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Election opens new marijuana markets, increases need for accountants

Written on Jul 31, 2020

BreidenbachJBy Justin P. Breidenbach, CPA, MAcc, CFE

My research and travels over the years have provided me with the unique opportunity to experience the growth of the legalized marijuana industry from an accounting and business perspective. The path from start-up is not an easy one, and regulation is always evolving. Each year and election cycle has brought forth the creation or expansion of markets previously adopted by voters or state governments.

The recent election cycle was no different, with nine states having medical or adult-use marijuana related ballot measures. Some of the most notable ballot measures that passed included California, Nevada, and Massachusetts legalizing for adult-use and Florida for medical-use. As these states come online or adopt new legalization measures, Ohio continues to move forward with developing regulations around its medical market. Additionally, other states are expanding their regulation by revising the overall structure or allowing medical use for new conditions. In light of the burgeoning state markets, it should be no surprise that there is a growing request for accounting, legal and other professional services.

I became more aware of this demand on accountants in November during my travels to Las Vegas to attend the 5th Annual Marijuana Business Conference and Expo. I have had the opportunity to attend this conference through the years, and it provides  insight into the interest people have in entering the legalized marijuana market. Since this conference started, it has grown from about 450 attendees to this year’s sellout crowd of more than 10,000.

Upon speaking with attendees, it became obvious that the California market was a driving factor. Many had an interest to get involved in some capacity. There was no shortage of people interested in cultivating, processing or operating a retail store or dispensary. It was no surprise that many were eyeing California, given that the revenue within the state is expected to trump the entire marijuana market. But the development of the Ohio market and the surrounding area was still of interest to many.

It seemed no matter what state they were from, attendees were interested in how other states develop regulation and how businesses are operating within the industry. Ohio is still a bit of a question mark when it comes to these matters. The Ohio medical marijuana industry will not be fully functioning for some time, and Ohio has only released draft medical marijuana cultivator rules. Even though Ohio does not have final regulations in place, the draft rules provide a glimpse into the direction that state might be going when it comes to regulating cultivation activity.

Ohio’s cultivation draft rules (see below), along with other states’ regulations, demand that businesses acquire appropriate accounting, legal and professional services. These services help with the operations and reporting requirements to be approved for and to maintain licensing.

It’s no surprise that many of those new to the industry don’t think about these “back office” issues when kicking around the idea of entering this space. But those who are seasoned in the industry understand the importance of having a strong accounting and legal team. While many like to discuss IRC 280e – which does have a massive effect on the industry – there is a plethora of accounting, tax and reporting issues that businesses need to better understand to ensure they comply with regulations.

The importance of technical accounting topics was evident at the Marijuana Business Conference and Expo. Two tax workshop sessions were made available to attendees. As an academic and accounting professional, it was exciting to see the demand for these sessions. Pre-registration was required, and there was even a waitlist of attendees trying to acquire seats for the sessions. Past conferences didn’t even have formal presentations on technical accounting issues; if accounting and tax topics were discussed, it was during networking sessions in one-on-one conversations or small roundtable discussions.

Additionally, all attendees at the conference this year were required to wear an identification badge at all times because of the capacity crowd. The badge included the attendee’s name, state, company name and title. I noticed many people being aware of the word “accounting” in my job title. This normally turned into the individual or group asking if they “could pick my brain for a moment.” Attendees who’ve been active in the legalized industry were interested in gaining whatever accounting insight they could based on what I’ve viewed in their home state or other states. The questions were constant, and whenever someone passing by heard the word “accounting” or “tax” they immediately stopped to take part in the conversation.

As Ohio moves forward with developing regulation, and prospective license holders continue their interest to enter the market, there will be a demand placed on accounting, legal and professional services. Every state is unique in its development of the marijuana industry, but the importance of accounting and reporting is never limited.

Highlights of Ohio’s draft rules:

  • License quota of up to 12 Level I cultivator licenses and up to six Level II cultivator licenses.
  • Level I and Level II cultivator license are permitted to operate a 15,000- and 1,600-square-foot marijuana cultivation area, respectively.
  • Financial responsibility must be demonstrated by cultivators – adequate capital to meet facility plans and operational needs.
  • Quality control and security plans must be submitted with the application and then followed.
  • Record, reporting and retention policies must be in place and executed appropriately as it relates to sales, inventory, finances, employee records, disposal, security, test samples and more.
  • Fees of $200,000 ($20,000 application fee and $180,000 license fee) for Level I cultivators and $20,000 ($2,000 application fee and $18,000 licensing fee) for Level II cultivators.

Justin P. Breidenbach, CPA, MAcc, CFE is an assistant professor of accounting at Ohio Wesleyan University in Delaware, Ohio. He instructs courses relating to financial accounting, taxation, and audit & assurance services. Additionally, Justin has had extensive professional work experience in public accounting and has provided services to organizations operating in the fields of agriculture, manufacturing, distribution, service and not-for-profit. His current academic research includes investigating the legalized marijuana industry and working to obtain data to better understand operations, internal controls, taxation, regulation, employment, banking, insurance, financial sustainability and pricing.