The cannabis industry: how big will it get?

Thompson Coburn LLP

Medical cannabis - Illinois

On November 17, the PBS affiliate in Chicago, WTTW, reported the Better Government Association had issued an investigative report on the medical marijuana application process in Illinois. While the “Chicago Tonight” program focused on the transparency (or lack thereof) of the application process, nothing substantially new was reported. As we’ve discussed in our previous post, Illinois has the most rigorous standards for the industry of any state. What industry hopefuls in Illinois already know is that several hundred applicants are competing for a very limited number of licenses. The state is expected to act on applications before the end of the year.

The BGA report did include interesting state and federal tax developments on the industry in multiple states. The Business Cheat Sheet blog has summarized the state sales and excise tax projections in the seven states with the largest potential revenue from the sale of cannabis, medical and recreational.

Digging deeper, we see that some of the numbers cannot be taken at face value, such as the Colorado report, which spans the January to August time frame. That time frame includes the famous “smoke out” date of April 20, which annually produces a spike in all data, including sales tax revenue. For that reason, revenue figures for the full calendar year may be distorted by the spike due to increase sales on 4/20. If so, there will be modest but measurable growth in sales for the year reported in Colorado.

Overall, industry experts are predicting that the size of the national market for legalized cannabis will exceed the November 2010 predictions of Harvard economist (and Cato Institute affiliate) Jeffrey Miron, who previously put the size of the marijuana market at $14 billion.

Can accountants work with marijuana retailers?
In further breaking news, The IRS Office of Professional Responsibility (OPR) plans to release guidance in the first quarter of 2015 for practitioners working with marijuana retailers in states where the business is legal, an official said Nov. 19.

It is important for OPR to make a statement as to ethical practices for tax return preparers working with the marijuana business, OPR Director Karen Hawkins said at a public meeting of the Internal Revenue Service Advisory Council.

“I'm going to stay away from the controlled substances issue and focus on what the tax courts have said, so cost of goods sold is in play, but anything else that's in play is going to depend on whether it's part of the trade or business of cultivating or sale, or whether it's a subsidiary trade or business that just happens to have a connection,” Hawkins said.

Members of the advisory panel suggested that the IRS issue published guidance clarifying that a tax professional will not be considered unethical, targeted for audit or be considered in violation of Circular 230 rules solely for preparing a return for a marijuana business. Some states now allow the retail sale of marijuana, but such sales are still illegal under federal law.

The text of the IRSAC’s 2014 annual report is here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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