Post Wayfair Aftershocks: Top Ten Sales and Use Tax Changes – Part 6

#9: Cannabis

In our previous post in this series, Post Wayfair Aftershocks: Top Ten Sales and Use Tax Changes, Part 5, we took a look at the taxation of services, especially cloud-based services. In this blog, we continue with a deeper analysis and practical recommendations into another of the Wayfair issues — the taxation and regulation of cannabis on the federal, state, and local levels.

On the State Front

More states continue to legalize medical and recreational cannabis/marijuana in 2019. Now, there are 33 states and D.C. where medical cannabis is legal; 10 states and DC where recreational cannabis is legal; and 17 states where cannabis is illegal. However, there are subtle differences and exceptions in each state that you must be aware of. In general:

Recreational Cannabis. The following states (including D.C.) at last count have made recreational cannabis legal with differing regulatory rules: Alaska, California, Colorado, District of Columbia, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington.

Medical Cannabis. For medical cannabis use, the number of states (including D.C.) is much larger: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, Oklahoma, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington and West Virginia.

Illegal. Alabama, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Mississippi, Nebraska, North Carolina, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin, and Wyoming.

On the Local Front

Many local districts in California and Colorado, for example, tax cannabis. For example, recently the voters in San Francisco approved Proposition D, a measure to impose new taxes on recreational cannabis businesses. The measure levies a local gross receipts tax on marijuana of between 1 to 5 percent, depending on whether the business is a retail operator and how much gross revenue it takes in. The first $500,000 of gross receipts from sales of recreational cannabis is exempt from the tax, as will retail sales of medical cannabis.

However, the language of the proposition also extends the reach of this local nexus provision beyond marijuana businesses to other businesses as well. Given this growing interest in states to legalize and tax marijuana businesses, as well as the growing reach of Wayfair economic nexus to both state and local governments, especially in so-called home rule states like California and Colorado, such local actions bear closer tracking. The implications for you and your business is can be quite significant.

On the Federal Front

On the federal front, there are at least two developments to track.

Firstly, although Cannabis continues to be defined as a controlled substance under federal law primarily because of the psychoactive substance called THC, the federal farm legislation of 2014 and 2018 continues to “loosen” the federal grip on the production of hemp, a member of the broader cannabis family, which contains a substance called CBD. CBD is a non-psychoactive compound in cannabis that is low in THC.

However, like most things “cannabis-related,” answers to issues around sales of CBD are unclear. For example, the FDA says adding CBD to foods and dietary supplements in interstate commerce are both illegal. The glut of CBD and hemp products already on the market is creating a headache for the agency, and lawmakers want to know what regulators are going to do about it. To make this even more complicated, in 2018 the FDA approved its first CBD-based drug, Epidiolex, for the treatment of epilepsy. But under agency rules, that means any other CBD product is also considered a drug and is subject to their standard rigorous approval process.

Secondly, the 2019 Congress appears to be more determined than ever to address federal banking laws that currently place stifling prohibitions on the ability of cannabis companies to utilize banks as most other businesses are able to do.

Like many things in life, appearances are very often deceptive. At the end of March, the House Financial Services Committee voted approved legislation aimed at increasing marijuana businesses’ access to financial institutions creating much excitement among cannabis advocates. This was the first time a cannabis-related bill of any kind made it through any committee in Congress. And, Treasury Secretary Steven Mnuchin, voiced his strong support of the bill. That’s the good news for those in favor. But—and there always seems to be a but involved where cannabis is concerned—a vote on the bill on the entire House has yet to be scheduled. Not exactly an encouraging sign.

These developments and trends on the federal, state and local level will continue to put pressure on existing and new cannabis businesses and advisors to continue to improve the businesses legacy cash management problems, as well as their tax and accounting competencies.

How Does Wayfair’s expanded sales tax nexus figure specifically into all this uncertainty?

For recreational cannabis/marijuana companies, most of the business is intrastate because of federal restrictions, and so Wayfair has a lesser immediate impact. Hemp sales, on the other hand, are significantly more interstate and therefore, Wayfair will have a more immediate impact on those companies in the hemp industry that are selling hemp-related products into states all around the U.S. in which they now have economic presence. Moreover, as new federal legislation is passed, interstate prohibitions will lessen on recreational and medical marijuana companies, and therefore, Wayfair’s impact will grow even more as business moves across state lines.

Better to Be Wise Than Sorry

The increasing reach of Wayfair has resulting in heightened civil and criminal risk and liability, as well as significantly enhanced audit activity — tax and legal – across the entire country by both federal and state authorities. This increased scrutiny and risk especially applies to industries and products that are more closely regulated, e.g., cannabis, alcohol, tobacco, etc.

Make no mistake about it, if you are in the cannabis business you will be audited by your state and local taxing authorities. Being prepared with documented records and accurate tax compliance practices are critical.

Because of the new Wayfair standard, these more closely scrutinized businesses will now have to register for sales tax in more states where they may have economic nexus. That means that such expanded jurisdictional reach of tax authorities will start first with sales and use tax audits, most likely expand to income tax and then get the attention of attorney generals for potential nontax statutory violations. Best practice is for businesses to register even in those states that haven’t yet imposed the Wayfair standards to “get ahead of the curve” as more and more states get more aggressive, especially against businesses and individuals in these industries. “Getting ahead of the curve” also means putting in place the systems and expertise needed to manage so-called legacy cash, as well as to be in compliance on an ongoing basis with strict business, tax and accounting regulations of this industry.

 

Stay up to date with rapidly changing nexus standards across the country.

AUTHOR

Mark Friedlich

All stories by: Mark Friedlich

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