Pubdate: Sun, 21 Feb 2016
Source: New York Times (NY)
Copyright: 2016 The New York Times Company
Contact: http://www.nytimes.com/ref/membercenter/help/lettertoeditor.html
Website: http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Conrad De Aenlle

LEGALIZED, SURE. BUT GOOD LUCK FILING THE PAPERWORK

Marijuana is legal to buy in several states, but no law says that 
selling it will be free from cumbersome expense and paperwork, 
especially when it comes to taxation.

Sales of the drug are permitted for recreational use in just four 
states - Colorado, Oregon, Washington and Alaska - and the District 
of Columbia; 18 other states allow sales for medicinal use. But 
marijuana is still illegal under federal law, and that helps explain 
why production and sale are tightly controlled.

A record of each plant must be maintained, beginning before the seed 
even sprouts, and it must be updated with every significant movement 
or activity involving the plant, business owners and their advocates 
within the industry say. Once a plant is processed for consumption 
and reaches a store, the authorities want to get their cut.

City, county and state governments tax marijuana sales, often at 
rates that differ from place to place and are higher than for other 
products. To complicate matters further, customers typically must pay 
different tax rates on the substance itself, depending on whether it 
is intended for medical or recreational use, and yet another rate on 
related items, say, vintage Mr. Natural T-shirts.

"There's definitely a great deal of regulation," said Keith Stroup, 
legal counsel for the National Organization for the Reform of 
Marijuana Laws, known as Norml. "Most states that have legal 
marijuana have seed-to-sale" tracking rules. "It reflects the reality 
that marijuana has been illegal for 75 to 80 years."

The reality for Derek Peterson, chief executive of Terra Tech, the 
first publicly traded American marijuana grower, is "a significant 
burden from a manpower and data-collection standpoint."

"A lot of banks won't serve the industry," Mr. Peterson said. That 
forces him to devote extra labor to "counting and organizing dollars 
on a monthly basis and cash on a daily basis to avoid shrinkage and 
theft," he said. "The cash-management aspect is the most difficult 
hurdle any of us have."

Without access to routine banking services, just paying employees 
becomes problematic for marijuana businesses, said Eddie Miller, 
chief strategy officer at GreenRush.com, an online delivery platform 
offering products from about 180 marijuana vendors. Handling the part 
of their salaries that employees are not paid is also difficult.

"You can't do federal withholding" for income tax and Social Security 
contributions "because you can't get a bank account," he said. 
"Cannabis businesses have all the compliance that regular businesses 
have to follow, and they have to jump through even more hoops."

Their tax liability is likely to be higher, too, another effect of 
marijuana's dubious reputation. Certain jurisdictions tack a 
special-purpose tax onto the sales tax, Mr. Peterson noted. Oakland, 
Calif., for instance, adds 5 percent to the city's regular 10 percent 
sales tax.

Just because marijuana can be sold legally in some states does not 
mean that Washington approves of the practice. It is still considered 
illegal drug trafficking under federal law, and the Internal Revenue 
Service taxes the industry accordingly. Section 280E of the Internal 
Revenue Code forbids businesses that traffic in controlled substances 
from deducting business expenses, apart from the cost of goods sold.

"That makes our business challenging," Mr. Peterson said. "We've got 
all these states establishing laws, but we have to answer to federal 
authority on taxes. There's no break or pass that any of us are getting."

He is able to organize his operation to minimize the impact of 280E 
by ensuring that many of his expenses can be counted as costs of 
goods sold. He also takes care to distinguish production and sales of 
the drug from the rest of the business, the part that involves 
ancillary items, from which deductions are permitted.

The difficulties that growers and retailers face are being eased by a 
range of software systems tailored to the industry. With names like 
Proteus 420, BioTrack THC, MJ Freeway and BudMate POS, these systems 
track various bits of data related to plants and employees and help 
companies meet the onerous seed-to-sale requirements.

The software "helps business owners get away from the paperwork and 
grow their businesses," said Kyle Sherman, chief executive of 
Flowhub, a Denver company that provides an application designed to 
"track plants throughout the life cycle" for growers and to aid 
retailers by logging sales of items that receive different tax 
treatment. His system also allows users to transmit information to 
state authorities, but so far only in Colorado and Oregon.

Josh Ginsberg, chief executive of Native Roots, an operator of 
marijuana retail outlets across Colorado, said he chose Flowhub's 
system because of its utility in dealing with the state's regulatory 
environment. Mr. Peterson at Terra Tech said he chose MJ Freeway, a 
much larger company, because he thought it would better meet the 
needs of a business that, like his, operates in several states.

As much as marijuana providers may grumble about the tax and 
regulatory obligations imposed on them, Mr. Stroup, who founded Norml 
in 1970, considers it merely a cost of doing business. Without the 
stringent and expensive requirements, moreover, he wonders whether 
legalization would have occurred.

"I'm sympathetic to those in the industry who end up having to hire 
legal counsel and regulatory experts," he said. "There are a lot of 
items to worry about, but it's not the only industry to face heavy 
regulation, and you can still charge a fair price and show a hefty 
profit at the end of the year."

If you do it right, that is. As with any other product line, "a 
successful business plan is essential," Mr. Stroup said. "It's a 
naive concept that growing marijuana is just about throwing a few 
seeds in the ground and watering them occasionally."
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MAP posted-by: Jay Bergstrom