On November 3, 2020, Arizona voters passed Proposition 207, approving the legalization of adult-use of marijuana. The proposition allows all current medical marijuana dispensary licensees to also hold a recreational (adult-use) license. In addition, the proposition provides for the issuance of an additional 26 social equity licenses, allowing for more medical marijuana dispensary licensees.
The passage of Prop 207 prompts a number of considerations for existing medical marijuana dispensaries that may be contemplating whether to add an adult-use license, including entity restructuring, and tax and audit implications, in addition to changes occurring outside the proposition at the state level, such as sales taxes. The following are areas that a medical marijuana dispensary considering an adult-use license should carefully consider.
Many Arizona dispensaries have one or more for-profit companies that manage the nonprofit’s operations. For example, one company may manage the retail side, while another company manages cultivation, and a third real estate. You will want to evaluate whether all those management companies will still be necessary, taking into account current legal and tax structure.
The marijuana industry is already subject to extremely high tax expenses due to Internal Revenue Code Section 280E. Medical Marijuana licensees that elect to operate on a for-profit basis will be subject to Arizona state income taxes, which they are currently exempt from due to their non-profit status in Arizona. There may also be additional federal taxes for related entities; however, it is important to note that Arizona will not conform to the federal law as it pertains to 280E, thereby allowing all ordinary and necessary business expenses to be applied on the state income tax returns.
Perform an analysis internally and consider consulting a CPA to determine whether the potential gain in sales from an adult-use license will more than offset the additional taxes owed. Aside from tax implications, a CPA can help analyze other costs/benefits of operating a for-profit marijuana business.
Currently, in order to renew a non-profit dispensary license, the Arizona Department of Health Services requires an independent CPA to perform a financial audit. If an entity elects to sell adult-use and operate on a for-profit basis, the audit requirement no longer applies; however, the company’s management and Board of Directors should carefully consider the benefits of an annual financial statement audit, particularly when planning for future growth. Financial statement audits would encompass all entities, giving current and potential investors a clearer picture of the company’s financial position. Generally, three-years of financial statements audits are required when selling a company, and they add validity to financial information, such as for reference in an IRS tax audit.
The new testing law has also spurred questions regarding changes to sales and use taxes. Arizona taxes the storage, use, or consumption of tangible personal property unless an exemption applies. There is currently no exemption for destroyed product. According to recent data obtained through sales tax audits with the Arizona Department of Revenue, product sent out for testing that is destroyed is still subject to use tax.
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Price Kong was established in Phoenix in 1967. Since then, our team has grown to 50 professionals and includes seventeen CPAs. The depth of our audit and tax practices allows us to provide services to clients in numerous industries, of a wide-range of sizes, and with revenues ranging from $1 million to over $500 million.
Since 2011, Price Kong has been the leader in providing audit, tax and consulting services to businesses in Arizona’s cannabis industry, as well as those throughout the United States. Our professionals have spent 1,000s of hours collectively researching and studying this industry, and the complexities and nuances inherent to it. We have proprietary models, strategies, and processes that have been implemented at hundreds of cannabis businesses, saving them time and money. For further information, contact Troy Griffith or Melissa Harrington.