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Industry Voice: Utility sales tax exemption often unexplored by cannabis growers and manufacturers

By Sean Covi, CFP August 14, 2019, 06:56 am MDT

Descheduling cannabis is likely coming soon. Watch what the FDA and USDA come up with for hemp in late 2019. 

If you're a manufacturer dealing with THC and CBD, how will you pay for the changes needed to stay ahead of the Good Manufacturing Practice (GMP) and other regulatory requirements that will follow?

Smart money will follow those who stay ahead of the coming regulatory wave. And for those who wait, time is the great eraser of companies that did not see change coming and acted like deer in headlights when it arrived: Edsel. TWA. Blockbuster. Pets.com. Don't let your cannabis business end up on this list in the future.

This is the first column in a series that will examine different financial tools and strategies to help cannabis businesses find hidden money to help offset the cost of these required regulatory changes. 

Grows and manufacturers need to be paying close attention to how the FDA and USDA will be regulating the newly legal hemp/CBD marketplace. Best guess is that about half of current cannabis grows and plant-touching manufacturers will be out of compliance when guidelines are released. That not only puts them at risk of losing their business, but it also puts them behind the curve if they choose to wait for final regulations to be enacted before they begin to adopt industry best practices such as GMP certification and appropriate ISO standards as starting points. The leaders in this space are already planning to be ahead of this curve to capitalize on the results once final rules are confirmed by going above and beyond what they anticipate regulators to enact.

These changes will cost time and money, so how can a hemp or cannabis company uncover hidden money to defray these costs? Hemp companies have an advantage as more tools have become available when legalization made 280E, the IRS ban on write-offs related to illegal controlled substances, irrelevant. Higher-THC cannabis may still be able to benefit to a lesser degree from tools that are not restricted by 280E.

Let's explore an idea that can benefit for both types of companies first. Currently, 31 states charge sales tax on utility bills, but most of those states allow manufacturing businesses (including cannabis grows) to apply for an exemption. The application process is specific and should be completed by an experienced engineering professional; if the application is denied initially, it can be even harder to get upon appeal, so make sure you have the right data in the right order before proceeding.

The exemption is allowed with any utility that is used for production purposes, as opposed to administrative purposes, so the utility usage needs to be measured down to the last light bulb and then separated by production vs. administrative use. Once the data has been documented according to proper protocol, the relevant agency or organization awards a certificate allowing the exemption to be declared to the utility provider that is assessing the sales tax.

In many states, this exemption is permanent and the total savings gets larger as the business uses more of the utility. Electric is the most common, but water and gas can also receive the exemption. In some cases, refunds from prior years' payments can also be triggered, but that must be approached in a specific manner.

If your utility statement has a line item for sales tax, there is a good chance it can be reduced or eliminated for your cannabis or hemp operation (except in New Mexico). This is very different from state sales tax you may collect on sale of your product to consumers, and dispensaries don't usually qualify as manufacturers and are unable to receive this benefit. As a grow or manufacturer if you see a line item for sales tax on your utility bill, the opportunity to reduce it exists. When the engineering requirements are met, the meter will qualify for the tax exemption.

The refund process is often turnkey, with results manifesting in 30 to 60 days. Since there is no effect on income tax for the business using this strategy, code section 280E does not apply. Therefore any cannabis or hemp grow or manufacturing operation that uses significant electricity and operates in a state that charges this sales tax should explore this option.

Stay tuned for the next part in this series where we explore R&D tax credits now available to many hemp operations.

Sean Covi, CFP, works with businesses and their tax planners to help them implement underutilized expense controls that reduce tax and operational costs with an emphasis on improving profit and financial performance. The strategies he brings are often overlooked by CPAs because they are not directly accounting-related, they may not know which programs are allowed within the parameters of code section 280E, or in the case of hemp, they are no longer bound by CSA schedule I or 280E, so many business owners don't even know such tools exist to save them money. Call Sean at (303) 931-3697.

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