Naomi Granger discusses the latest developments in the industry, and what accountants and tax pros who serve it need to know.
Transcription:
Dan Hood: (
Welcome to On the Air with Accounting Today. I'm editor-in-chief Dan hood. You know, since March of 2020, the pandemic has eclipsed a lot of big stories. And one of those was the rise of the cannabis industry with state after state legalizing marijuana in one way or another, and accountants discovering that was a, a growing business with some very serious tax and accounting issues that it needed professional help with. Uh, you know, the pandemic aside cannabis is still a big story. It's still going on. Legislation is, uh, is continuing the industry's growing. It's changing in a lot of different ways, uh, but it's still remaining a major opportunity for accountants here to talk about. All of that is, uh, is Naomi grand. She's a CPA and the founder of the national association of cannabis, accounting and tax professionals. Naomi, thanks for joining us.
Naomi Granger: (
Thank you so much for having me I'm I'm ex excited to be here.
Dan Hood: (
It's uh, this is an exciting topic there's and like I said, it's sort of, at least for, I think for a lot of people sort of dropped off their radar with the late unpleasantness with the, the pandemic. Um, but, uh, there's still a lot going on there. I wanna sort of start by diving in what's what's uh, what are the big trends you're seeing in, in the cannabis industry as a whole?
Naomi Granger: (
Yeah, absolutely. So, yeah, for, for some people it may have dropped off, off their radar, but it has been on my radar for the last four years. Um, I've been in the, in the cannabis industry and what I've seen from the pandemic is cannabis was deemed an essential service during that time. So cannabis operators got to keep their doors open. So this kind of legitimize this business to many people in this country that at cannabis is here to stay. Um, so in the past a lot of accountants, um, a lot of professionals didn't think that it was gonna be around. They may have thought, you know, this is not a, a good industry to get in who really it's, it's too variable. It's not, um, federally legal. I don't wanna take my chances, but the fact that it was deemed essential, we're able to see that it's here and not only was it deemed essential. So many more states came on board subsequent to the pandemic. And so we have, um, exciting things going on in New York. They're expected to hit over a billion dollars in sales within their first year of legalization and then followed by that is New Jersey. And they're expected to hit about, um, 0.7, 5 billion in sales. And Virginia is also coming on board at a half, a billion dollars in sales all within the first year of, of legalization in these states.
Dan Hood: (
Wow. I didn't, uh, I had no idea that I knew it was a big, uh, opportunity realize it was quite that large, but I guess that makes sense, right? Because those are, you know, in many cases it's hitting huge states, right? New York to say, uh, Virginia, big, big states, the lots and lots of opportunity. And again, tons of tons of accounting issues. And I hadn't realized it was established as essential. I knew a lot of individual people whose names I will not name, uh, who felt that it was essential for them, for their, their personal mental health get through the, uh, the pandemic. But, uh, I hadn't realized it was, uh, deemed essential, you know, sort of officially, which, uh, explains a lot, right. I mean, uh, why it was able to, to, into operating through the pandemic and to continue growing and to keep up the levels of, of legalization. Um, and it's at the point now where, I mean is the expectation that it will be, you know, sort of legal in every state, obviously there's still the federal, uh, issue, but is, you know, do we have a timeline roughly for, uh, expectations of, of, you know, most states or all states having it, uh, legalized?
Naomi Granger: (
Yeah. So I don't think we have a firm timeline. However, since I started in 2017, there were only about 23 legal states in, just in the last four to five years. We're at 37 legal states, which are medically legal. And then of those 37, 18 of those are adult what we call adult use. And when I started about four years ago, there was only eight. So it is, it has a it's it's legalizing pretty rapidly in all the states. I don't see it going federally anytime soon. However, the states are coming on board because they're seeing the benefits of being able to collect tax revenues from this, from this industry.
Dan Hood: (
Well, and that all of literally every word you just said is a perfect example of why this is a huge issue for accountants, right? The variation among the states, uh, is a huge issue. Uh, the variation in, you know, what, what, what a state is recognizing what it's not medical versus, uh, adult or, or some people say recreational, but I guess adult is the industry term. Um, uh, and then the tax issues. These are all perfect examples of why, uh, it's a huge issue for let's put it way, why it's a great opportunity for accountants, why they really need accountants and tax pro. Maybe we can dive a little bit more into that, uh, you know, explain a little bit more about why it's a natural opportunity or, or why there's put it like said different way. There's a natural need for tax and accounting expertise, uh, in the industry.
Naomi Granger: (
Yeah, absolutely. So this industry is heavily regulated and it's extremely specialized. It's state legal and federally illegal. So with it being federally illegal, a lot of the talk out there, and a lot of the occasion out there is two 80 E uh, cannabis is subject to two 80 E you cannot write off any operating expenses. However, you can write off cost of good sold, but then that's dependent on if you're a producer or a reseller. And then there's these special codes that tell you how much, um, how much you can allocate to cost, depending on your area of, of the, depending on which vertical you are in. However, when it, um, comes to state, there's not a lot of education out there and they're, they're still taxed by the state. They have the excise tax, they have the marijuana retail tax, they have sales tax, they have, there's a number of different taxes and every single state is different. And so it's important that accountants understand, you know, their states and they understand how those companies are taxed, because that can mean the difference between your operator, keeping their doors open and having to shut their doors down because they have this huge tax bill that they weren't anticipating. And wasn't in you as the accountant, didn't understand it and you didn't properly. But for that, and now your cannabis operator cannot continue operating within their state legally
Dan Hood: (
And the tax. I mean, the, the, the tax systems vary insanely from state to state. It seems to be the, the few times I've looked at it made my head hurt and I stopped looking, but they really seem wildly different. I think we will talk a little bit more about that, but, but there's also compliance regimes in a state, right? There's the, uh, seed to sale sort of requirements for, um, uh, all that sort of stuff. Do you see accountants playing a role in that?
Naomi Granger: (
Yeah, absolutely. That's a very important role that accountants need to play. And first, I just wanna talk about the difference between the states and the, the taxes. So some states tax based on potency of the plant. So depending on the level of THC, that's how you're going to be taxed. Some states tax based on, you know, sales volume. Um, so they have just different things, weight of the plant. There's so many different, different ways that they're tax, um, in this plant. Um, but yes, and then there's also compliance issues. So when the regulators come and they're auditing these, which they do regularly, the state regulators come at a minimum on a quarterly basis, but they're looking at the inventory levels. And they're ensuring that, that what they see in the store is what's being maintained on the state mandated system. So metric is one of the most popular ones that I've seen in all the states I've worked in there's, BioTrack, there's also MJ freeway.
Naomi Granger: (
And these are seed to sale track and trace inventory systems that are maintained by the state. And the purpose of the system is to ensure that none of the plants, um, leaks into the black market. So they wanna ensure that everything that you grow is actually being sold to an end user within the legal market. And so the regulators will come and, and look at your metric reports. And if what's in your store, doesn't match, then you're going to have some fines. You're gonna have penalties. You may even have to shut your doors down there. There sometimes might be a daily fine $500 a day until you get this fixed or shut your doors down until you get this fixed. There's a lot of significant penalties if you're not compliant with the state. Gotcha.
Dan Hood: (
And that's, while it's not necessarily strictly speaking attacks or accounting issue, that kind of system, that kind of internal control, uh, sort stuff is a natural place for accountants to, uh, to bring expertise. Cause a lot of the people who go into now, stop me if I'm wrong about this. My impression of it, there's a lot of folks going in, there are some people who go in very well prepared and very understanding of, of, of what the, the cannabis industry is like. But it seems like there's a lot of other folks who go in with no idea, no idea of what it means to, uh, to be fully compliant with these systems. And they're the kind, you know, it's just as with small businesses or business anywhere, they're gonna look to their accountant for advice, even if it's not strictly speaking a tax or accounting issue.
Naomi Granger: (
Correct. Yeah. So with these state mandated systems, the accountant should have a three way match set up where they are looking at the inventory manifest from the seat to sale system, the invoice that the client received and, or the, the PO as well as the POS system, to make sure that the amounts were imported into the, um, records into the POS system for your client properly. Because at the end of the day, the accountant will be pulling down your POS reports in order to report sales in order to report inventory. There's no with, with cannabis, some of the things that are kind of shocking you get in there, you can't just push a button and have a direct feed into your accounting software with sales and inventory and bank is reconciled and everything is done. There's a lot of download and upload and, um, between systems cuz a lot of these systems aren't integr at this point.
Dan Hood: (
Uh, yeah. And this is another thing I've heard jumping, you know, the technology around a lot of this because it's so new. I mean you told the, the timeline we look at in terms of, you know, 2017 is relatively recent, 20, 60, relatively recent. Uh, there hasn't been a lot of time for these systems to be developed. Um, so one of the things we hear is that the technology is still, still, uh, still fairly new and any te that's that, and it was gonna have bugs or problems or integration issues and that sort of thing.
Naomi Granger: (
Yeah, absolutely. And I've seen it all. And a lot of times people come to me and they're like, which system should I pick? And it's almost like you just need to, to pick one because they all have their own issues. They all have their unique bugs and kinks. And there's no at this point, no perfect system out there that will not have a problem. And so as an accountant, that's the reason why we get to charge a little bit higher fees. That's the reason why it takes a little bit more time. We have to do a little bit more due diligence and we have to be able make sure that we're pulling down reports and reconciling these reports. And so it's not, as, you know, as I mentioned earlier, you can't just push a button and have a beautiful set of balance sheet in P and L you need to push a button, you need to, you know, download the report. You need to count the inventory in the store and then make sure that things are all reconciled and then do your upload and double check and triple check that numbers are going into each system properly and that you have an accurate set of books.
Dan Hood: (
All right. Um, well I think we that's equally terrifying for accountants, uh, but also hopefully we explain why, why it's, uh, it's a great opportunity. I'd like to dive a little, a lot more into, you know, uh, what would go into building sort of an accounting practice or tax accounting practice for, uh, for cannabis industry clients. Um, we're gonna do that in a minute, but we're gonna step away for just a second right now. All right. And we're back with Naomi Granger of NA hats, uh, talking about, uh, uh, cannabis and the cannabis industry and the opportunity at reference for accountants. And I'd like to turn, as we said, uh, to, to what accountants should be thinking of, if they're looking at building a practice and I think one of the first questions just sort of, you know, we've talked about some of the, the intricacies and weirdnesses and unique aspects of the cannabis industry for tech, for accounting and just in general, but are there things, you know, what's, uh, what's the most surprising thing you think an accountant's gonna find when they go into, to looking at the cannabis industry?
Naomi Granger: (
Yeah. So a lot of time, many accountants, anybody who's looking into the cannabis industry, they have an idea and they know that banking is limited, but what was the most surprising thing to was, you know, knowing that, but then actually walking into a dispensary and seeing that they are keeping their records or not their records, but doing their banking under the envelope system. So you go into their vault and they have, this is for payroll. This is for rent. This is for vendor payments for inventory. And that's how they're managing it at this point without banking. So that was one of the most shocking things. And so having to, it was like an eight month process to get the bank account up and running. And then once you get the bank account up and running, there is a huge transition as the accountant because eventually the accountant needs to take that over. You do not want your 20 something year old, but tender with an envelope for payroll for your store. So that was one of the most shocking things just in real life while you can think about, oh, there's no banking, but actually seeing what it takes without banking to run a multimillion dollar business is absolutely bananas.
Dan Hood: (
Right, right. Uh, first off bud tender, I've never heard that. I like that. I gotta remember that. Um, but also I, you know, I remember reading at some point and I don't know if this issue has been resolved cuz this was pre pandemic, but they were talking about, you know, that the IRS in Colorado, uh, didn't have enough facilities to accept cash payments. Right. Cause even though, you know, there's the IRS, it's not legally recognized that doesn't mean the IRS doesn't expect you to pay tax on it. Um, so, you know, and they were like, we don't have enough places for people to show up with, you know, uh, a truckload of cash to be counted into the IRS paid that way. And they couldn't obviously can't do a check cuz you can't get a, a bank account. Um, so yeah, it's, it's full of weird things like that. Um, and, and I think, you know, my next question is, um, apart from listening to podcasts like this, uh, you know, where do people, where can people, what do people need to know when they want, if they wanna look at starting a practice like this and where can they get that sort of knowledge.
Naomi Granger: (
Yeah, absolutely. So I think any accountant who's looking to go into cannabis, you definitely need training. I mean, there is a way that you can figure it out yourself, but there's a higher risk when it comes to cannabis because you can risk your clients' business by not doing things correctly. And so it's important to get yourself connected with training and connected with other experts in the industry so that we can bounce ideas off of each other. And some of the trainings that we provide, um, recently released calculating cannabis is a step by step guide on how to do cannabis accounting. What do your SOPs look like? How do you handle payables? When some of them are cash, some of them might be a check. Some of them, you may have a debit card if you have of a bank account and you're trying to reconcile all your payables and keep track of all these different types of payment methods. Um, so everything that you need from onboarding a client to, um, doing everything that you need for them, as far as SOPs inventory cash SOPs is there. So I would seek out training professional training if you wanna get into this industry.
Dan Hood: (
Gotcha. Yeah. It's definitely not something you'd be like, ah, it's just another small business or it's just another business client to take on. It's a, I mean, there's a lot of niches that accountants serve already, but it's got its own very specific things. You don't wanna just jump into it. Um, and this brings up a question. We were talking about the diff the, the extreme differences between, uh, from state to state. And there's also, there are a lot of different parts of you think of it all as just growing or, uh, um, um, I'm going say infirmaries, that's not the word to book for
Naomi Granger: (
Dispensary dispensaries.
Dan Hood: (
Thank you. I dunno, I couldn't, I couldn't get dispensaries into my head, but anyways, you know, we think of it it's that, but there's, there's a bunch of other businesses. There's transport, there's security, there's grow lights, there's all kinds of facility builders. There's all kinds of different aspects. There's private equity coming through it, all that sort of thing. And I, if you're an accountant looking at this, um, you know, how broadly or how narrowly do you think it makes sense for an accounting firm to, to structure its practice? Should it be just focused on their state? Should it be just focused on one part of the industry? Uh, or should they be like, yeah, we, we know what accountant, what, what the issues are for, for cannabis so we can serve anybody in the, the space.
Naomi Granger: (
Yeah, absolutely. So cannabis has niches within the niche and you can, you can specialize when it comes to cannabis. It's not the type of industry that you go into. Like if you're a small accounting firm and you're working with local restaurants or you're working, working with local chiropractors, you can pretty much do everything for them. Um, from soup to nuts, you can handle all of their financial needs, but when it comes to cannabis, you're not gonna be able to do that. So you can specialize. So these cannabis operations. So first of all, the supply chain, we, we touched on that little bit because it's only state legal, the entire supply chain has to happen within the state. You can't have a cultivator in, um, Oklahoma, who's supplying product to a retailer in Nevada, who's selling it out of Nevada. You have to grow and sell to the end user within your state.
Naomi Granger: (
And so we call all the supply chain verticals, um, in the cannabis industry. And so the cultivation is the very beginning of the supply chain and that's where you put the plants in the ground and you're growing. And then the next stage could be going into manufacturing and processing. And that's when they turn it into edibles or tinctures or waxes and different things like that. Um, the manufacturing, or you can take that directly to the dispensary. So the dispensary buys product both from the grower, the wholesaler. So they sell just, um, bulk flour. Um, and then they also buy tinctures and edibles in, in different things from the manufacturers and the producers. Um, and they sell that at the dispensary. And then you also have D distribution and this is B2B. So from the wholesaler to the manufacturing or to the retail operator, that's a distribution license.
Naomi Granger: (
And then you also have delivery license and that's B2C. So from the retailer, from the wholesaler, you're going to the very end user. So there's so many different avenues, um, when it comes to the supply chain for cannabis and when you are specializing in cannabis, you can also, so these businesses are not your, you know, if you're thinking about a small cannabis depending on your state, but they can go from zero to three to 5 million within the first year of operations. I know the ones that are going legal in New York are definitely gonna Surpas that within their first year of operations. And when you think about a multimillion dollar business, a lot of times you don't go in there and do everything from soup to nuts, you can't do everything. Sometimes you may just go in and you're gonna be the payroll, the payables clerk, or you may be the payroll processor or the revenue person.
Naomi Granger: (
Um, so you can even specialize there and just be the person who understands valuations for cannabis or the person who understands, um, payables or banking or setting up their it and making sure their accounting systems and everything is set up. So it's such a huge industry. It's a 30 billion industry in 2022. Um, there's just a lot of different ways you can go. So I preach to my, the people that I work with that, you know, do accounting the way that you love, like do the things that you want to do. And I know there's a lot of accountants who love what they do, but they just hate the payables piece or they just hate the bank reconciliations, but do it all well with cannabis, you can kind of niche down into whatever practice you, you prefer to do.
Dan Hood: (
Nice. Yeah. Yeah. Accountants do find themselves stuck with a lot of stuff they didn't wanna do cuz they wanted to do that thing. But then the client asked 'em to do this and this and this. Um, so it's gonna, uh, good to know that they can narrow it down. I had not thought about the fact that that everything would be strictly within a state. Is that a thing we expect that to, to continue? Is it, I'm assuming it's driven by state regulations as opposed to it's separate from the federal issue of being illegal at the federal level. Is that, is that a thing where in the future they might see, you know, yeah. Actually all cannabis states will allow, uh, trade between themselves or is that, is that too far out in the future to predict?
Naomi Granger: (
Yeah. So it's extremely complicated at this point. So because of cannabis being only Feder, uh, state legal, there's no interstate commerce permitted, which means they can, you can't go into a dispensary and swipe a credit card because that would be interstate commerce. And so that's the reason why most of these stores are so heavy cash because pull either if they have a bank account, you can, if they have a terminal, you can use your debit card, but you cannot use a credit card inside of a cannabis, um, dispensary. And so there's no interstate commerce. And then on top of that, even if, so, say for instance, you are in Oregon and you wanna export product to California in their neighboring states, you cannot drive across federal means you can't use the federal highway system to transport an illegal product. You can't use the federal mail.
Naomi Granger: (
You cannot use the federal. You can't good in a commercial airplane. You can't, you can't use any federal means to transport in a federal illegal product. So they can't import an export to each one of the states. Um, and then on top of that, the last reason why it's gonna make it even more complicated to go state to state is the fact that the metric track and trace systems are state specific. So you can't accept a product out of one metric system in one state, into another metric system in another state. Like they're not integrated yet. So there's a lot of infrastructure things that need to put, be put in place before any of that can happen. And so a lot of people are saying, oh yeah, it's gonna be legal next three to five years. Actually I have been saying that since I started four years ago. And now that I see how complicated it is, I'm thinking that it's probably gonna be maybe not this administration, but maybe the next one, the next one, after that, that will probably finally go, go legal. And we probably would not go, um, federally legal. It may become descheduled, which means it's no longer a scheduled one controlled substance, um, which will lighten up the load for banking and different things like that.
Dan Hood: (
I hadn't even thought about the, yeah, you couldn't, you can't go on the interstate or you can't go on, uh, that's crazy. Uh, I figured you couldn't mail stuff. I didn't figure that, but, but still I, so it's all, if you wanna go from Oregon to California, you'd have to go on back roads or whatever. That's crazy. Uh, so it's even more complicated than I thought, which makes it even more of a reason for accountants to get into it. Right. Complication solving, complicated problems or, or, uh, bringing solutions to that kind of complexity is what accountants do really well. And clearly, because it's such a new industry and a lot of people are, you know, just coming into it for the first time cuz it didn't exist before. Uh, there're definitely a need of, of the advice of a good account. Um, this has been great. Naomi, thank you so much. Any final advice for someone who's looking to the accountant or tax professionals like thinking, eh, should I tip my toe in the water? Any, uh, any advice for them?
Naomi Granger: (
Yeah, absolutely. If, if you're just interested in learning a little bit more, you can also always visit the national association of cannabis, accounting and tax professionals. We provide education and training and support. We're connected with a lot of the state legislators and we are making sure that we, our voices are heard and we're able to make a difference because a lot of times you'll have your legislators, their sole focus is tax, how much tax revenue can we make, but on the practical side from account, from the accounting standpoint and us seeing our clients and seeing what they need, they need to have that feedback. So can understand, um, how to actually roll out this program because we want the programs to be successful within these states. So if you would like more information, just contact me directly.
Dan Hood: (
Excellent. Is there a website that they can go to?
Naomi Granger: (
Yes. So it's um, the acronym for national association of cannabis, accounting and tax professionals, NA Catt pros dot
Dan Hood: (
Excellent Naka pros.org. Excellent. All right. That's where people should go. Naomi Grainger. Thank you so much for joining us.
Naomi Granger: (
Thank you,
Dan Hood: (
Ben. Thank you all for listening. This episode on the air was produced by accounting today with audio production by Kellie Malone. Ready to review us on your favorite podcast platform and see the rest of our content on accounting.com. Thanks again to our guest and thank you for.