Tax and Legal Challenges in the Cannabis Industry with Nick Richards Pt 2

When the cannabis industry got started, people didn't understand 280e and there are a lot of them. When 280e kind of showed up, they sort of said, that can't be right. Here's the reality of 280e in a very, very, simple little example.
280e applies to deductions but not cost of good sold. And so let's put it in the context of psilocybin. If I buy a mushroom to sell and I pay $2 for that mushroom, and then I pay my salesperson a $2 salary, and they sell it for $5, right? I just made a dollar, but because of 280e, I am not going to get to be able to deduct the $2 I pay to my salesperson.
So I'm gonna pay tax on $3. That is going to be my income for tax purposes. And so that creates a number of big problems. Number one, if you are an owner in an LLC and you're in a flow through company, that's your personal problem. You just got a dollar, but you have taxable income of $3 and it could well be that you didn't even get that dollar.
That’s a huge burden, right? Those numbers can be much, much, much, much bigger. A bunch of the cannabis industry woke up to the reality of 280e because they went through audits. They realized through that audit that they weren't even profitable once 280e applied. They weren't making any money, but guess what?
They had multimillion dollar, personal tax liabilities all in the same moment. That's the realization, right? That is not what Theil Simon industry wants to happen to them. Right. Um, it is brutal. A lot of those people are still carrying those huge liabilities. The IRS won't forgive them even though they never, never, never had the money. Right. It's horrible. It is a tragedy actually for the industry right now. Right. Cuz it's almost like they're getting taken out when they're a legitimate thing.
You, you know, let me, uh, uh, Meredith, let me add one more thing to this. Um, Can, I can just go right? Um, yes you can. So, you know, because of the way our system works, state tax returns start at, you know, line 35 or whatever it is of the federal tax return, 28 or 30.
And so, if you're in a company that's subject to 280e, you're gonna pay that tax again at the state level because it takes off from line's you're federal NDI Justin Gross. And so many states have decoupled from the federal regime and allowed what I call an add back, where you put those disallowed costs back in on your state tax return.
But I don't see that happening in the psilocybin industry right now. If I'm a person who is involved in that industry and is trying to advocate for my business, that's a really, really, really important thing to get is that add back to decouple from the federal 280e penalty.
Do you think that's why the psilocybin industry doesn't want to be associated with the marijuana? Or kind of piggyback off of that because they don't want to be roped into 280e or do you think, what other reason, cuz you had said that they kind of want to differentiate themselves. What other reason or why would you, why do you think that's the case?
I think it's a number of things. I think that's certainly one of 'em. I think also, you know, the marijuana industry is much more of a party industry kind of platform? There's maybe more like stereotypes or like biases associated with marijuana. It started out medical, and then, now we're finding out, I think that there really are legitimate medical uses and all this kind of stuff, whereas the psilocybin industry is really starting out medical and I think that is significant for the psilocybin industry.
The cannabis industry's on hard times right now. Right. It you look at the 10 biggest cannabis companies out there, they're carrying close to a billion dollars in tax debt because of 280e. If I'm a psilocybin company, I want to run away from that as far and as fast as I can.
That's fair and try to distinguish myself differently. Many of the state regulators are frustrated with the cannabis industry because the regulations and the industry aren't always on the same page right now.
Judy, there's this really fun thing going on in the state of Colorado that I call the Bud Trim Wars. It's sort of apocalyptic, I hope, and bud is the kind of cannabis that you want to buy, flour Bud, whatever that is. And Trim is the kind of cannabis that then goes to make oil and edibles and all that kinda the extractive component that you've used to make something else that you're not smoking.
Right? And they have different tax rates that apply to 'em. Bud rates higher than the trim rate, but the state thinks that the bud is like in the trim, are these two very distinct, totally separate things that, never the two are entwined. And the truth is that's not the case.
That actually there are leaves that come out of the buds, right? And there are, there is this thing called keefe. That's the good stuff that falls on the leaves and there's just all, it's not as clean as that. But the state wants to say that if you have any bud in your trim at all, it's all bud.
All of your trim is bud. And try to assess that tax. Guess what? That's $ millions. That's just bad policy. It's brutal. And the industry's like, look man, this is the way everyone's doing it. No one will buy that trim.
No one will pay Bud price for trim. And we can't sell that as Bud. That's the reality that the industry faces and the Department of Revenue isn't just on the same page with that. And, you've already collected the tax. It's done. You've already had that customer buy the good, you can't go back to the bats and redo it.
That's brutal. That's the white industry. It's one of many things like that every state has to work through those processes and it gets frustrating after a while. Oh, it's ridiculous. On both sides. Right. So back to why the psilocybin industry doesn't want to inherit those problems.
I think that we're gonna make real progress for a lot of people that need help. I think it's gonna become a main, both of these are gonna become in many different ways, mainstream medicine that we'll see.
It's really a promising time, I think for, people who don't want to take opioids and things of that sort and want an alternative source of comfort for them. We’re gonna get there, but it's like, how fast do you think? Are we five, 10 years out?
I mean, can this really happen in a day if people really wanted to do it, but it's not happening. It just keeps getting more complicated to sort through, but in the end, do you want the business to thrive or not? I really struggle with the 280e. Fundamentally, I just think it's a legitimate legal business. We should just allow it. That should just be a carve out. Nobody asked me.
It's fair to treat it like a legitimate business, but if what you're saying indirectly by disallowing expenses and otherwise, and then regulating and re transferring things that are muddled, you are saying it is an illegitimate business.
That's craziness. They're a huge taxpayer in our state. I think the car industry historically was the most sales tax revenue in the state. And I think construction's up there too. But I think you're right. Marijuana has turned out to be a very good revenue raiser and you need to rethink this government, right?
And people want it. The voters have spoken. So, and they're good community partners for the most part too. You know, they come into to urban decaying neighborhoods and they have to spend a bunch of money to update a facility that's falling down. They have to spend a bunch of money to make sure that that facility looks good and is compliant with all that and is secure all the regulations and is secure and everything else.
And if we did this right, we'd take those drug sales off of the streets and put 'em into these secure places where they could be controlled and tested. If you buy marijuana in a dispensary, you know it's clean. If you buy it on the street, you have no idea that whether it's clean or not.
Right. There's a lot of good reasons that why do take that day and make this work, Judy? But there's a lot of politics still preventing that from happening. Yeah. Well, and I think there's a lot of stigma associated too, right? Like my father-in-law suffers a lot with like chronic pain and his first source is a pill.
So you've got Vicodins and Percocets and all of that nonsense in his cabinet. But my mother-in-law is still of the impression that marijuana is a gateway drug to. I don't know, Alison, you're gonna smoke weed once and all of a sudden you're gonna get heroin. Pretty sure if we're talking through about like, the opioid crisis that exists in Ohio, which right kind of gets pinpointed to a lot. Like, there's still a lot of stigma and education that needs to be disassociated from it. And the unfortunate thing is, I think. You know, maybe more of the progressive states, Oregon, Colorado, or on the earlier adopter sides of more natural treatments also kind of stigmatized of like well, they're just like the stoner hippie states, so that like they just want to do it so they can get high legally. And so it's just like there's still this push pull, which is so not true. Lettuce. Right? The lettuce. It's lettuce. It's not, it's bad Lettuce.
Kentucky, I think. So I've heard that term from somebody. My dad died of cancer and he suffered greatly for almost a year, and I know he took medical marijuana to ease his stress. I can't even imagine living with a terminal illness and going to sleep at night. It's one thing when you're busy and everyone's telling you how much they love you, and we're sad you're, not doing well.
It's another thing when you're alone with your own thoughts. I mean, the stress of going through a very difficult illness. What a blessing to have something that might help you have less inflammation. All the things that we're suffering from as a society for a naturally occurring substance that's palliative.
I just I think it's really fascinating. I have to say, I went to a conference years ago in Vegas, cuz I was trying to decide how many of these cannabis clients who I want to work with. And I was very impressed with the quality of the people there, with the content, with the ethos was just super, not pot, you know?
It was not stoner. It was very, this is good, it makes me a better person. I want to help other people be better people. I want them to have less anxiety. Just a lot of that. And I really, really thought it was a lot of really good people and it wasn't the perception that people think of just getting stoned.
I don't think that's the case at all. They're very legitimate businesses. They are providing meaningful balance to this world. So they have to be and so as you know, we kind of wrap up, Nick, what are some things that you're kind of paying attention to and wanting to kind of get out to the public for companies who want to enter this space or think about, what would be your parting words to them? What would you leave them with?
First off, using good professionals like Judy and like you and having real advice is really important. A lot of people got really hurt because that wasn't available in the cannabis space and they really paid the price.
So get the right professionals, experienced professionals that have experience in the areas that you're talking about. There's a lot of different kinds of psilocybin and I wish I knew all the different strains cuz I'd throw one out right now. But, you know, a real tax professional, right?
Then know that you can't cut corners in these industries. You are gonna get audited and those corners are gonna be seen and you have to pay attention to it. And you have to spend those dollars. Professionals are not cheap. But the answer, the truth is that if you try to just wing it, you're probably gonna fail, it's probably gonna come back and be a big personal problem for you too. And so, it takes bravery, but it also takes a little bit of caution as well.
Well, I think that's really, you know, helpful advice even for any business owner right outside of just, you know, a, a stigmatized industry.
So, you know, Nick, we really appreciate it. If the tax man calls you, don't talk to them. Yeah, don't talk to them, Judy. I dunno how many cases I've taken on where they've already talked to the guys and I'm like, guys, what are you doing? No, it's not even true. Why would you say that? Don't talk to them; don't give them a tour. No, no, no. Not without somebody like being there to make sure what you say is correct. Cause people oversell their concepts, and it isn't really what they're doing. Sometimes they don't really have the right ear of how to explain. They're more marketing sales driven than they are actually what the government wants to know.
Instead, say I'm represented by Judy and here's her phone number. Please give her a call because if you don't say that, here's the next thing they're gonna say. Oh, Mr. Taxpayer, can you tell me where you bank? Why do you think they want to know that so they can take your money?
That's why it's a lot easier for me to say, gosh, Mr. Taxperson, I just don't know where they bank. A hundred percent, right? Well, and to sanitize the data, I mean, I actually am just in a situation right now where I'm dealing with the city audit. It's been going on since September and they're like at the deadline, and I gotta twist an appraisal to file a document, a protest with the city to stop the top clock.
Otherwise, the audit assessment stance, we got no relief. Right? We're just stuck. We gotta go to court. It's gonna be very expensive. Who knows? So I'm like, why do people do this? Like, you just thought you could do it and then you didn't really know what you're doing and then you thought it would be a better answer and it wasn't.
I wish I could do that at the outset though, because a lot of people are like I don't want to spend the money with you. You can't show them at the outset the money you're gonna save them because you don't have a number.
It's hard to prove a negative, if that makes sense. So I'll struggle with that cuz I mean, I look at what I'm able to do once I have a number, but if I don't have a number and I begin, I don't always know by the end it's, and I saved them anything. I try to say, well we didn't even deal with that, so we're good.
Right that's big. Think off the record. Yeah. It's interesting you say that, but you know, people are stressed. They don't know how to hire the right counsel. They don't know you. So hopefully more people will know you now and know that you're are a resource for them as a legal expert in the, in the field.
And that's really important to, like you said, have that expertise out there in the universe. And I think I speak for the tax professional community as a whole that look, if you have a problem, we will talk to you and not charge you and see if we can help you. And if we can't help you, we'll let you know.
And if we can help, then it's gonna be worth it. I think that's the truth of it.
Well, thank you so much and until next time, this is SALTovation. Thank you.