do some cost accounting work.’ Getting into those details is what this industry is evolving into, instead of what has traditionally been a more mom-and-pop type operation,” he said.
Hunzicker was confident that, over time, the issues that currently exist with cannabis software will be resolved, probably within the next 10 years. Granger, though, said practitioners need solutions today, noting that the software issues present major risk for both firms and their clients.
“We’re in one of the most highly regulated industries in the country and it’s really tough,” she said. “A half-baked product could cost someone their license because they don’t fully follow the state regulations. And it’s not like a slap on the wrist. You lose your license, that’s your livelihood. You’ve invested so much into getting it just to have the right thing in place, and risking losing your license is scary.”
