As part of our educational webinar series, we recruited cannabis CPAs Patrick Finnegan and Peter DeGregori who shed light on common tax liability issues they’re seeing with cannabis retail operations, income taxes and business formation, 280-E planning, and the steps to take to avoid compliance and accounting problems.

Knowing that tax day is coming up, we really wanted everyone to have an opportunity to ask questions and get answers and hear some updates about the state of the industry.

Watch the full webinar:

Read the Transcription Highlights Below:

Aria from Meadow: Welcome everyone. Good afternoon everyone. Thanks so much for being here today. At Meadow, we really want to see cannabis retailers succeed. Knowing that tax day is coming up, we wanted everyone to have an opportunity to ask questions and get answers and here some updates about the state of the industry.

Before we get into it, I’d love to take a minute to introduce Meadow.

We were the first cannabis business to come out of the Silicon Valley accelerator Y Combinator, and we’ve been building the most advanced software solutions for cannabis retailers since 2014. We work hand in hand with our dispensary partners to build the most-requested tools they need to thrive. Over the years our system has evolved into a full suite of connected software tools: cannabis retail, delivery, eCommerce, loyalty programs and rewards, analytics, text marketing and more.

Meadow's dispensary software is built in lockstep with California's shifting state and local regulatory requirements. While other systems let you oversell, Meadow's built-in guardrails keeps you compliant with clean inventory in all of your sales channels. With daily Metrc monitoring, our team ensures packages are uploaded correctly and any false negatives are rectified.

If you're still using a system with clunky workflows built for another regulatory environment, we’d love to help you upgrade to a 100% compliant system, designed for California's unique regulations with no CSV uploads, ever.

Today I’m pleased to introduce:

Wally Wong, who is on the Meadow SoCal sales team, and he also leads our education and social equity programming. Wally is passionate about cannabis, equity, and helping our dispensary partners navigate retail compliance so they can sell more cannabis and take care of their customers and teams.

We also have cannabis CPA Patrick Finnegan with us here today. Patrick works with cannabis operators across the state and specializes in Federal, State and Excise Tax cases. Patrick is offering free 15 minute tax consultations for anyone here today; we’ll share his information at the end of today’s conversation if you want to reach out for more support.

We’re grateful that Patrick’s business partner, Peter DeGregori, is also joining us today from Newport Beach-based boutique accounting firm Vault Eight. Peter brings over 25 years of traditional CPA experience. He is the founder and CEO of Vault 8 Advisors, Inc which he created shortly after California legalized recreational cannabis and he realized the industry needed more highly skilled accounting and tax services. Peter’s expertise is in income tax and business advisory.

Wally, take it away!

Wally from Meadow: Here we are. Peter DeGregori and Patrick Finnegan. Thank you so much for joining us, gents. I think we would be remiss not to begin with the status of tax reform? We're starting to see some movement and as it relates to retail, we know this is going to directly effect the wholesale price of flower, which will affect pricing for our retailers and what they're stocking in the store. So what are your thoughts with what we're seeing so far and what we're going to see in these next two quarters?

Patrick Finnegan: There's a lot of movement for tax reform and certainly the governor's on board and has spoken to the need for it to have such. There are some headwinds though for tax reform, because if you lower taxes, there's been a lot of great nonprofits that have benefited from the taxes that have been paid by the cannabis industry, and they're reluctant obviously to lose fundings for those. But California's got a lot of tax revenue now. And if there is a time period that tax reform can take place with the backfill coming from the state government, now would be the time to do so.

Wally from Meadow: We did see this past week; if anybody's been watching, we were just talking about how Humboldt County did affect the cultivation tax. We're wondering, you know, do you think that there's any version of that by local municipalities taking suit? Affecting, whether it be the cultivation or, and specifically, do we see it through the lens of, even if there's a temporary reprieve of taxes, right? All of this equates to real business planning.

Patrick Finnegan: Yeah. And I think what's needed right now; the industry is crying out for these tax breaks. Let's say you're in, I'll pick any county, let's say Santa Clara county for no other reason. I'm not picking on that. But if a dispensary has a $14,000 a year licensing fee or should, it can be even higher, $25,000. That comes right off the top of you have your net income, right? Those are real numbers that you have to pay the taxes even before you've had your first dollar in the business.

And what the operators are saying is there's a lot of headwinds in cannabis with the taxes that they have to pay. Certainly 280E for retail businesses is a big issue. The licensing fees, the labor costs, the insurance, the theft that's going on.

These are all difficulties in owning and operating a cannabis business. And I think that discussion has to be, certainly was helpful in Humboldt, where they reduced the taxes from 100% down to, I think, a 15% licensing fee and certainly the work that was done there, but all of this needs to happen to make it such that the industry can survive and prosper.

So many locations are not allowing for cannabis licensing. There's vast deserts among our state on where people can't even buy retail cannabis. That's affecting the supply chain and the production as well.

Wally from Meadow: I don't want to leave you out of this, Peter, as you're down here in SoCal with me. I don't think people in NorCal can appreciate just how many new licensees are coming online down here. By the end of the year, I don't know what it looks like, but I do know that the overall retail space especially is going to be vastly different. I think ultimately it is a good thing, but can you speak to like these last two quarters and what you saw? We're seeing a little bit of contraction in the consumer market. What are some of your concerns with some of your clients as we go into this new year? A lot of stores are opening, in addition to what we all know is a pretty strong traditional and legacy market as well. I'd love to hear from you.

Peter DeGregori: All right. Thanks. Well, Wally, if you're down here and we're close, we're going to have to hook up in person, but we'll talk about that another time. Look, Patrick really stays up on what's going on with the state more than I. And, that's why he and I are just really good team. You know, we tag team everything together. You know, I was just up in Hollywood two or three weeks ago, and there's just more opening up down the street around the corner. And what's happening is you have pressure on pricing. Margins are getting crunched down. And I think maybe Humboldt started this. Maybe some other counties, cities are going to start looking at it. When you have oversupply, demand drops.

Wally from Meadow: I think that's really the thing. And I think that that is going to be, for Southern California specifically, a real challenge with what we're seeing in terms of the scale of cultivation. Cultivation is a real kind of "go big or go home" kind of situation, especially down here with the indoor grows.

I think it's going to be healthy overall, but for the new licensees, especially, I'm sure we've got a few in the room, it can look a little bit daunting. All right. So let's keep it moving here. Let's just start with just basics from both of you. Cause I know we've got some new licensees or new teams on. If I've never run a cannabis specific business, and I'm not sure where excise tax fits in and I'm preparing my books for an audit for a tax season. What are some basics?

"The primary area I would look at if I'm having a retail company is how have I set up my point of sale system? Because if you make an error there, it carries over for years. And the story I'll tell is that if you don't include the excise tax in your taxable measure for sales tax and you set it up and all of a sudden, two, two and a half, three years later, you're getting audited, the tax liability goes back to the first day." - Cannabis CPA Patrick Finnegan

Patrick Finnegan: Yeah, I'll start on the sales in the state tax side. The primary area I would look at if I'm having a retail company is how have I set up my point of sale system? Because if you make an error there, it carries over for years. And the story I'll tell is that if you don't include the excise tax in your taxable measure for sales tax and you set it up and all of a sudden, two, two and a half, three years later, you're getting audited, the tax liability goes back to the first day. And so you've got three years of problems, with taxes that you've never collected from your customers. And now the government's saying, "Hey, you were short $10,000 every month, and oh, by the way, we're three years into it, so now we've got a $360,000 tax liability." Those are real, and those are preventable and those are the areas that Peter and I have to have correct because it's hard to argue with the state that you don't know. Because it was your responsibility to properly set up your billing system in your point of sale, and there are a lot of vendors out there that are incorrectly charging. I've seen errors in Greenbits. I've seen errors in Indica Online. Not to point those out, but to say that if you have those, or if you have a software system that you're not sure if it's correctly charging the tax, get somebody professional and say, "Hey, look at this and am I charging and remitting the right tax?" Because if you're not, you've got a risk that's carrying over for a long period of time. And it's a simple fix. That is a primary area that I've seen. It is that important to get, right.

Wally from Meadow: I couldn't agree more; the need of having a tax professional, especially down in Los Angeles, when we've got all these different areas. Every region has its specific challenges, but to have the tax professional set it up, so the taxes are assessed right in the system, is so important. And you want to find someone who's going to accept and own that fiduciary duty. Peter, any more to add regarding that and what you've seen?

Peter DeGregori: Yeah, the point of sale system is key because that's where the business owners are going to say, we've got to get it set up, manage inventory, and we got to be ready for sales. But, we've seen a lot of problems where it's not just set up right. It's not calculating the taxes right. And it causes problems at the local tax level, the sales tax level, and the excise tax that's being charged. Right. And it is much easier in my mind and cheaper if get it set up right and you buy the right software; don't go cheap in the beginning and have to get a bill, you know, three, four years later for $350,000.

Wally from Meadow: A hundred percent. And I'm biased of course, but we both see it. We all see this because we're on the other side of the table, seeing people who are undergoing audits or facing, you know, a tax bill, because of "system inefficacy" is the way we like to frame it, for people switching to Meadow from other systems. For the new teams that are in the room, could you talk about business formation and overall structure advice for new teams? Because this is the thing I think is so challenging. There are so many things that new operators who have not participated in cannabis take for granted that they don't realize, and I think this pushes up directly up against 280E and that initial business formation. They secured the license and they think they're going to run it; they're off to the races, but they don't really realize the what 280E represents in there. We don't have to spend a lot of time with, but it's such a blind spot for new operators.

Peter DeGregori: So Patrick and I, I feel, have a similar thought here. We're seeing if we're focusing on dispensaries, generally you're going to be set up as a corporation or a C Corp. Generally a C corporation gets set up. And, you know, cost of goods sold is going to be a tax deduction. But for federal you're really paying tax at gross profit. And this gets into the setup of your GL system after your point of sale system's working. Making sure you're capturing the right cost and costs of goods sold to try to drive it down. Setting up a management company doesn't get you out of 280E. At the right time, I'll talk about 471C. The other reason why I like C Corporations is, remember: 280E applies to federal, but California doesn't. So California cannabis companies get taxed just like a non-cannabis company, more or less you pay tax in your net income. When you get into cultivation and everything else, you know, you can pick and choose. But the other reason why I like C corporations is generally the license, when you're ready to sell it, you've got to sell the stock, so it's very easy. And then the entity itself pays the tax. So then the next thing is, is with C corporations, even if it's not cannabis, well, how do you get the profits out? Well first, generate the profits. And then how do you get the profits out? You know, you could do management fees, you can do payroll, all these different things to look at.

Patrick Finnegan: I was also going to say also: issuing dividends to the corporate shareholders, but Peter's got that.

Wally from Meadow: Any changes regarding a verticalized operation? Because often, you know, it's so common if somebody has got a retail or a non-store front license and then pick up a distribution license, and maybe in three years, they've got a manufacturing, distribution and retail license. Does that stay the same in terms of initial entity formation under that C Corp? Or is it for each license we're considering it a separate entity formation?

Peter DeGregori: I'll let Patrick speak a little bit more regarding the licensing, but generally, we're setting up a separate entity, typically one for cultivation, one for manufacturing, one for dispensary. And then you have to look at the ownership and the relationship and any common expenses. Does it make sense to have a management company? You got to have a strategy, right?

Patrick Finnegan: And I'll add, on the common ownership of a distributor that you talked about, having a distribution and a dispensary together, what that allows you to do under state taxing, is to have a non arm's length transaction so that we can move the excise tax over to the retail side. And oftentimes that does create benefits for that relationship, especially if we're under the 80% threshold that the state of California has established. Let's say you're buying product at $10 for an eighth, you're selling it at $15. If you have that symbiotic relationship between yourself as the distributor and to the retailer, you can really lower the retail sale price of that product by having less of an excise tax burden. That's something I can probably need to talk offline to, or to the dispensaries or people that are vertically integrated because there's more strategy about it and "Hey, are you really going to run those margins? And it doesn't make sense for you as well?"

Wally from Meadow: Yeah, and I bring all this up because I think equal to what we were talking about at the beginning regarding the new licensees opening. I'm sure you've all been seen and watched collectively that the M&A space, the merging from small to large, to medium, to large, there's so much movement. As it stands, every license is of value in the space. So we've got some questions from the audience and I'll start kind of running through this as we go: "How's the excise tax set up in Meadow? Is it automated even when taxes change?"

No, the excise tax is automatically calculated to California's specifications upon inventory reception. Okay. When we're receiving it. So it's calculated properly inside the system. You can edit it though. From the setting from the default, it will automatically execute, but you can edit it. So that's an easy one. Okay, next we've got a straight up tax question: "If I purchase a product for $10, and then pay excise tax, and then I sell it for $25, I will then charge sales tax on $25. Is that correct?"

Patrick Finnegan: Yes. Be careful though, of what you're putting on your invoice too, though. If you're putting the excise tax of $2.70 cents, which would be the rate at the $10, then that has to be subject to tax. Any separately stated excise tax has to be part of the taxable measure.

So where I noticed this, and I'll circle back and hopefully make it a little clearer, is if I'm saying that the excise tax and the sales tax have the same basis, I mean, they're applied to the same number, I got issues. The sales tax should be the excise tax base, plus the excise, is what the sales tax should be charged upon. It's that important; if you mess up your point of sale system and have it incorrect, it's a long-term problem.

Wally from Meadow: I think what's so frustrating on my side is the there's quite a bit of disinformation out there, and a lot of friends of friends getting in people's ears. That is a very real thing of telling you how to assess it. And let me tell you how to do it. And where I'm at, this is my fifth year on this end of the supply chain in cannabis, and I'm just like, some of this is just plain wrong. Right? And now there's a stick at the end of this, which is the audit and which we've talked about earlier. Peter, you brought up about the 471-C and that was a specific question that we got from registrants. The question was literally, "do you have any 471-C advice for retailers?

Peter DeGregori: So this issue came up last year. After this webinar, Wally I’ll give you a link to read a memo that I wrote. (Read Peter's memo: "Inventory Tax Laws for the Cannabis Industry").

But more or less here's the concept: Federal law says under 280E, you can only take a tax deduction for costs of goods sold. I won't to talk about everything in cost of goods sold, but what are the main components? The flower. The excise tax, local tax, right? Those are the normal ones. And then you try to capture more, right? So now you're really paying tax on gross profit. People don't like that. It gets very expensive and makes your tax rate huge. Right? So then 471-C, there was a lot of advisors last year, kicking it around that it's the greatest thing ever. It's a secret, now you're going to be able to pay your tax and make it lower. Well, how are they doing that? Under 471-C, it's saying, if you're cash basis, it could be cash basis, typically for 25 million in sales or lower, then you can elect to deduct your inventory. You don't have to show it on your balance sheet, deduct it under cost to get sold. And then it goes so far to say, in theory, if your books have all your expenses as cost of goods sold, and that's your books, that's how you can file your tax return.

So if we step back and we say, well, look, does 471-C allow us to get around 280E? My answer, which everyone will be able to read and talk to their tax advisor says, unfortunately, no. And this only applies to federal. California, which makes sense, they're saying, Hey, cannabis is legal in California. Thank God. Now they say fine, you can pay taxes on your net income.

Wally from Meadow: Definitely. I appreciate that. So we have another one here: "Please discuss AB300 issues and enforcement and how retailers increasing prices results in higher markup excised tax calculations?"

Patrick Finnegan: So I have a form 8300 audit that I'm representing right now. It's not in the cannabis business, it's in a cigarette/tobacco case, but I work with other usinesses outside of cannabis. What happened is, a distributor is taking money from their customers. So it would be similar to a distributor taking money from the dispensary owners for product. And if they're taking cash in excess of $10,000, they're required to get a form 8300 completed that identifies that transaction, as well as how much money they received from that dispensary. So that's generally the way it goes, but it also can go from a cultivator receiving cash from a distributor as well. So it's anytime you take or you receive an excess of $10,000 on the transaction. So a distributor will issue these form 8300s to the dispensary saying, "Hey, I received this over $10,000," and they're required to inform the IRS within, I believe it's a 15 day time period, that the transaction occurred, but even more so at the end of the year, by January 31st, you have to send to everybody that you received over $10,000 and above, a description on how muchyou took in during that year. So if you took in a hundred thousand dollars over the year and over $10,000 increments, you have to tell that company, "Hey, I received $10,000 from you and that's reportable to the IRS." So that's where that's where a form 8300 is real problematic, is if the IRS is seeing all these monies cash being received and reported by distributors for you, and that amount doesn't equal what your retail sales and so forth, it really is an avenue that the government has into your business. And that's why it's so important. You have to understand this is a requirement by law. It's meant to clear up any money laundering cases. And the IRS is serious about these.

Wally from Meadow: For both of you, because of the level of specificity of these last two questions, can you speak to, when we're talking about it the importance of cannabis specific point of sale and high system efficacy, but when we're looking at deepening use of existing tax code, and then it being applied and getting a bit advisement from CPAs who have not worked in cannabis and what that looks like on your side of the table and also on the audit side?

I'm always floored by where the CDTFA comes in and how they're looking at executing the audits. But can you all speak to that in terms of the importance of somebody who actually works in cannabis in a CPA capacity, doing your books?

Peter DeGregori: Patrick and I have seen this, and I'll hit some of the highlights. So what it seems like to me, is that when California approved recreational cannabis and we started getting all the cannabis businesses starting up, it seemed like, and I'm not saying this is all the accountants, but it seemed like the accountants that weren't very technical went into that industry and said, "Hey, I'm not that busy. I'm going to start working on the cannabis industry." And we saw them charging a lot of money. Getting paid in the service was terrible. Now I've, I'm not the best. And there's other people that do what I do. But I also see that in non-cannabis industry too. So business owners just need to be smart; if their gut's telling them "This isn't right," or they're not answering my questions or I don't have good financials, then they've got to go out and seek information. And that's why I think it's great that, you know, Meadow, you guys are doing these webinars because it allows people to learn some information, but you know, I've seen charges of people paying, you know, $3,500 a month for easy bookkeeping and their bookkeeping's terrible. And then what happened? We saw that their revenue was so much lower in their QuickBooks system, but on Metrc, it was like 10 times higher. Well, what happened? No one was reconciling it. They didn't have a system like Meadow that reconciles it. And then later they found out, which was way too late, because CDTFA came in, someone was using their Metrc license, other than the real owner.

Wally from Meadow: This is a new one for me. I haven't heard of this level of piggybacking. I haven't heard of this.

Patrick Finnegan: It was also the shopping of the distributor licenses as well. If somebody's got the name and they piggybacked on another license as well. We've had some discussion with CDTFA on the nature of these burner licenses as well. People can set up a distributor license, because in California, all taxes flow through the distributor, right? You set up a phony entity and you buy cannabis from a cultivator. They simply say that they sold to the licensed distributor, which the licenses aren't that difficult to receive. Right? And then that distributor takes the cannabis, sells it for interstate commerce, sells it for retail, collects the excise tax and the excise tax never gets remitted. Well, remember the dispensary owner is off the hook because he's got the receipt saying that excise taxes are included and separately stated on the invoice. And what happens is the state loses all this money. I've talked to my ex-coworkers that are still working at CDTFA. It's almost a whack-a-mole issue here. CDTFA sends out auditors. They look at the transaction. They say "No, it wasn't me. It's this person over here." And you're following transactions down the rabbit hole that tax has never been paid. You want to see how serious the state is about taxing and the regulatory issues? It's how many people have they placed into these jobs that have the responsibility of monitoring and doing the tax work? The state has two employees that do cannabis cultivation and excise tax audit. And certainly not at the level that you'd see in a tobacco and alcohol or sales tax or however, so the resources really weren't there in the most pressing of time, which is the beginning of the 2018 to forward. Now, you know, we're now over three years into this program.

Wally from Meadow: And that goes right into what we've always talked about, Patrick, is the secondary consulting firms, especially. I don't think we see that as much down herein Southern California, but in central California and up north, we do see audits being affected by secondary consultant teams that are, representatives of local. Can you speak on that?

Patrick Finnegan: I think you're describing like an HDL company that a locality might contract with the company that says, "I want you to handle all of my cannabis licensing and compliance work." Let's say I'm the city of Long Beach; I don't want to hire people to actually have to do the review of all these businesses that have now moved into Long Beach. We're going to contract with the HDL or any of the other others. I don't know how many there are, to do that for us. So we don't have to pay the wages and the benefits of hiring all new staff to do that. So they contract with these companies and now these companies have that responsibility to audit you. And I've always had distress, because if you have a financial interest in how that audit is going to work, whether you continue to conduct the audit, if you find errors and so forth, you have a vested interest to find errors, and you can't go into it like that. You have to be an unbiased reviewer. And some of that is what concerns me. I think it's that important to have somebody like Peter or I, or any competent CPA to take a look at that and seeing if those of what their work is actually accurate or not.

Wally from Meadow: This specific scenarios is a real challenge and I don't, I honestly don't know how it ever got started and got to this extent, but I think at the level of normalization in terms of where these consulting firms, whether statewide or local, consulting teams literally creating the regulations and then auditing and securing clients off of them. It's a banana situation. I do want to be really clear because Peter brought it up and for the new teams in the room, regarding Metrc variance, Metrc discrepancies, and audits. And I don't think people understand it. So let me really clarify that. And Peter, please hop in here as well. Cause I see it from one side, you see it from the other, right? So what I mean by that is currently I have three teams that are going through egregious auditing, because their former POS system was not reporting correctly to Metrc. There is what we call, broadly speaking, system inefficacy, which means it doesn't do its job. Metrc API goes. When that Metrc API goes down, you're paying your cannabis point of sale system to maintain accurate package counts. So when that little blip of outage happens, if the system can't do its job, or if it has weird inventory workflows, where for example, you create a a salesperson creates a cart and then abandons it when a customer changes their mind, that inventory holds and pulls from the package, and then we start having these minute discrepancies that over a period of time, start adding up. So if this is repeatedly happening, CDTFa comes in and looks at the Metrc account and there are tons of phantom packages (packages that have already been sold that were never auto finished in other systems). On Meadow, we do auto finish them. So with these other cannabis POS systems, there's gross discrepancies, negative package counts, and then they come and audit you. And then they reach out to cannabis CPAs like you two, and they're pulling their hair out and they're under audit and have to begin cleaning up their Metrc. So please speak to that because I don't think retailers understand that these things go together. And, I'll be honest, I didn't think it was going to happen as fast as it did; I thought it would take a little bit longer with Metrc discrepancies being grounds for audit. I's quickly become the reality and it's only growing, where dispensaries have maybe a year or six months of sales unreported, and now I what do I do?

Peter DeGregregori: Well, I think thankfully, you know, CDTFA just doesn't have enough agent general if they did, we'd see a lot more of them. Patrick and I see that the reconciliation between the point of sale system and Metrc, or, you know, the sales receipts and the point of sale systems are not working as correctly.

You know, set it up right. Have someone maybe look at it periodically because things change, make sure the links didn't break and everything. I've had a couple and it's because of the discrepancy between Metrc and the tax return filed was so huge. It got one of those two people to come in and say, "Hey, I got to start auditing this."

If they had 200, they'd be doing way more audits. But, Patrick, why don't you add a couple other comments?

Patrick Finnegan: And, and the way it works is there are two people doing it. And what they look at is the overall records available to them. And if they take a look and they see there's a company out there, who's reconciliations are so far off, that's how they're going to spend my time. That's that's my audit selection thing. And that's all the more reason why you have to be tight and your reporting and your Metrcs, uh, together. If you're not, it's just welcoming auditors to my business, please come in on.

Wally from Meadow: And you should know, before we move on, is before those mass reconciliations, during that initial migration period they allowed mass reconciliations increasingly in the Metrc account to do a clean up. You're increasingly seeing there's a lot of push back, from not only Metrc, but also CDTFA. They want a lot of grounds for why you're going to be affecting that level of package cleanups. So it's something to be aware of once again, because there's always the friend in your ear. Let us talk about delivery. It's going to be the biggest growing space. There's some tax stuff that's specific to it, to the local jurisdiction. Can y'all just broadly speaking; if I'm just running a retail storefront and I've got a couple of cars or if I'm just a nonstorefront and I'm running five to 10 cars? You've got teams running up close to 30-40 cars and then you've got the real brave souls that are attempting to deliver across the state, which, I don't know how long that lasts, but those taxes follow them, right, from jurisdiction to jurisdiction?

Patrick Finnegan: I'll take the quick hit on the local tax and discussion. If you are, let's say you're in Sacramento and you have a delivery company. Well, you're delivering to five different tax zones, right? You might be into Yellow County, Placer, Eldorado, Sacramento, and elsewhere. Each of those areas have different tax rates. Your tax software has to be sophisticated enough to know that when you make a delivery--because remember title passage is where the tax is owed, right? It's not from the place of shipment, it's where the title and the customer receives that inventory. So you better have your taxes internally, correct. If you're delivering across the state of California and you just do one flat rate and everybody gets charged that amount, during an audit, if I was the auditor, I would pick up the tax at the higher rate. If it was lower than the rate that you collected, I'd still pick up that rate because you can't enrich yourself upon the taxes. You're not saving yourself by doing an average tax rate; you're going to get screwed. So the state will always look to see where the delivery is, calculate the tax upon that and compare that to what you remitted. So there are a lot of areas to mess up and that's why it's so critical to have it right.

Wally from Meadow: And I think San Diego is pretty infamous for coming to look and looking for their taxes; it doesn't matter how far north you are, they'll they'll come looking for their appropriate taxes.

Patrick Finngan: Yeah, you just had to use their roads. That's what they told me. "Hey, uh, your business drove on our streets in San Diego; you owe X amount of money." So what do you do? I mean, they have you, you have to have your license. You have to be compliant with all tax authorities.

Peter DeGregori: And just like Patrick mentioned, you know, up in Sacramento and all the different tax rates, we have the same thing in Southern California, right? So this is where it comes into the counties and the cities wanting their fair share and not getting gypped because they've already spent it 10 times. So they want it.

Wally from Meadow: Speak to that on spending it 10 times. It's relevant in terms of the tax reform discussion. I don't think people realize that this tax money is spoken for on the local and at the state level; there's programs that are being funded and it's not like they can automatically refund some of these programs, especially, because of these cannabis tax dollars.

Patrick Finnegan: And in the real scary one, as far as being able to reduce it, is generally a city, in most any cities, the majority of their expenses is for police and fire. At least in the town I live in, it's probably 60% of the city budget. And so let's say cannabis comes along and they're expecting say $200,000 a year in tax revenue for the city; they go out and hire two police officers, right? The tax doesn't materialize. And, or let's say we want to reduce that tax. Well they still have those two bodies, and it's really difficult for a city council person in their district to say, "Hey, we're going to cut police and fire so we can give the money to cannabis." I think that's something that cannabis people have to understand that, "Hey, we can't just demand these taxes." There's other people that are, that are receiving these taxes; it could be a very worthwhile nonprofit that talks about afterschool care for children. It could be funding for drug addiction and trying to alleviate that or provide services for people experiencing homelessness. There's a lot of worthwhile goals that excise and cultivation and the cannabis taxes are supporting. So I think it'd be naive for the industry, not to understand that there's give and take in this issue. So please understand who the other monies are going to, and work with them from the beginning to understand that they're going to have the pushback as well.

Wally from Meadow: Yes, I think that if there was a misread, it's that specific issue. And let me say to all the licensees in the room, you can affect this. We say all this, because you can affect this, but that needs to go into part of the conversation when you're doing your advocacy to your local and state representatives. You, can't just be like, "we want tax reform." You have to be aware of the funding for the secondary programs. Let's talk deductions to 280E; we got a lot of those questions. What's on the table or entity to duct or what, and what is, what is the most common one you see attempted that they shouldn't be doing or that someone told them, "oh, you can deduct that." One question we received was: "Can you deduct website development?" This is for California cannabis retail license holders, specifically.

Peter DeGregori: Yeah, I'll take it. First is, you know, 280E, I think you have some simple ones that are no problem. And then you start getting into a gray area and starting to get into the red area. So let's take the simple ones first. So the flower, the product, the excise tax, the city tax; these are all costs that are required to sell the product. I would say that those are the basics, and then you've got to look at it. Then Patrick, and I'll go in there and say, okay, well, of your rent that you pay for your space, how much is your storage and warehousing space? Because that's cost allocated to your product. And then we try to carve some of that in; it's not a home run. These are singles, but you know, singles and doubles can get some points up on the board. You know, we can look at security. We want to look at, do you have any people on payroll that are doing packaging or trimming or working in the warehouse? We want to pull that into cost of goods sold. So because 280E is an issue for federal, only, it doesn't apply to California. We want to try to get as much into 280E as possible. There's guidance with the Harborside court cases.

Now, on your tax returns, when you do a business, it says more or less, "What's your net income, and then tell me what your 280E deductions are that you can't deduct?" So there's gotta be something.

Patrick Finnegan: I would say if you're a dispensary and you have somebody that's responsible for purchasing, procurement wages would be one that we would look at closely. I know Peter and I are in agreement that we'd want to see job titles and descriptions to support that as well, just in case, we have to deal with that or defend that in the latter period. But you know, it's not uncommon to send somebody up to Humboldt or some of the farms out there to go buy flower.

Peter DeGregori: The majority of rent is not deductible, right? Because it's in 280E. Security. Salespeople, the employees, you know, all those things that are to run the business are not deductible.

Wally from Meadow: For 280E, what about the for delivery operators? The car's, tracking, any of the phones, is any of that in game?

Patrick Finnegan: I would say the delivery operators are the most impacted by 280E, because so much of their expenses are associated with the delivery drivers and the vehicles. That's a sales expense. Are we tracking the inventory? I guess Peter and I could make a point on that to include it, but then again, that's a small dollar amount. The expenses of the employees and the deliveries and so forth, make it a really tough environment for 280E.

Wally from Meadow: This last is the last question we're going to take. Would just the buyer salary bet deducted or the salary and the transportation?

Patrick Finnegan: Neither. Right, Peter. I don't see it. I mean, the, the vehicle is part of the delivery and expense. It's not a cost of sale.

Peter DeGregori: Yeah. See, this is a hard one. This is where, you know, you go in and look to see. And thank God about Harborside, because they've gone toe to toe with the government. So you kind of go back to those sort of court cases. And you look at, what's been arguing, what's been.

Patrick Finnegan: I saw I might've misspoke. If there is a buyer that's operating on behalf of a delivery company and their job is to buy the weed, we can make a contention that that's part of cost of sales. They're likely to be doing other things. Not everybody has a full time buyer, but the transportation expenses, are considered part of the sales expenses.

Wally from Meadow: So we're about to wrap. As we close, two things I want to say. We didn't talk about how important a good cannabis bookkeeper is to an operator; they're worth their weight in gold. We didn't really touch on that, but for everyone in the room, if you don't have somebody that has done bookkeeping in cannabis, it's equally as important as a good CPA; they can save your business. I also want to say, because someone did ask us at the beginning regarding if the tax issues that we're seeing are the bad software issue or lack of internal testing by the compliance person or owner/operator? On the tech side, it's system efficacy. And I can't stress this enough; if you're taking for granted that the system that you're using is gonna just work because you paid for, it's not, and that's the unfortunate thing and a disinformation that we're trying to really dispel over at Meadow. The reality is that some of these systems do not execute tax structures correctly. They don't do it consistently. Tax structure execution doesn't mean anything if the Metrc reporting is inaccurate. This is what's cannabis specific; this is where the point of sale system comes in.

If the tax structure is fine, but it doesn't report to Metrc, you're just taking on one problem and leaving another. They both have to do it correctly. Meadow's the best at it. To the delivery side of things, we just rolled out Dynamic Delivery. We have a full ice cream truck model with regional tax execution automated into the system that comes up as a line item in the reports.

So when you call Peter, he can quickly say, "Oh, there it is. There's that local tax I was looking for, etc." And I think Aria brought it up at the beginning, if you're doing any manual uploading as a retailer into Metrc, if you're doing manual adjustments inside Metrc, you're doing it wrong. That's not the way to do it.

And it's a real thing. Let me say that: That is not tenable. It is not how you should do business. It's a horrible way to spend the time. It's a true labor cost, and there's a better way to do it. And Meadow does it every day. So please, I want to thank Patrick and Peter for joining us today. This was awesome.

Look, let's make a little pact here that have broad cannabis industry tax reform happens, let's run this back and do this webinar again, because I think it's going to change this conversation considerably right.

If you need support with your cannabis dispensary taxes, please reach out to Patrick and Peter. Basically between the two of them, they have just about covered the state of California here with Peter down in SoCal and Patrick cover the Bay Area right on up.

Thanks to everyone for tuning in for asking your questions. If you still need more support, feel free to reach out to anybody. Their email addresses are there on the screen, and we look forward to seeing you all again, hopefully soon.

For more cannabis retail tax support, reach out:

Patrick Finnegan: patrickfinnegancpa@gmail.com

Peter DeGregori of Vault 8 Advisors: peter.degregori@vault8advisors.com

To explore how Meadow's point of sale system can help you streamline your operations and keep you 100% compliant, book a call.

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