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Arizona Proposition 207: Tax and Audit Implications for Nonprofit Medical Marijuana Dispensaries (NMMDs)

Arizona Proposition 207: Tax and Audit Implications for Nonprofit Medical Marijuana Dispensaries (NMMDs)

Home » Blog » Arizona Proposition 207: Tax and Audit Implications for Nonprofit Medical Marijuana Dispensaries (NMMDs)

Proposition 207 (Prop 207), also referred to as the Smart and Safe Arizona Act, is a voter initiative that will appear on the November 3, 2020 general election ballot. The proposition declares that “the responsible adult use of marijuana should be legal for persons twenty-one years of age or older…” If passed, Arizona would join eleven other states in legalizing marijuana for adult use.

Prop 207 amends Arizona Revised Statute Title 36 by adding Chapter 28.2 – Responsible Adult Use of Marijuana. The total number of available licenses will be dependent on the number of Arizona pharmacies and the locations of existing vertically integrated nonprofit medical marijuana dispensaries (NMMDs). Prop 207 allows for one vertically integrated marijuana company per every 10 pharmacies. So, hypothetically, if there are 7,000 pharmacies in Arizona, the number of available marijuana licenses would be 700. As of September 1, 2020, there were 130 NMMDs licensed in Arizona, with 122 of those in operation.

In addition, Prop 207 permits additional adult-use cannabis business licenses to be issued in counties that have fewer than two existing NMMDs, such as in rural areas. Also, new licenses would be made available as Arizona’s population increased, so unlike before, when medical marijuana was made legal in the state, there is no set limit on the number of licenses to be issued.

The passage of Prop 207 presents a huge opportunity for NMMDs to expand their footprint in Arizona since it permits dual licensees, meaning an entity can hold both NMMD and adult use licenses. In addition, early application, which takes place January 19, 2021 through March 9, 2021, is only open to current Arizona NMMDs and twenty-six new social equity businesses, allowing them first right of refusal for adult licenses.

So, what impact will the passage of Prop 207 have on current NMMDs in terms of state taxes and Arizona Department of Health Services (ADHS) financial reporting requirements?

Those that choose to be dual licensees will need to carefully consider tax implications. Currently, NMMDs are exempt from Arizona state income tax and file an Arizona Form 99M. This saves dispensaries approximately 5% in state income taxes each year. NMMDs that choose to be dual licensees can change their status to for-profit, and as such, will be required to pay taxes imposed by Arizona Revised Statutes Title 43 – Taxation of Income. Prop 207 does provide for the state to allow all ordinary and necessary business expense deductions, which is contrary to the current IRS 280E requirements, which, in practice, do not allow any deductions for operating expenses. Additional excise taxes will also be imposed on adult use, which can be passed on to the customer.

As for annual reporting, dual licensees that elect to operate as for-profit will no longer be required to submit financial statements or audit reports of the NMMD to ADHS upon license renewal.

If you currently operate an NMMD, and choose to apply for an adult use license if Prop 207 passes,  meet with your CPA to determine the best strategies to minimize the already burdensome income tax bill. Special consideration should be given to the advantages and disadvantages of operating as for-profit, and the effect on your NMMD license.

Price Kong is available to assist with all of your cannabis tax, accounting, auditing, consulting, and compliance needs. We provide services to over 40 cannabis businesses in Arizona, and no other accounting firm in the state has served the cannabis industry longer than Price Kong. Visit www.pricekong.com for more information.

About the Author

Troy Griffith, a certified public accountant (CPA), has worked in public accounting since 2009. Prior to joining Price Kong in 2014, he worked for BDO in Anchorage, Alaska, where he ran audits of numerous closely-held business, governments, and non-profits.

As Audit Partner, Troy’s focus is on expanding services to clients and growing the audit practice, while enhancing quality and efficiencies within the current attest process. He ensures audits are completed in accordance with required auditing standards and unique state compliance regulations. Troy also consults with companies on generally accepted accounting principles (GAAP) and standards, potential merger and acquisition transactions, International Financial Reporting Standards (IFRS), reporting, due diligence requests, and operational controls.

Troy has been instrumental in developing the firm’s Cannabis Services group. He created and implemented audit methodologies specifically tailored for the distinct compliance and reporting issues cannabis businesses face.

Scott Mitchem

Troy Griffith, CPA

Partner

[email protected]

(602) 776-6367