Once a cannabis owner secures their license, that’s it, right? Beyond just a yearly check-in?
State regulators review cannabis business license holders every quarter, if not monthly. If cannabis business owners do not meet stringent state compliance requirements, they risk losing their licenses or paying severe tax penalties.
As a cannabis accountant, it’s your job to help your fledgling and established cannabis entrepreneur clients stay afloat in this industry. You’ll assist them with compliance by fully understanding not only federal tax codes but also individual requirements of the states where your clients are licensed.
By understanding the basic requirements for license and compliance, you automatically help your clients stay competitive and in business. And you add instant value to your offering.
Unpacking State Requirements from Fees to Renewals
Before you begin helping a client with state compliance, ensure you check with the state where you serve so you have the most updated details for your clients. Regulatory information is constantly changing, and it’s your job to stay up-to-date.
General State-Related Information to Check Out
You’ll want to start by verifying license types in your state or the state you’re interested in serving. Are they medical, adult use, or both?
Next, check out license fee information. You can access some of this info from resources such as the Marijuana Policy Project website. You can locate application and registration fees for your state and state taxes on that website. Knowing these figures will assist you in drafting a budget for your client, including license renewal and taxes. In some states, license renewals can be six figures, making them a must to plan properly.
In addition to state taxes and license fees, you’ll also need to read specific state regulation laws. You can find this info with the National Conference of State Legislatures. You will also want to research state marijuana tax. Each state levies this tax differently, depending on the product, sales price, weight, potency, and more. Consider these variables part of your foundation as you move forward in ensuring your client’s compliance.
Know Your Regulators
Every state has various regulatory bodies that oversee state and local cannabis programs. Some may just have one regulator, while others have medical regulators and a separate adult-use regulators. Others may have separate state and local regulators. You’ll also need to report to bank regulators if your client is banked.
An excellent example of a regulator structure is Massachusetts. Cannabis is legal in Massachusetts for both medical and recreational. The Cannabis Control Commission (CCC) is their state program that implements laws for medical and adult use. Annual renewal fees are required for business owners to maintain their licenses with the CCC.
Individual Massachusetts cities manage Host Community Agreements (HCA). Under state law, Marijuana Establishments (ME) and Medical Marijuana Treatment Centers must uphold HCA requirements within the municipalities where they plan to run their businesses. The complicated part is that a business owner must be approved for an HCA before getting licensed with the state. Owners pay annual renewal fees up to 3% of yearly revenue. If a client makes $1 million in sales, that’s a $30k HCA fee. If your client makes closer to $5 million, that would be a $150k fee, which translates to a damaging chunk of change if your client didn’t properly budget for it.
Business Registration Components
Business registration for cannabis companies is fortunately the same as it is for any other business. Keep tabs on ongoing registration requirements, fees, and renewal dates to accurately serve your clients. If you familiarize yourself with the steps involved, you can guide many clients to success by properly registering them and procuring a license from the beginning.
Registration involves the following essential parts:
Your client first needs an EIN (employer identification number), a nine-digit number assigned by the IRS. Even though cannabis is federally illegal, cannabis business owners are required to obtain a federal EIN, just like any traditional company.
When onboarding a new client, ensure you obtain the IRS documentation issuing the EIN. Too often, business owners lose this paperwork and end up using an incorrect EIN when trying to establish banking and file income tax returns. Make sure you know all EINs associated with your clients’ operations and cross-reference IRS letters for validation.
Business License with the Secretary of State
Registering with the secretary of state follows the same process you’d follow with any other industry. You’ll verify your clients’ licenses are up-to-date and active. Note renewal dates and fees, and plan and budget for those annual renewals. Verify appropriate login details to renew your clients’ business license.
State and Local Cannabis Licenses
Valid cannabis licenses are critical when it comes to serving clients. We do not advise providing any services to unlicensed or black market businesses. Doing so could result in steep fines and criminal allegations for both your clients and you.
Before you serve a client, double-check all licensure requirements for that client’s license type. You’ll want to thoroughly understand the needs of the state and any city, town, or local jurisdiction. Finally, there are frequently several layers of cannabis licensure. Each layer has a different fee structure, and some require approval from another layer to move forward. This is where licensing gets tricky, and your skills will be in demand. Once you understand the renewal timeline and fees, you'll want to work this into your client’s budget and preliminary engagement letter.
State Department of Revenue
Your clients must be registered with the state’s Department of Revenue (DOR). To do this correctly, make sure you have your client’s login details for the DOR website and double-check that your client is registered for all required taxes for their license. Also, verify that all applicable tax payments are current.
State Unemployment Tax Department
This step in the process is vital if your client has employees. Have them register with the unemployment department in each state where their employees are located, including remote employees.
If your client uses a third-party payroll provider, the provider will need access to the state payroll and unemployment departments so they can properly file and remit payroll or unemployment taxes. Typically, these third-party firms will ensure payroll and unemployment taxes are paid, but you’ll need to know the details required to confirm this end of licensure and renewal is taken care of.
Making Sense of the Marijuana Renewal Process
Aside from all general business registration processes and requirements, you must be aware of the marijuana renewal to ensure all the financial requirements are met. While you should not complete the license renewal process, your role is to assist the client with budgeting and provide any support necessary in the necessary the application process, along with verifying that all state, local, and unemployment taxes are in good standing.
To use the example of Massachusetts again, in that state for renewal, your client would need:
Certificate of Good Standing from the Secretary of State, including validation of current state registrations
Certificate of Good Standing from the Department of Revenue, detailing all recent filing and marijuana retail tax
Certificate of Good Standing from the Unemployment Department, which included all current unemployment taxes
We have seen many cannabis operators try to skimp on these compliance requirements. Some may take what they view as a “low cost” loan from the state, slowly paying or not paying state marijuana tax at all.
These practices are highly inadvisable. Inform your client about the costs of not correctly remitting sales taxes or following the renewal protocol. Issues that could result from noncompliance include the state freezing your client’s bank and garnishing accounts, losing their banking privileges, and losing their license.
Leading your client towards state compliance and license renewals takes some initial legwork and research, but once you understand the laws within your state, your value for clients will be unparalleled. To learn more about the processes required to serve cannabis accounting or bookkeeping clients and rise as a leader in the cannabis space, check out a free 30-day trial at NACAT Pros.