With its intricate tax rules and evolving regulation, the legal cannabis industry offers tax & accounting firms enormous business opportunity despite the challenges
As of the time this piece is written, there are more than 20 U.S. states, plus Washington, D.C., that have fully legalized cannabis, commonly known as marijuana. These states have recognized the income potential for their jurisdiction and have levied various taxes, including special excise tax, sales tax, and more — and each state differs in how it calculates and assesses those taxes.
In 2022, the cannabis market in the U.S. was estimated at $13.2 billion and is expected to reach $15.8 billion by the end of 2023. Further, the market is expected to grow at a compounded annual rate of about 14%, reaching about $40 billion by 2030.
As with any emerging industry or new market, many opportunities abound; however, in the cannabis industry, there are gray areas that will requires not just knowing taxes but also understanding the complexities related to this market.
For example, cannabis is taxed differently at the federal and individual state level. And although many states have legalized it, cannabis/marijuana is regarded as a Schedule 1 substance under the federal Controlled Substance Act, accord to the U.S. Drug Enforcement Administration (DEA). This misalignment does create some challenges in regard to taxes, but the Internal Revenue Service (IRS) still requires the payments of taxes by cannabis-related businesses.
Further, the many tax deductions and allowances that are offered to regulator businesses are not afforded to cannabis-related businesses, and they are therefore subjected to higher tax rates. Adding to these many complexities, because cannabis is still considered illegal under federal law in the U.S., many traditional banking services are unavailable to cannabis businesses, which can complicate the process of paying taxes and create additional compliance challenges.
Understanding client needs and educating the market
Even beyond these high hurdles, there are some potential opportunities to expand your tax & accounting business by serving the cannabis industry.
In the 2023 State of the Tax Professionals Report, many survey respondents from tax & accounting firms said their firms planned to continue, as in previous years, to add or increase their advisory services offerings to clients. To gain an edge, some said their firms would offer specialized services, including being an expert in specific industries. Clearly, those tax & accounting firms that can specialize in knowing the cannabis market and its related tax issues will create a unique opportunity for themselves and an advantage over their competitors.
The ever-evolving landscape of cannabis legislation in the U.S. also signifies a rich vein of opportunity for tax firms. As the cannabis industry matures and continues its expansion, a range of challenges and opportunities around product legality and industry regulation will surface, making it imperative for tax & accounting firms to position themselves strategically to better help those clients navigate these uncertain waters.
In the cannabis industry, there are gray areas that will requires not just knowing taxes but also understanding the complexities related to this market.
While the figures and forecasts paint a promising picture, tax & accounting firms must remember that this industry itself, for many, is uncharted territory. Most cannabis entrepreneurs ventured into this business driven by passion, the promise of growth, or both. However, their expertise in cultivation, product development, or retail might not extend to intricate tax laws.
Tax & accounting firms, therefore, must play a dual role. First, as service providers, firms must ensure that their clients’ businesses remain compliant and tax-efficient; and second, as educators, they must demystify tax concepts and regulations that are specific to the cannabis industry. Indeed, webinars, workshops, and informational blogs can serve as excellent platforms for this education. Going down the educational road with clients, not only positions tax & accounting firms as industry thought leaders, but it also helps potential clients understand the value of professional tax & accounting services that are specific to the cannabis industry.
Further, there is a slew of adjacent services and products that complement cannabis cultivation and sales, ranging from cannabis-related tech platforms (like Leafy and Weedmaps), marketing agencies that specialize in cannabis, cannabis-centric event management, and more. Each of these sectors carries its own unique tax implications and represents other avenues in which tax & accounting firms can offer their services.
How tax technology can help
Clearly, tax & accounting firms that are agile enough can significantly benefit from offering accounting to the cannabis industry. Depending on the location, firms offering cannabis tax service can suddenly be overwhelmed by the boom in business — this would make a firm’s ability to integrate advanced technologies that can streamline and enhance the services tax firms offer quite advantageous.
Implementing artificial intelligence- (AI-) driven tax analytics, for example, can provide insights into tax optimization strategies. And using cloud-based platforms can enable seamless documentation and real-time collaboration between the firm and its clients. Investing in such technologies now can help prepare tax & accounting firms for the industry’s future demands.
Of course, firms shouldn’t bet the entire farm on the cannabis industry. And it is worthwhile noting that while the trajectory looks promising, there will be bumps along the road. Regulatory changes, market saturation, international trade policies, and shifts in public sentiment can all influence the cannabis industry’s growth. Tax & accounting firms should proactively monitor these variables and adapt their strategies accordingly. In fact, offering this kind of scenario-planning and risk assessment as part of their overall service suite also can set a tax & accounting firm apart.
The cannabis industry, in all its vibrancy and challenges, represents an untapped goldmine for many tax & accounting firms. While the potential for profit is evident, the real winners will be those firms that approach it with a mix of expertise, adaptability, and a genuine desire to guide and support cannabis entrepreneurs through the maze of tax compliance. As the green wave continues to sweep the nation, tax & accounting firms have a pivotal role to play in shaping the industry’s future.