On-Demand: The ABC’s of the Cannabis Sector
In this webinar participants will learn about the difference between CBD and cannabis, how the pandemic impacted the cannabis industry, current involvement in the industry by minority groups, and the challenges and opportunities related to e-commerce.
Eric Altstadter: It’s my pleasure to welcome everyone to today's webinar sponsored by The Women of EisnerAmper and Carter DeLuca Farrell & Schmidt, the ABCs of Cannabis. As Lexi mentioned, my name is Eric Altstadter. I'm a partner at EisnerAmper and the National Cannabis and Hemp Practice Leader.
Today, and these numbers change often, cannabis is still a Schedule 1 drug under the Controlled Substances Act, and therefore federally illegal. Medicinal cannabis is legal in 36 states and another 17 have legalized adult-use recreational cannabis. Schedule 1 drugs are defined as drugs with no currently accepted medical use in the US and have a high potential for abuse. And just for context, some other Schedule 1 drugs are heroin, LSD, and ecstasy.
Here in New York earlier in 2021, adult-use recreational cannabis was legalized and that was after years and years of discussion. And even with that legalization, purchase and sale of adult-use recreational cannabis is not expected for at least another year. This is an unprecedented time for this industry. I think the cannabis industry today most closely resembles the alcohol industry in December 1933 when prohibition ended. Prohibition ended after Franklin Roosevelt won the presidential election on a platform that included ending prohibition. And people felt the end of prohibition would create jobs and revenue, which was an important, with the US still mired in the great depression. While we're not in depression, COVID has made the creation of jobs and revenue as important today as it was then.
Now, before I turn it over to our panel, I want to discuss some basic information such as the differences between cannabis, marijuana, hemp, and CBD. It is a common misconception that all come from different species of plants. The reality is they all come from the same plant, a species known as the cannabis plant, though technically it's got a different name, but effectively known as the cannabis plant. So they're all effectively cannabis with some needed clarification.
Hemp is cannabis that contains 0.3% or less of tetrahydrocannabinol or THC. That amount 0.3% was first used in a 1976 study and has been adopted as part of the legal definition of hemp in the Agricultural Act of 2018, known as the Farm Bill, as well as other laws. The Farm Bill is rather historic as it removed hemp and hemp seeds from the statutory definition of marijuana under the Controlled Substances Act, legalizing hemp. THC is one of many cannabinoids found in the cannabis plant and it's the one responsible for the high associated with marijuana. I believe there are about 113 different cannabinoids in the plant. Now, hemp can be used in the production of paper, clothing, textiles, and other products.
Marijuana is defined as cannabis that contains more than 0.3% of THC by dry weight. Now, the term marijuana has racist connotations associated with it as well as many racial stereotypes going back to the early 1900s. As a result, many industry people no longer use that term, and simply use the word cannabis to refer to the leafy part of the flower that contains THC.
Confusing, right? Well, let's confuse you a bit more. CBD or cannabidiol is a cannabinoid that can be derived from hemp or marijuana. Many people use CBD because it's said to have numerous health benefits, but the sale of CBD formulations for medical use or as an ingredient, in dietary supplements, or a manufactured food is still illegal under the Food and Drug Administration regulations. CBD also contains 0.3% or less of THC. But CBD produced from marijuana is not legal, while CBD produced from hemp is.
Our panel today will help clear all this up. So with that, I'd like to turn this over to Miri Forster. Miri is a tax partner who leads our Tax Controversy Practice and is co-chair of The Women of EisnerAmper. Miri, thank you for letting me speak. It's all yours.
Miri Forster:Thank you so much, Eric. And so happy to be here. As a tax partner, there's enough going on in the tax world to make things very complex so I'm glad that you, at least from the cannabis perspective, broke it down for us to make things a little bit simpler. Again, I lead the Tax Controversy Practice at Eisner Advisory Group. We represent tax payers with IRS exams, appeals, penalty, abatements, and anything really before the IRS. And my other hat is co-chair of the Women of Advisory EisnerAmper, New Jersey chapter. We like to combine technical topics with esteemed women's panels for the benefit of all our clients. So without further ado, I want the rest of our panel to introduce themselves, and then we'll start our program. Pina, you want to hit it off?
Pina Campagna:Hi everyone. Thanks for joining today. My name is Pina Campagna. I'm a partner and intellectual property attorney at the firm of Carter DeLuca & Farrell in Melville, New York on Long Island.
Miri Forster:Thank you. Chirali, you want to go next?
Chirali Patel:Yeah. Hi everybody. My name's Chirali Patel. I'm an associate at Pashman Stein Walder Hayden in Hackensack, New Jersey, part of the Cannabis and Hemp Litigation groups. I've been involved in cannabis since 2016, worked with the ACLU for the campaign that legalized adult-use in New Jersey last year. And I also do a lot of advocacy work in this space with my own brand called Blaze Responsibly. So I'm just excited to be here. Thank you.
Miri Forster:Thank you so much. Jennifer?
Jennifer Benda:Good morning, everyone. It's a pleasure to be here. My name is Jennifer Benda. I'm a tax attorney and former CPA. I am in Denver, Colorado, where we've had medical marijuana since 2009. I've been working with industry clients on IRS issues, tax issues, and various planning matters since about 2015.
Miri Forster:Thanks so much. Ani?
Ani Collum:Hi, everyone. Glad to be here. I'm Ani Collum and I am co-founder and chief marketing officer of Zolt. We are a plant-based beverage brand in the wellness space with an arm of our business in CBD and full spectrum hemp.
Miri Forster:Great. Last but not least, Allyson.
Allyson Milbrod:Hi everyone. My name is Allyson Milbrod and I'm a tax director at EisnerAmper. I work in the New Jersey office and I work on costly held businesses and high net worth individuals. Glad to be here today.
Miri Forster:Thank you so much. So let's get started. Pina, I think I'm going to start with you. Let's talk a little bit about your practice and how it connects with starting a business. I mean, your law practice covers patents and trademarks, IP protection. Those topics are so important to the initial stages of a business. I think some people think you just get your storefront, you put up your shingle and you get to work, but there's a lot before that. So when you start a business, generally, what should you first think about in terms of protections and intellectual property rights?
Pina Campagna:Thanks, Miri. That's not an easy question with a short answer so everyone please hang tight. As with any growing industry, cannabis stakeholders are eager to protect their valuable IP rights since it increases business valuation which can drive mergers and acquisitions. But the ability to obtain comprehensive IP protection and enforce those rights is sometimes in conflict with the federal drug loss. Nevertheless, the current IP landscape, which surrounds cannabis, does allow for some forms of IP protection and enforcement under patents, trademarks, trade secrets, and copyrights.
For patent protection, it is generally available for cannabis related innovations on the same basis as any other innovation with relatively few obstacles. The patent office has been issuing cannabis patents for over 50 years for technology that relates to cultivation methods, processing and extraction techniques, cannabis derived products, consumption devices, even medical treatments, as well as new strains of the cannabis plant itself. A patent right excludes others from making, using, selling, offering for sale the invention claimed in the patent and you get that protection for a period of 20 years from the filing date. In order to obtain a patent however, the invention must be new, it must be not obvious, useful, subject matter eligible, and it has to be described in a way that would enable one skilled in the art to actually make the invention.
There are three kinds of patents that are not mutually exclusive, so you can get broad protection in a variety of areas. There's utility patents which cover processes and articles of manufacture, design patents cover overall outer appearance or ornamental designs distinctive of products. Plant patents can be narrow, but they do cover new distinct plants that have been asexually reproduced.
The primary challenges though for cannabis patent applications is that we may be seeing overly broad patents granted, which could lead to invalid patents if they're litigated. This is because of the lack of prior art publications in this field because of the fact that it was illegal at some point, and people were really afraid to write about it. So we have very limited information or proof of prior use in the cannabis industry. With respect to litigation in the cannabis space, whether federal courts will be willing or able to enforce cannabis, patents remain an open question because we have yet to see an infringement claim issued in the cannabis space. Nevertheless, we do recommend pursuing patent protection for cannabis companies, and it can be important in building your IP portfolio. So it should be considered if you have a new process method of extraction, a new strain, new formulations.
Now, some things don't lend itself to protection under patents if it's not patentable or because it can be protected for longer than the 20 years. That's where trade secret protection comes in. As you may know, trade secrets are information that derives economic value from being kept secret. And it's the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Think of the Coca-Cola formulation which was protected for over a century under trade secrets. There is a federal cause of action for trade secret misappropriation now available. And there is no requirement that the subject matter actually be legal.
So you should consider trade secret protection for subject matter that might not be patentable such as customer lists, confidential business information, formulas, processes that are inventive, but competitively valuable when it's kept a secret. So if you decide to go the trade secret route, you need to ensure that you have proper non-disclosure agreements in place, strong employment agreements which clearly set forth the expectations of your employees and the penalties of misappropriation before and after employment, and you need to draft and enforce secrecy policies and security measures.
Now, there may be trademark protection available for canna brands through a combination of federal state and common law sources. Federal trademark registration would be the strongest form of protection because it's nationwide in scope. As you may know, a trademark can be a symbol, design, logo, or word. It can be a set of words that represents a company or a product where the trademark identifies the source or origin of the product or service to the consumer. So when you see a Starbucks coffee cup, you know where that coffee came from. The green logo design on the cup identifies the source of those goods.
So while federal trademark registration is the strongest form of protection, it also presents the greatest challenges for canna brands as most forms of cannabis are still considered illegal substances under federal law. Even with the enactment of the Farm Bill that Eric talked about in 2018, adding the availability of federal registration for some marks covering cannabis related goods and services, the trademark office is still rejecting applications under the Controlled Substances Act if the cannabis products have more than 0.3% THC even if the products are legal on the state level. They are also rejecting applications under the Food, Drug, and Cosmetic Act if the mark is applied for food, for drugs, supplements, or cosmetics that have cannabis, even if they're legal under the Controlled Substances Act.
So for trademark protection, we need to consider whether the mark is actually eligible for protection on certain goods. And if not, come up with a strategy on how to get some protection for that brand. Now, moving on to copyrights.
Miri Forster:I just wanted to say that it's fascinating all the different rules. You listen to Shark Tank and they hold up a piece of paper and they say "Utility patent. Design patent." I've actually never heard of a plant patent, and there's so much more here to consider as part of the analysis so I really appreciate the explanation.
Pina Campagna:And just quickly just to touch on copyrights, because that's the other IP protection under the umbrella of IP, it's an aspect that I think most cannabis businesses and a lot of businesses don't really consider, and yet copyrights can afford their holders with market dominance and profitability if they're utilized correctly.
Almost all marijuana businesses own numerous unregistered copyrights whether or not they realize it. It's a form of IP that protects original works of authorship, including literary, dramatic, musical, artistic works, songs, movies, computer software architecture. And it's protected for the life of the author, plus 70 years. Therefore, the cannabis industry protects copyrights in a variety of waste, such as maybe the cannabis businesses' website, the writing and the photographs relating to the products. The descriptions of the particular product can be copywritten. Labels, product tags, packaging, logos, instructional materials, product designs They can all be protected by copyrights.
Copyrights are created immediately as soon as it's fixed in a tangible form. So it's really not necessary to register your copyrights because you already can obtain a copyright without it. But if you want us to, for infringement, you need to register your copyrights. And given the fact that copyrights are inexpensive and very quick to register online and the fact that there is no legal or moral requirement of the goods, we recommend registration in most cases. However, there is the potential risk that the federal illegality of cannabis might be raised in litigation aspects and might impede enforceability of copyrights. I think that's a general quick overview of the four different types of IP that could be adventurous for cannabis companies.
Miri Forster:And so copyrights are one of the ways to get around the trademark challenges that you talked about?
Pina Campagna:Yes. So that would be a consideration if the goods are going to be considered legal or reject, or the application can be rejected on the trademark or the brand based on the Controlled Substances Act or the Food, Drug, and Cosmetic Act. So that's one way to get around it. Another way, or I should say alternative protections, would be to try to get a state level trademark registration for a trademark especially in the states where it is legal, although those trademark registrations are more limited in scope because they only cover the trademarks in that particular state. So you might have to file multiple applications in multiple states to get good coverage.
Another consideration would be to try to file the trademark applications under ancillary goods that are not considered illegal under the FDCA or the Controlled Substances Act. Usually products that are ancillary to the core product, such as websites, services relating to the hemp, clothing items are okay. Those are legal to apply for. And even mobile apps, software mobile applications might be an ancillary product to consider to file under that would be considered legal.
Miri Forster:Thanks so much, Pina. That's all very fascinating. Maybe we should switch gears to Ani and Allyson. Ani, you probably did all this behind the scenes and can tell us how you got through those hoops and launched your business.
Ani Collum:Sure, sure. Absolutely.
Miri Forster:Allyson, take over.
Allyson Milbrod:Sure. Pina, that was great. So now that we have a business that has put all these protections in place and now we've launched our business, so Ani, this is a question for you. Can you share a bit about your background and what owners should think about when launching a business in the consumer products, in this space generally?
Ani Collum:Sure. So my background's been kind of across the board, always in commerce. I started my career early on with big brands like Macy's and Tommy Hilfiger. And then kind of halfway through my career, morphed into advising startups in particular across commerce. So in women's fashion, CPG, emergency preparedness, like you name it, how to launch and scale businesses. And that's kind of where I spent probably the past 15 years of my career as an advisor, as a paid consultant, et cetera.
I think a couple things just generally about launching a CPG brand in particular is that it is super expensive. A lot of people think, "I have this great idea. I want to bring it to market." If you're in the cannabis and hemp space in particular, there's that additional layer. But some of the things that Pina talked about, those protections come with a cost. So a lot of people kind of come in and maybe underestimate the level of investment that needs to happen just to set up. And then to actually get brand awareness, acquire customers, get market penetration, whether you're in the hemp space or selling cupcakes, really, really takes money.
And so businesses that aren't well capitalized from the beginning, even if it's a great idea, you're going to be at a big disadvantage. And there's obviously some exceptions to that. You get an article on the Wall Street Journal and all of a sudden like a Warby Parker, you sell out in a day in your first launch day, but that doesn't happen most of the time. So I think making sure you have a business plan, a go-to market strategy, and then the capital behind it to be able to support that growth is critically important.
Allyson Milbrod:Great, thank you for that. With respect to Zolt, which the product that you co-founded as a wellness brand in the plant-powered beverage space which we know started and has been launched in the pandemic, which I'm sure that had additional challenges, how did you get into this business and how we're you able to successfully connect with customers and consumers?
Ani Collum:Sure. Yep. So just for context, the website is heyzolt.com if anyone wants to check it out kind of as I'm talking. But we essentially are a plant-based beverage brand with an arm of our business in the cannabis and hemp space. We're totally focused on wellness and the power of plants and how that can help people bring kind of balance and wellness to their every day through what they're drinking and putting in their body. So I actually started with Zolt though as a consultant. So as I mentioned, half of my career has really been consulting brands. My co-founder, Doug Siegel, had a really terrific idea. He is a formulator. He knows so much about plants, hemp and cannabinoids. So we were connected because he needed help in marketing and kind of explaining the concept out to the world.
So we had a call and I was like, "Wow, this guy's super passionate and he really knows what he's talking about, but his branding leaves a lot to be desired." And him and I have a very transparent relationship from the beginning, so I basically was like, "Listen, whether you hire me or not is somewhat irrelevant to this conversation, you really need to take a step back though and think about how you're communicating the brand story to your consumers, how you're educating them and what are you going to do to help them want to explore your brand and then convert."
So I did start working with him. It was fall of 2019, about six months before we launched. I was a consultant as I mentioned. I worked through all of the branding, storytelling, website, packaging, et cetera, with him. And from there, then kind of morphed into co-founder. So, it's a not replicatable experience. I've worked with so many founders, but he and I, in terms of the needs of the business, had such complimentary skill sets that it kind of became a no brainer for me to kind of morph into this role of co-founder.
So fast forward, six months later, we launched shortly after the US shut down. So it was like March 23rd. So about 10 days after all the stay-at-home orders were in place, which was challenging because our approach to launching into the market of course was part D2C, direct to consumer through our online experience, but also through retail and in-person trial. And that kind of just got thrown out the window right when we launched. So we had come out into the market thinking, "All right, we'll soft launch direct to consumer. We'll kind of ease our way in, not drive a ton of traffic there." And all of a sudden, really had to pivot and move all of our marketing dollars into direct to consumer so that we could get traction.
So that was interesting, but it was somewhat timely in terms of what our product offers, which is this calm balance. And then we have specific functional use cases, immunity, sleep. The entourage of our ingredients kind of help support a lot of those functional needs. So in a way, with people being home and stressed and worried about their health and their overall wellbeing, launching a product during the pandemic of this nature was not as terrible I think if we were launching a women's work wear line, right? No one's going into the office suddenly.
Allyson Milbrod:Right. That's great. Thank you for that. Because I would imagine that during the pandemic, most businesses had a pivot and it seems like from what you said, that this was I guess a good pivot. So that's good.
Allyson Milbrod:I guess when you were mentioning that you went from online to direct to consumer, is there any trends that you think that you would comment on in terms of any demographics that you think that purchased more over others?
Ani Collum:Sure. What was surprising when we launched was we had built the brand really thinking we were going to have a 50/50 split, men and women. And we were probably, and we still are, about 70% women, which is interesting because if you think about some of the stereotypes within the cannabis space, you don't always necessarily think it's like a health and wellness minded millennial woman who's really interested in this space, but she is. And a lot of that I think stems from the fact that the platform of our brand is really about education, cutting through the clutter. It's the wild west out there as many of you guys know in terms of brands that focus on cannabis, whether CBD, hemp-derived, or otherwise. And so it was very important for us to be able to kind of strip down what we were telling the consumer and provide full transparency into the process. And we found that that really resonated with women.
So that was just really interesting for us. And it's something we've done definitely leaned into that as we think about what are our marketing vehicles and how are we kind of introducing the brand to new pockets of customers. Another thing along those lines which wasn't as surprising but it holds true from when we launched and still does, our variety pack is our top seller. And it's kind of the gateway in for someone who's experiencing the brand. So you have a full suite of sampling of all of our different products. And that variety packet is a little bit more expensive because there's more product in it.
But what we're finding is that the consumer's very open to exploring. So they start with the variety pack. They're not only looking for our most basic product that's like a unflavored drink mix with just CBD in it. They're maybe looking for a full spectrum product, but also want to try a CBD product. Looking for something to help with sleep or immunity. They're open to trying all of these things. And then from there, they kind of lean in on their favorite and then buy that from there. So it was interesting to us that people were very open to exploring and not afraid to try multiple different products.
And then lastly, the other thing that I was very surprised about, and still continue to be, is that when people at least experience our brand, and I think it can be said for a lot of other brands in our space, they are coming with the intent to purchase. So our conversion rate as compared to just overall e-com industry is pretty high and healthy. Part of that I think has to do with how we present the product, how we explain the product, all of the little things that happen behind the scenes to drive someone in the conversion funnel. But at the same time, people want to buy products with cannabis in them. Whether it's in a more mainstream way or in another way, there is intent to purchase. And people should not be afraid to kind of get out there with these business ideas because there are customers out there and they're looking to buy.
Allyson Milbrod:Great. Thank you, Ani. I have to say that I'm not sure if I'm surprised or not surprised by some of those statistics, but thank you. I really appreciate that.
Allyson Milbrod:So now we're going to kind of pivot from the branding to kind of marketing. And this is going to be a question for you, Chirali. So now that we know that a company has a solid branding strategy in place, and thank you Ani for some of the things that you talked about, how do companies take advantage of business opportunities and what kind of marketing efforts are allowed? And what types of marketing efforts are prohibited by either federal or state law? Chirali?
Chirali Patel:Yep. Maybe it's better to start with what is permitted and what isn't allowed just to set the stage.
Chirali Patel:Federally, like Eric mentioned, and I think Pina kind of touched on as well, cannabis remains federally illegal. So we don't have any rules or regulations with respect to marketing or advertising or anything really from the federal government. But what we do have with respect to marketing and regulations is at a state level. Each state really determines how they want to set this type of industry up. And so, just speaking to New Jersey for example, because that's where I'm located right now, the regulations will say that when it comes to packaging or advertising, you can't have certain types of imagery. So with adult-use cannabis, they don't want to see cartoons. They don't want to see the cannabis plant even as a designation. So that sometimes makes it a little challenging when you're looking to be a plant-touching business or you're looking to be in cannabis. Usually, you want to use some sort of plant imagery or something that delineates that this is cannabis associated. So that's where the creativity starts to kick in.
So as far as what you can and cannot do, definitely when you're figuring out what you're branding and your packaging, your marketing plan's going to look like, avoiding the cliche imagery that gets associated with cannabis use, more of the recreational stuff. And kind of thinking about it more from a CPG perspective, consumer packaged goods, because that's what some of the larger players see themselves as. They're already positioning themselves to be the largest distributors, the largest producers, and comparing themselves to the likes of Coca-Cola or Walmart even. And so, what people can do right now is taking advantage.
I will say what you can't do is you can't advertise in traditional means. So you can't take advantage of TV commercials or radio announcements, at least not in these newly legalized states. And so, you're really limited to online presence, social media marketing. And so, definitely taking advantage of the platforms that LinkedIn provides or Instagram, Facebook, TikTok. I mean, even though I should be more involved in social media, I know that from a personal standpoint, I don't get too involved, but when it comes to the business side of things, unfortunately or fortunately, you have to be present online because that's where a lot of your consumers are going to find you. So whether it's having at a minimum your website, but being able to have an online presence where you can actually engage with your community, because otherwise it's going to be really hard to get feedback from individuals.
And so, as simple as creating, and again, with these social media companies, they all have internal regulations. So Instagram and Facebook are known to be a little bit more stringent when it comes to cannabis companies. And they've been known to shut down cannabis companies, even CBD companies, your accounts. So making sure whenever you're putting out content, you at least have a backup. And then the platforms like LinkedIn, they're a little bit more liberal as far as what I've seen. I haven't seen them actively shutting down companies that are promoting cannabis or speaking about it. And so, being mindful about the platforms that you do take advantage of. But really, you want to have a presence online. And you want to make sure that you're taking advantage of all those, the free resources that are available to you when it comes to ad spend and marketing dollars, because it doesn't cost you anything to create a profile on LinkedIn or on Facebook, right? But it's going to be able to put yourself out there and just to start marketing. I don't want to spend too much time on that, but Allyson, does that help?
Allyson Milbrod:Oh yeah, no, that's I think exactly what we were looking for because as we know that there's a lot of restrictions in a lot of areas in banking and taxes, it's not surprising that in the marketing space that there were those restrictions too. So yeah, no, I think that kind of answers my question. I appreciate it. I guess now we're going to go on to Pina. And she's going to talk about social justice and related issues. Thank you.
Pina Campagna:Thank you, Allyson and Chirali. That was great. So moving on to social justice and related issues, state cannabis reform is highlighting social justice issues. For example, New York cannabis law requires half of all cannabis licenses to go to social equity applicants such as minorities, women-owned businesses, veterans, et cetera. So I have a question for Jen now. Can you talk about the activism in this area? Given that you live in Colorado where legalization occurred much earlier than on the East Coast, any observations that you have that you'd like to share with us?
Jennifer Benda:Absolutely. I think that unfortunately Colorado started their licensing by prohibiting licenses from being issued to felons. And so, that really restricted the social justice targeting that we now see a very important part I think not only of state legalization, but also it's going to be a big factor in federal legalization. So, we are seeing, and I'm involved with an organization called Color of Cannabis that gives a 10-week starter course to social equity applicants that helps them understand on a very basic level the aspects of starting a business. But I do think I'm excited for the industry and that I think this is something that the newer states or more recently legalizing states are doing better than what was historically done. And I'm glad this is going to be a big part of the industry going forward.
Pina Campagna:Thank you, Jen. I have a question now for Chirali. How can women and minorities position themselves for those set aside licenses?
Chirali Patel:Yeah, that's a great question. And so this also depends on each state because each state decides to do their set asides a little bit differently. But let me give you the two states that are, I guess not most relevant, but just newer states, New York and New Jersey. What New York did was that 50%, they've decided to set aside at least 50% of their licenses to be allocated to qualified social equity businesses as well as women-owned and minority-owned businesses. And so that's huge. And then in New Jersey, we have 15% of licenses that are set aside to go to minority-owned businesses and then 15% of licenses to go to either women-owned or disabled veterans businesses.
The way that you can actually take advantage legally of that set aside is that you actually have to get certified from the state. So what that means is, obviously being a new business you're not going to have tax return to submit and things like that, but you basically need to have at a minimum in LLC, you have to have like some sort of standard operating agreement in place, resumes for everybody that makes up your team. And then you submit this little application for the certification. That certification now says that you're qualified as either a minority business enterprise and/or a woman-owned business enterprise. Once you get that certification, that actually goes with the application that you submit to the state so that they see that you've actually been certified by a state agency, and so now you get qualified to take advantage of these set asides.
Without that certification, even though your ownership may show 51% majority women-owned, you can show that on the application and your organizational chart, but without that certification, the state doesn't have to actually give you, they don't have to award you the license because you didn't go ahead and get that state certification. So at a minimum, for anybody that's starting their businesses or wanting to get into this space, make sure you take advantage of the certification, and that's through the state level. Some states have waived the fees so it's not even a cost factor anymore. You can go ahead and get that certification for free.
So that's just a way that everybody wants to be able to take advantage because even if you don't use that certification for cannabis for example, that certification comes in handy when you want to, I don't know, apply for grants or government contracts, because even at the state and federal government levels, there's set aside for women-owned businesses. So that certification really is valuable.
Pina Campagna:Thank you. And just another follow up question for you. You talked about marketing strategies earlier. Any tips on how to successfully market yourself in the cannabis industry as a woman?
Chirali Patel:Yeah. I mean, there's a lot of different ways to go about it. I think being a woman is even better in this industry just in my opinion, because the cannabis plant that actually is creating a lot of the genetics is a female plant, right? And so taking that aside, I think being able to really be mindful about what it is you're looking to do, number one. So figuring out who your audience is for whatever your marketing strategy is. And so is that going to be 65 and above? Is that going to be women 15 over? Is that going to be more 21 and above? And so figuring out who your audience is going to be so that you can tailor your messaging accordingly, because each demographic usually cares about something different.
Just from my own experiences, my mom only wants to learn about topical usage for example. So I have to educate her on how topicals can be utilized and how dosing works for topicals and how they interact with your body, versus my brother who's 25. He's more concerned about who's the best genetics in the state or who has better marketing and branding.
And so, once you figure out who your demographic is and your audience, then you can tailor your messaging accordingly. And then, really being strategic about providing valuable information that they can't go and find elsewhere. Because a lot of what happens with cannabis is that we focus on the business side and then we forget that there's just a lack of education overall. Whether it's from a business standpoint or understanding the botany behind the plant, or even tying into law enforcement for example. Communities, when states legalized, municipalities are left kind of figuring out "How do we regulate, do we even want dispensaries in our backyard?" So I think incorporating education into whatever your marketing strategy is going to be is highly important in making sure that you're being strategic about different milestones.
Right now in cannabis, one of the largest companies that is visibly known and because of their branding and marketing is Cookies. And Cookies, the name Cookies works right now, but post federal legalization, I can only imagine a child being in the car with their mom driving past a dispensary whose name is Cookies and then them say, "Oh mom, I want to go to Cookies." It's like I can foresee that in the future when we have federal regulations, the names are going to really matter a lot more than they do right now. So just being mindful about when you're deciding to open up your business, being really strategic with the name that you do select.
Pina Campagna:Thank you. That was very informative. Yeah, I definitely think there's going to be challenges with the naming of brands and confusion out there. So, I will turn it back over to Miri at this time to talk about taxes, banking, and access to capital.
Miri Forster:Thank you so much. Thanks to everyone. I mean, cannabis reform has really opened up, just like Chirali said, not just social justice issues, but education, botany, names of businesses. There's really a lot here that's going to change in the future. But before we get to some predictions at the end, I did want to talk about taxes. Ani kind of hinted about it, it's hard to start this business and it costs a lot of money. Jen, you and I have worked with the IRS helping numerous taxpayers in a broad range of industries. So it's no surprise that a business like cannabis that has generated significant attention over the past few years is also on the IRS's radar. What are some of the most important things to understand, from an income tax perspective, about the cannabis industry?
Jennifer Benda:Right. Thanks, Miri. So we've talked about a lot of fun stuff related to starting these businesses. And I feel like this section is the nuts and bolts and maybe less fun parts of operating a marijuana business. So let's just start off with something everyone needs to understand, which is the Congress during the 1980s, during the war on drugs, decided to pass a law that said business that sells Schedule 1 or Schedule 2 controlled substances can't deduct any business expenses. And what that means is that while they can deduct the inventory costs that they have as cost of goods sold, you cannot deduct any other operating expenses. And when we talk about these different types of businesses, what that means is that if you're a business that's growing, cultivating products, most of your costs are going to be inventory costs, not all. So you aren't going to have a big amount of money that you're spending that you're not getting to deduct for tax purposes.
But for everyone who's operating a dispensary, those costs related to running that dispensary, all the employees that are there, the rent for the location, things like that, those are not going to be deductible. Advertising costs, those are a big part of this. And one of the really tough issues that we've had is that people have decided they were going to ignore this provision, or early on they weren't aware of it so they weren't applying it. Businesses didn't keep good books and records for a lot of various reasons. One of which they were concerned about federal prosecution. And so, the IRS has kind of targeted this as low hanging fruit to collect more income taxes.
So there's been a lot of pushes on audits. And we have problems because what exactly are your inventory costs is not a precise number. There are a lot of different rules that have been implemented over the years and there's arguments about which of those rules apply. There's also rules that are kind of steadfast rules we've been dealing with for years and years and years that the IRS is taking the position, that because we have this provision of the tax code that disallows expenses, we get to determine those rules the way we want. And so I've been dealing with these audits for a long time. We're working with taxpayers who have big liabilities, big audit adjustments, tax court cases. And what I've just described is obviously clearly going to apply to something that's a marijuana business or a medical marijuana business.
Prior to hemp becoming legal, my position has always been that this provision of the code, 280E, also applies to a hemp business or a CBD business. However, as long as you're selling a legal product, I think that you are outside of 280E. But there are still issues I talked to tax advisors about, which is, "I know that this company isn't really monitoring whether the products are under 0.3 THC. Well, does that tax practitioner then need to be applying 280E on a tax return?" There's lots of questions there to deal with.
I've talked about the IRS has really focused on the industry, focused on some of the compliance issues, and the audits are tough. And that's not slowing down. They just recently announced a new initiative which they say is health taxpayers comply, but I do think that with the number of new businesses that are out there, we're going to see quite a wave of audits. And this is going to be a part of the industry for a long time. And when you look at this from an overall profitability standpoint, this is the highest tax industry of any industry. It really does drive down profits fast. If you're a flow-through entity, it can have implications for the owners personally. So there are a lot of issues to think about, a lot of problem that we have to help our clients work through.
Miri Forster:You're right. And if the IRS funding in the Build Back Better plan gets approved, then certainly we're going to see more and more audits and other enforcement activity for this industry and many, many others. So thanks Jen. Jen, one follow up question. Once marijuana is federally legal, how do you expect the tax profile of the business to change?
Jennifer Benda:Well, we're hopeful that this will really help the profitability of these businesses, but we are going to see – my prediction is that when there's federal legality, we'll also going to see a new federal excise tax. And so this is a whole new compliance regime, similar to the state excise taxes. Probably similar to some of the state excise taxes. And as I know from dealing with clients all the time, that these excise tax audits can be just as tough as the federal income tax audits. So, it's very important for anyone who's getting in this industry to pay attention to how these taxes are drafted, all the different rule making that goes into them, things like whether 280E applies for state income tax purposes. Not every state fixes that once they've legalized. So there's a lot of lobbying to do for these new tax regimes that we're going to see going forward.
Miri Forster:Awesome. Thank you, Jen. I guess another follow up question, there's so much cash in this business. I know initially it was hard with the banks. And maybe I'll open this up to you and Chirali. Are there banks currently servicing the industry? What kind of numbers are there and what are the costs that are involved?
Jennifer Benda:Well, I'll give some observations on my end and then let Chirali give her observations. In Colorado, we've really had access to banking for most of the time, or I would say at least the most recent seven to eight years. But it's not big national banks. It is more local, credit unions, state chartered banks, things like that. And what those banks have to think about is that every time these businesses deposit money, the bank has to file with the Financial Crimes Enforcement Network a suspicious activity report that says, "Hey, we got money from a state legal marijuana business." And there's a lot of nuances there. But what that means is that the banks charge very high fees for having a bank account issued to a state license. There's a lot of monitoring and compliance that goes on in that end.
I think that the way the businesses are starting up in the newer states and on the East Coast is giving a lot more comfort to banks, although I still know it's very hard in some instances to have banking. And that is something you have to start working on early to make sure that you have that secured. Because what does happen a lot of times is banks think they're okay with it, and then they decide they're not going to be. And trying to get all your money out of a bank and into another bank, I've heard all kinds of horror stories about those situations. So it's really, really fascinating. Chirali, what have you seen?
Chirali Patel:Yeah. Similar to what you're seeing, it's kind of the same, right? Just because of the heightened scrutiny that banks have to go through with filing the SARs every time there's the deposit and withdrawal, a lot of the traditional banks just don't want to go anywhere near it. And so in New Jersey, there are two banks that are actively accepting new cannabis businesses and there's fees associated it with it. So initially, when the market opened up a couple years ago, or not opened. When we had medical rounds back in 2018 and 2019, the banks were not charging fees. They just wanted to open themselves up to be cannabis friendly.
Now that we have more applicants, more licenses and more opportunities that are coming available, because it's limited options, the banks are starting to realize that they can kind of monetize on this opportunity. And so, some of the fees range from monthly, kind of reasonable, $150 a month to open up an account. And then all the way through to them charging you up front a couple thousand dollars. I've seen all the way up to $7,500 to open up a bank account. These are the fees associated with just opening up a bank account to do business. It doesn't mean that you have access to now applying for a loan or any of the other ancillary supports that you traditionally would get with an institution. So it's really just the ability to open up a bank account, which it limits the ability for a lot of the other smaller players because it's not like you're getting access to capital.
What I am seeing kind of like a work around, Jennifer, and I wonder if you've seen this in Colorado, is I've seen a lot of groups when they have good credit scores, actually going and applying for a construction loan to acquire the real estate and then using the construction loan to finance the build out. None of this is associated with the plan-touching side of it. And so I've seen some of that success not in New Jersey but in some other states. And so, there are little clever ways where you can kind of go about getting capital, but again they're high interest loans, it's not always reasonable commercial terms. And so there's that to take into account. But I think at a minimum, we have banks that are accepting cannabis businesses. And from there on, it's kind of we're looking at the federal government to really put some more measures in place, allow safe banking to pass so that we can start to operate from this industry like a real marketplace versus the siloed markets that we've created.
Jennifer Benda:Right. And one thing that I think is interesting is that FinCEN publishes a report, or they were for a while, about every quarter showing what states SARs are being filed in and the number of banks that are operating in each state. And it seems as if it's a fairly decent number, but one of the things that can be a little bit tricky is, one, the banks have regulatory requirements on how they diversify their client base. So there's a limited number maybe of marijuana companies. And so there may be a get in line element to this whole thing and if they kick somebody out, then somebody can come in. But also, I have been told that the banks make you sign non-disclosure agreements and they don't necessarily want it public that this is what they're doing. So that is just a whole different ballgame from, I can walk into a bank and open up a bank account with a few pieces of business information or identification and things like that. So it's interesting. Did we want to stop there, Miri? Or-
Eric Altstadter:If I could just step in for one second.
Jennifer Benda:Oh, go ahead.
Eric Altstadter:If I could just step in for one second, people have talked about things such as the MORE Act and States Reform Act. I just want to clarify the MORE Act was a democratic led bill to legalized cannabis, which contains an excise tax of about 5%. The States Reform Act has recently been released, and its Republican led though it doesn't have the complete backing of the Republican party. And that has an excise tax of about 3%. So there is movement on the aisle and we may see legalization somewhere down the road maybe sooner than maybe all of us thought. So I just wanted to mention that.
Miri Forster:Thanks for the clarification.
Jennifer Benda:I think a lot of my clients, I call them from time to time. I've never heard anything under a five year timeline. And that's for the past six years. So it is hard to predict when this is going to happen. I think that especially when the economy has been suffered, I find it kind of shocking that this can be such a big economic booster. And that in a tax revenue source, we've seen that for states that it hasn't happened yet, but there is, as we've seen Justice Thomas shame Congress recently into not acknowledging that most of the American public is pro legalization. And Congress, for some reason, can't really implement this will of their constituencies.
Miri Forster:Great. Thank you so much. We're heading to the last four minutes of our program. This has been super informative from start to finish on things to think about in the cannabis sector. I guess to close this out, I'd just love to ask the panelists, any predictions on where the industry might be five, 10 years from now? And maybe I'll start with Pina.
Pina Campagna:Well, I don't know if it's a prediction, but I'm hoping that things will get easier on the trademark side of things, because this is it. I mean, cannabis is exploding. As states legalize it, I hope that the Federal Act will be amended to at least allow for branding and trademark protection. It's almost considered freedom of speech, right? So it's kind of hindering a lot of companies from getting that first amendment right and their trademark protection. So hopefully, there'll be some amendments to the trademark laws, if not, to the federal law.
Miri Forster:Thank you. Ani, are you thinking you're going to have more businesses in the future?
Ani Collum:Yes, 100%. I think particularly with the concept of ingestible CBD. I know it's a baby step, but I am envisioning a world where it will be sitting on target shelves. Not today, but maybe in a couple years.
Miri Forster:That's awesome. Thank you. How about you, Jennifer?
Jennifer Benda:It's hard to make predictions here. I kind of rely on my clients to tell me what they see as the future, but I do hope that we can get 280E repealed or at least have a carve out so that we can have this law apply to truly illegal businesses, but acknowledge the state's legalization.
Miri Forster:Yeah, 280E would make it a lot easier for us on those IRS exams for sure.
Miri Forster:Chirali, can you close this out with a final prediction?
Chirali Patel:Yeah, I would love to see the market go towards innovation when it comes to the medicinal side of this plant. I really believe that all use in some capacity is medicinal or wellness based. So I really hope that companies start to get innovative with products and offerings, and we start to focus on conditions and more patient specific things. Or just even women in general. I think there's over 50 million women just in America, maybe my numbers are wrong, I'm not good at numbers, that could be either menstruating or PMs or post menopause that have symptoms that can be alleviated by cannabis, whether it's a topical or a tincture. There's companies that are doing it right now actively all over the world. And so I really hope that we can start to see just innovation to help people, because we've barely scratched the surface as far as what this plant can really provide for people.
Miri Forster:Completely agree. Well, ladies, thank you very much. Eric, thank you very much for letting us surround you today. And I'm going to turn it over to Lexi to talk about how to get into the networking rooms for 30 minutes after the session. Thanks again for joining us today.
Allyson Milbrod:Thank you everyone.
Pina Campagna:Thank you, Miri.
Ani Collum:Thanks everyone.
Chirali Patel:Thank you.
Transcribed by Rev.com
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