Cannabis Industry | Nesteggg Accounting

Cannabis Industry Pummeled

The road after legalization for recreational use of cannabis in California has not been paved with gold. Strangling excise taxes, license uncertainty, vape crisis…

Already uncertain industry manages through uncertain times

When California decided that dispensaries could remain open as an essential business there was, no doubt, a collective sigh of relief in the already fragile industry. With the stay at home order in mid-March there was an initial spike of sales, and there have been bumps since but overall sales are down. Reduced hours undoubtedly have had an impact. But the industry is surviving.

Even though Gov. Gavin Newsom declared marijuana an essential business, the State has been deferring to local governments to determine the restrictions needed to enforce social distancing. Meaning, some localities have made sales permissible curbside only or via delivery, which, if a dispensary does not have a relationship with an entity that has a license to deliver, or possess their own, it could take months to be approved.

In counties where the “delivery only” order has come down, like Santa Clara, the industry has been able to rally and get reversal. The Bureau of Cannabis Control is currently backing the new rules local governments are putting out but that brings uncertainty, in a time of great uncertainty, to a industry that was already filled with uncertainty.

USDA Hands are Tied

The USDA told hemp producers that it could not change the rules that set the allowable limit of THC in their product.

USDA cannot completely free industrial hemp of regulations

While the agency can, and is open to changing other aspects of the 2018 Farm Bill that made non-intoxicating cultivars of hemp legal to grow in the US, it cannot change the allowable level of THC because that part of the bill is statutory and can only be changed by Congress.

The 2018 Farm Bill, although it did not “legalize” CBD, opened the window enough to see the market of CBD oil and products explode in ensuing years. Though hemp had historically been an industrial crop in the US, the Marihuana Tax Act of 1937 effectively destroyed the hemp industry. While industrial hemp continued to be cultivated and used for industrial products such as rope and canvas, most notably in WWII hemp was used extensively for uniforms, tarps, and rope, the scale was limited.

One tweak the USDA has agreed to visit is allowing industrial hemp growers to re-purpose “hot” hemp – hemp that tests higher than the allowable 0.3% THC – rather than destroy it.

Even Big Cannabis Struggles in CA Market

California industry giant, MedMen, is selling its holdings in Arizona — a state it entered a little more than a year ago. It is also selling a factory in Illinois to help the multi-state operator cut costs and shore up cash. In part, the company is trimming down its holdings in order to focus more on markets like California.

California cannabis industry a lot to navigate successfully

CNN reported recently that MedMen has been struggling with cash flow problems, falling behind in paying vendors. Speculation ranges between too fast growth and asset grab issues. But most certainly, the Culver City, CA based company struggles to navigate the California market like all licensed cannabis companies in the state who continue to compete with black market cannabis, a part of the industry that persists even three years after legalization and is not beholden to the same requirements.

And another rub for the marijuana industry. Despite reports that MedMen is heading into “bankruptcy”, that is not an option available to marijuana businesses because cannabis remains illegal on the federal level.

All along the supply chain the industry can struggle with the ever-changing regulation landscape. Growers are faced with recalls almost inevitable. The culprits are often mold or yeast, not pesticides or other man made contaminants.

Retailers also compete for business with unlicensed, black market retailers which can look a lot like “real” dispensaries. The BCC recently implemented a requirement to post QR Codes, an attempt to inform the public whether a retailer was licensed and to help protect health and safety.

The industry took a hit, along with non-cannabis vape industry, late last year with the emergence of a lung disease connected to vaping and e-cigarettes consumption, sending even stock offerings plummeting.

California’s 3rd phase of testing regulations went into effect at the end of last year, increasing testing costs to cultivators. Some growers worry that the cost of compliance is getting too high to sustain.

And, of course, the taxing structure in the California industry continues to be daunting, amounting to over 30% of retail price, one of the highest in the nation. The direction of cannabis tax rates does not appear to be going down any time soon, despite attempts by the Legislature to give the industry some relief. The CDTFA increased the markup rate as of the new year, requiring an increase in collection of excise taxes from retailers to distributors.

Clean Declaration

Eureka based cannabis company Papa & Barkley has announced a commitment to what it is calling “clean cannabis”.

Many companies tout their product as “organic”, is this the next step in the natural products wave of eschewing chemicals and using chemical processes in manufacturing, or perhaps a simple attempt to set their products apart from the ever growing CBD market. Or a counter to the vape crisis of 2019. One thing is certain, the cannabis industry will continue to grow apace in 2020 and we may see other cannabis companies making similar declarations or perhaps quietly following suit. As the industry remains under scrutiny companies will continue to attempt to pull ahead of the pack.

Papa & Barkely’s core “clean” commitments:

Organic and regenerative farming practices – Choose trusted farm partners in the U.S. who use native soil, organic and regenerative farming practices when growing both cannabis and hemp plants.
Solventless – Avoid solvents and chemical extraction methods that yield isolates or distillates; employ a solventless whole plant infusion process that maintains the integrity of the plant and creates more effective products.
Whole plant infusion – By infusing the whole plant, it maintains the full spectrum of cannabinoids, terpenes, chlorophyll and valuable phytonutrients; naturally infused into products without the use of chemicals or adding terpenes.
Clean ingredients – Supporting ingredients such as carrier oils, essential oils and beeswax are clean, conscientiously sourced and made with no residual chemicals.
Triple-tested by third-party – To ensure the product is clean throughout the process from soil to shelf, its crucial to test the product at three stages – the input cannabis plant material, the infused oil and the final blended product.

CDA Co-Sponsors Bill to Fix Distributor Transfers for Cannabis Industry

CDA Co-Sponsors Bill to Fix Distributor Transfers for Cannabis Industry

Thanks to our working relationship with the Bureau of Cannabis Control and policymakers in State Legislature, CDA learned that existing law would prohibit the movement of compliance tested cannabis goods between more than one distribution facility prior to being delivered to a retailer.

In order to ensure distributors can transfer tested cannabis goods to multiple distribution facilities throughout the state to meet market demands, CDA is co-sponsoring SB 311 by Senator Pan (D-Sacramento) to authorize distributor-to-distributor transfers after the point of testing.

The cannabis supply chain depends on multiple points of distribution to efficiently bring products to market. Licensed operators are conducting these transfers today, however many are unaware of a section in the Business & Professions Code that prohibits distributor-to-distributor transfers after the point of testing.

CDA has built a coalition of stakeholders, including co-sponsors the California Growers Association, the California Cannabis Industry Association and supporters including the Teamsters Public Affairs Council and several licensed industry stakeholders. CDA’s advocacy team has been working behind the scenes over the past several weeks to garner support for the policy and we expect SB 311 to be heard in the Assembly Business & Professions Committee next week.

This is CDA’s top legislative priority and will work to get this bill on the Governor’s desk in the next 45 days. If you support CDA’s efforts to protect the diversity of licensed distribution businesses, support the regulated market, and ensure tested products can be transferred between distributors, please join our ranks by helping us pass SB 311 (Pan).

Information for the Cannabis Industry: How Tax Applies to Immature Plants, Clones, and Seeds

Cultivation Tax
The cultivation tax does not apply to the sale or transfer of immature plants, including clones or seeds. The cultivation tax is imposed on cultivators for harvested cannabis that enters the commercial market; however, the definition of “enters the commercial market” specifically excludes immature plants and seeds.

Excise Tax
Immature plants, clones, and seeds are subject to the 15 percent cannabis excise tax when sold at retail. Nurseries may sell immature plants, clones, or seeds to another cannabis licensee. However, a distributor is required to transport the cannabis from the nursery to the licensee and when the immature plants, clones, or seeds are sold or transported to a retailer, the distributor is also required to collect the 15 percent cannabis excise tax from the retailer based on the average market price of the immature plants, clones, or seeds. The retailer is responsible for collecting the cannabis excise tax from their retail customers when the immature plants, clones, or seeds are sold at retail.

Sales and Use Tax
Sales tax applies to the retail sale of immature plants, clones, and seeds. Sales and use tax does not apply to a cultivator’s purchase of immature plants, clones, and seeds when the products grown from them will be resold as part of the cultivator’s regular business activities. The seller should obtain and keep a valid and timely resale certificate from the purchaser as support that the sale was for resale. For information on sales for resale and resale certificates, see publication 103, Sales for Resale.

This email is intended to give you an overview of how tax applies to immature plants, seeds, and clones and does not address all requirements for the cannabis industry. For additional information, we encourage you to read our online Tax Guide for Cannabis Businesses, or contact us

Cannabis Industry Pummeled

USDA Hands are Tied

Even Big Cannabis Struggles in CA Market

Clean Declaration

CDA Co-Sponsors Bill to Fix Distributor Transfers for Cannabis Industry

Information for the Cannabis Industry: How Tax Applies to Immature Plants, Clones, and Seeds

Information for the Cannabis Industry: How Tax Applies to Immature Plants, Clones, and Seeds

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