Stories of cannabis business owners carrying around backpacks filled with cash while doing business are symbolic of an industry saddled with the challenges that come with being formally prohibited by federal laws.
The federal classification as illegal makes it difficult for cannabis businesses to open checking accounts, obtain bank loans or even accept credit card transactions. In essence, it places the industry in an all-cash accounting jail, according to some.
“It’s the wild, wild west for a reason,” said Katie L. Abraham, vice president of finance and accounting at MWG Holdings Group Inc., a Sacramento, Calif., company that operates the Ocean State Cultivation Center in Warwick.
MWG, which operates 18 cannabis retail stores in California and New Mexico, takes in about $100,000 in monthly marijuana sales at its 2,500-square-foot Rhode Island grow facility.
Abraham’s path to the cannabis industry was serendipitous. She burnt out after working more than nine years at Ernst & Young Global Ltd. in Chicago, a job she took after graduating from the University of Illinois with a bachelor’s degree in accounting.
“I was done. I was ready to make a life change, and move to California because my brother lived there,” she said.
A colleague invited her to Oregon to see the cannabis industry firsthand. After expressing reservations, she made the trip, and it changed her career trajectory.
“It was so exciting,” she said. “I called my parents and said I am going to have to take this job. So, I took the leap.”
The job was head of accounting for Portland-based Nectar Cannabis, which was founded in 2014 and grew from a 1,200-square-foot medical marijuana dispensary to a 17-store retail operation. After a year, she returned to California, accepting her position at MWG Holdings Group Inc.
‘Everyone views us as high risk.’
KATIE L. ABRAHAM, MWG Holdings Group Inc. vice president of finance and accounting
Abraham said she sees opportunities for accountants to build the infrastructure for a burgeoning billion-dollar industry. The goal is to create accounting practices that lead to a clean audit, she said.
Ocean State Cultivation Center banks at People’s Credit Union, a financial institution willing to assume the risk of doing business with the cannabis industry. Big banks such as Bank of America Corp. and JPMorgan Chase Bank are not involved with the industry because it’s not legal at the federal level.
“Everyone views us as high risk,” Abraham said. “There are a lot of established businesses that don’t want to risk action by the federal government.”
The risk could involve an audit by the IRS. But banking at credit unions comes at a premium, from a high cost for cash pickup to a fee structure higher than traditional banks.
“You’re paying almost double, if not triple, in transaction fees, compared to what another business, such as a grocery store or restaurant pays,” she said.
Spencer Blier, CEO of Mammoth Inc. in Warwick, said his cultivation operation also keeps its capital at People’s Credit Union.
The refusal of most banks to work with marijuana businesses prevented Mammoth from financing the purchase of a neighboring building for expansion. As a solution, Mammoth is looking into expanding its building upwards to create more space.
Another issue is the inability to deduct typical business expenses associated with his cannabis operation when filing taxes per section 280E of the Internal Revenue Code, which prohibits such deductions.
“You end up showing way more profit on the books than you actually have, and you’re taxed on it a ton. So, you’re paying a hefty fee to operate,” Blier said.
The legalization of recreational marijuana in Rhode Island would begin to change the financial playing field, allowing for greater ease of operation, he said.
Jim Marty founded the Denver-based accounting firm Bridge West LLC in 2009 to specialize as the “CPAs and advisers to the cannabis industry.” The firm quickly signed on more than 100 clients and now serves more than 600 cannabis industry clients nationwide.
Marty said a lack of Rhode Island accounting firms involved in the marijuana sector as it evolves could create issues such as inaccurate financial reporting. “It’s an area of specialization,” said Marty, noting that accounting firms need to learn the nuances of the business before getting involved.
Years ago, the cannabis industry was disorganized because it began as an illicit market with its own bookkeepers. Now, some clients yield $100 million in sales, which requires sophisticated accounting, he said.
Marty, who sees his firm as a pioneer in the industry, said the cannabis industry is growing so rapidly that young accountants joining the firm call it a dream job.
“It makes everything else look dull and boring,” he said.
Despite the legalization wave building across the country, with 19 states passing legislation for adult-use recreational marijuana, Abraham said it is going to take about 15 to 20 years to operate efficiently nationwide.
“We have a marathon ahead of us when it comes to getting all 50 states on board with cannabis rules, regulations, taxes and banking,” she said. “There is so much more work to do across the country.”
Cassius Shuman is a PBN staff writer. Email him at Shuman@PBN.com.
