A cadre of lawyers, accountants, insurers and real estate agents expect big returns from the start of adult-use marijuana sales in Maine on Oct. 9 as companies seek professional help to navigate the complicated new market.
While they had previously shied away from touting their “green business” clientele in Maine, those professionals now are openly advertising specialties in the highly regulated recreational marijuana business as it comes with increasing oversight at the state and federal levels.
“The cannabis industry is not only about cannabis,” Jacques Santucci, the founder of Portland-based cannabis business consulting firm Nucleus One, said. “Think about insurance, software, professional training and packaging. Cannabis can create a framework or a business environment that would create more jobs.”
The IRS recently issued detailed guidelines for marijuana businesses after a U.S. Treasury department report indicated more audits may be needed to find millions of dollars in unpaid taxes. Existing medical marijuana businesses in Maine said the state Office of Marijuana Policy is ramping up inspections to check whether they are meeting license conditions.
“A lot of people want to be involved and see the industry as a cash cow,” said Keri-Jon Wilson, a co-owner of Pot + Pan, a Portland medical edibles manufacturer and a medical marijuana caregiver. “But every piece of regulation means more cost to the person in the industry.”
Various edibles containing THC, the main psychoactive ingredient in cannabis, made by medical marijuana edibles company Pot + Pan of Portland. Credit: Courtesy of Pot + Pan
Support companies would be tapping into a fast-growing market. Nucleus One projects sales for the legal medical and recreational markets will total $76 million this year in Maine, with adult-use making up $20 million of that. Sales are expected to almost quadruple to $295 million by 2025, when adult-use will dominate the market with $265 million in sales.
Maine also expects sales and excise taxes on marijuana businesses to bump up revenue. Even in the first partial year of sales, the state’s budget department forecasts $6.1 million in gross sales tax revenue and another $6.8 million in gross excise tax revenue for adult-use marijuana in the current fiscal year from July 1 until June 30, 2021. That should almost double to $11.8 million in sales tax revenue and $11.8 million in excise tax revenue for the following year, the first full year of adult-use sales.
The tax on recreational marijuana retail sales is 10 percent. The excise tax on cultivators is $335 per pound of flowers, $94 per pound for trim, $1.50 per pound for seedlings and 35 cents per pound for seeds.
Maine has been generating between $12 million and $14 million per year from the 5.5 percent sales tax on medical marijuana, a trend that is expected to continue this and next fiscal year, according to a budget department spokesperson.
While rewards are potentially large for both marijuana and support businesses, so are risks. Marijuana is legal in Maine, but illegal at the federal level. That has made it difficult for marijuana businesses, which can cost $300,000 or more to set up, to get traditional financing from banks or credit unions, which could face federal penalties if their cannabis customers aren’t legitimate. Many cannabis business owners deal in cash, putting them at risk for theft and making it more difficult to document purchases and sales for tax purposes.
Wilson of Pot + Pan said she cannot get a home or car loan from her credit union because of her income sources. Instead, she pays $35 more per month to her credit union as a marijuana business and pays an extra percentage for any cash she deposits.
She wants to branch out into recreational marijuana, and has conditional licenses from the state marijuana oversight agency for a manufacturing and a retail store. Those licenses are the first step in getting approval to operate a recreational marijuana business.
But financing it is a challenge and she’ll likely have to turn to private financing. Stringent regulations also are costly, as is the still-taboo nature of the business, which can add costs to doing business.
The state’s delays in starting the recreational business, which was approved by voters in 2016 and pushed back this year from the spring to October as the state and municipalities figured out licenses amid the coronavirus pandemic, also hurt cannabis businesses.
“We’ve been paying rent on prime retail space in Portland that we can’t open, so when it came down to applying for an adult-use license, we could not come up with the money for licensing or even applying for adult-use right away,” Sergio Hernandez, general manager of Evergreen Cannabis Co., a medical marijuana business in Portland, said.
Marijuana businesses also face barriers in finding real estate, because landlords could risk losing their bank loans if they let a cannabis business in the building, Santucci of Nucleus One said. That’s created a premium of up to 50 percent on what cannabis businesses pay for space.
“I’m not saying the owners are entirely wrong,” Santucci said of the risk. “I understand why they charge a little bit more, but not 50 percent more.”
Sara Moppin, a lawyer at Preti Flaherty in Portland, which has 11 lawyers in its cannabis practice, noted that few cities and towns have opted into allowing recreational marijuana businesses. Those that did have a limited number of zones to conduct business, she said.
“These folks are having to enter leases with astronomical rent amounts and they have no idea if their business will support it,” Moppin said.
Even if they find space, marijuana businesses, especially retail stores, will find they can’t write off a lot of expenses that non-marijuana businesses can, including, rent, utilities and employee costs. That’s because of a part of the federal tax code that prohibits deductions because it considers marijuana businesses to be illegal.
Maine has decided to decouple its taxes from the federal tax code and allows business deductions for medical marijuana businesses. A bill to extend that to recreational businesses has not yet passed the Legislature.
That leaves only the cost of goods sold, such as soil and packaging cultivators must buy to do business, as writeoffs. Retail stores have very little cost of goods sold, said Martha Fox, another Preti Flaherty lawyer.
But it’s not all bad news, said Walter Matthews, a certified public accountant at Dufour Tax Group in Portland, where almost half of the nine employees specialize in marijuana business clients. He said many marijuana businesses don’t know that Maine has a sales tax exemption for commercial agriculture, including marijuana.
It’s those kinds of business details that made Wilson of Pot + Pan, a client of Matthews, seek professional advice from the moment she started her business.
“A lot of small business owners probably would have done their own books, but trying to figure out what is legal in my state and is federally taboo is something I pushed off to someone in that profession,” she said.