Welcome And Vegas Mixer Tease

Ben Larson 0:20

Hey everyone, welcome to episode one hundred and fifty-five of High Spirits. I'm Ben Larson.

AnnaRae Grabstein 0:27

And I'm Anna Ray Gradstein.

Ben Larson 0:29

And it's Tuesday, September 29th, 2026. And we've got a great show for you today. We've got Nick Richards, tax attorney and partner at Greenspoon Martyr LLP. Uh 280E isn't only a Canada's problem anymore. If the federal hemp ban goes through, liquor stores, distributors, and beverage brands could end up with a tax bill that they never planned for. On top of all that, we have the big Schedule 3 conversation going on this year. We have a bunch of MSOs with a bunch of unpaid bills that they probably hope to not pay, and so on and so forth. Uh, but before we get there, Henry, how are you feeling? We're gonna make it through.

AnnaRae Grabstein 1:09

I'm making it through. I've got my first cold of the season, a bit of an upset stomach, but I'm not gonna let you guys down. We got this awesome episode scheduled, and um I'm I'm here for it. So yeah, how about you?

Ben Larson 1:22

Same, same. I uh I haven't been sick in a long time. I haven't been sick since the baby was born, and I think finally get into the space where well, maybe my body thought it was okay to let go, but it didn't realize how busy I was this week, so we're just gonna pretend it's not happening uh because I can't deny the sickness. I think strategy. I'm not usually because I think tequila fixes it.

AnnaRae Grabstein 1:45

Tequila, okay, yeah, and possibly THC. Well, this week we do have some big news. We're kicking off promotion for our fourth annual High Spirits Morning Mix in Las Vegas. So woo-hoo! It's coming back, guys. Um, and this year it's gonna be better than ever. The event is going to be co-hosted with our friends at Ordo Verde and Seth Yakutian, who's part of the Ordo Verde team.

Ben Larson 2:12

Uh we've got some part of the High Spirits family, episode 64, if you haven't seen it.

AnnaRae Grabstein 2:17

Awesome. Yeah, episode 64, Seth Yakutian. Um, so we've got some great sponsors who we're gonna be shouting out over the coming weeks leading up to the event, and we will be sharing um formal announcement and um applications for attendance. Uh so we're just really excited to be doing this great event this year again, and you'll be hearing about it a lot from us leading up to it over the next couple months.

Ben Larson 2:42

Yeah, and it's truly gonna be bigger and better than ever. I don't know if you any of you uh have ever worked with Seth Yakadan, but the guy's a machine uh and he is going all out. Not that we aren't, but you know, I uh we're the talent.

AnnaRae Grabstein 2:58

He wanted to partner with us because he knows that our party is the best party in Vegas, and uh it has been for the last three years. We have too many people than could fit in the room. So we also are leveling up with an extra big suite. It's gonna be epic. Uh so more on all that later. Let's um jump in with our news update. Uh should I get us started? Do you want to get us started?

Ben Larson 3:23

You just do it. You're so good at it. Okay.

California Track And Trace Appeal

AnnaRae Grabstein 3:26

Well, our first story is uh about California who would rather fight than fix track and trace. In August, an Orange County judge ruled that the DCC failed its ministerial duty to build a track and trace system that actually flagged suspicious activity. And it gave the DCC six months to fix it. But on September 23rd, the DCC appealed instead. The case began in 2021 uh with notorious retailer catalyst with CEO Elliott Lewis at the home when they brought the lawsuit. And at issue was quote, burner distributors that bring cannabis into metric legally and then send it out the back door, theoretically, right into the illicit market. Um, California shipped about 9 million pounds into interstate commerce in 2024, um, affording according to the lawsuit. Uh this the state gets to collect tax and skip the enforcement. So um Elliott Lewis won. He was very excited, and no big surprise, the DCC is appealing a ruling.

Ben Larson 4:42

I I just don't understand what you're appealing. Like, how hard is it to quote unquote fix it? Like you start taking action on suspicious things that are flagged by your system. Like, isn't that why we have a DCC instead of harassing good operators?

AnnaRae Grabstein 4:57

Um But nobody wants to accept fault or to lose. So I think that that's what part of this is about. But I'm with you. If if the fix is available to them, they should just fix it, right?

Ben Larson 5:10

Yeah, yeah. Well, Elliot's been fighting the good fight, episode 106. Uh, if you want to catch his episode, um quite the character. And good luck, good luck to the DCC. I just know that they're they've got their hands full uh when it comes to Elliot. Uh, I will say that we are in a gubernatorial race now uh in California, and stuff like this like really starts the prop up the kind of Republican candidate, uh Steve Hilton, that has been putting his his self out there. Um he's not a typical Republican. I think he speaks to a lot of the frustrations that I've been talking a lot about on the show is just a broken system, like the the old guard just streaming through um you know regulations and kind of doing what they want. And so it would be nice to see some checks and balances come into play here and people held accountable.

AnnaRae Grabstein 6:06

Yeah, and uh Steve Hilton is actually going to be speaking at the Ignited California market spotlight next week. So the fact that um one of the two uh gubernatorial candidates is coming to a cannabis conference, I think is notable.

New York Targets Illicit Inversion

AnnaRae Grabstein 6:22

Um, uh taking it to where that illicit weed leaving California might be going, um, New York has an anti-inversion bill that is targeting illicit out-of-state cannabis moving into the licensed supply chain. Um, go figure. It passed in the so in the Senate 60 to 1 in June and is waiting on Governor Hoachel's signature. Penalties are proposed to be 10 up to $10,000 a day plus up to five times the revenue from the illicit sales. And CuraLeaf ran an ad on September 23rd, uh full page, asking her to sign it. And it just really pairs well with the super story. California product leap leaks out, and then New York is trying to keep it out. So it's like you kind of see what's happening here. Uh, but the DCC apparently doesn't mind in California. They want to keep keep the flow to New York, but New York is saying, no, thank you, California.

Ben Larson 7:24

I just have to point out the irony of the other story that we were talking about last week or the week before. Kure Leaf, the federally illegal business trying to stop other people from doing federally illegal stuff. Um, but I'm not saying that it's wrong. I'm I'm just pointing it out.

AnnaRae Grabstein 7:44

Yeah, there's a lot of irony going on with CuraLif right now, for sure.

Why THC Breathalyzers Miss The Point

AnnaRae Grabstein 7:48

Uh and our last story of the day, uh weed breathalyzer built on post-9-11 bomb detection. This was reported in marijuana moment this morning. The National Institute of Standards and Technology, which is a government um department and or is a government agency under the U.S. Department of Commerce, uh, has it now explained that it has a cannabis breathalyzer that grew out of post-9-11 bomb detection. After 20 uh 2001, one of their researchers developed a technique to pick out explosive compounds in air because the compounds changed faster than the dogs were trained to smell them. And that same method is now being used to detect THC. Uh, in the agency's words, while sniffer dogs and human nose can smell the musky odor of cannabis and luggage and from burning a joint, these compounds are not the intoxicant. THC is the intoxicant, and it's a heavy compound that is difficult to detect in breath. Despite this challenge, industry is working to create breathalyzers for law enforcement and workplace safety. The researchers first detected THC in the breath using an edible as the test case last year. Uh, but there is still no roadside test um on the market. But it is clearly in development based on this announcement.

Ben Larson 9:19

In development to fail. Let's just let's like so uh when I worked in early stage startups, you know, we we used to coach people, like, go find the graveyard. It's hard to find because you know you don't get tech crunch articles about all the little startups that fail. But every couple years there's one of these breathalyzer ideas that pop up and they inevitably fail. I the first one that I remember was Hound Labs. They were based in Oakland or Fremont or something like that back in 2014. And we all in the industry knew that like detecting any amount of THC on your breath is not gonna tell you how intoxicated someone is, like this it's like a dumb idea. It's just it's so stupid, like they just need to like bury it because like is that technology like why breathalyzers? Because it worked for alcohol, but is that technology gonna help you identify psilocybin or or codeine or or whatever it is we're all hopped up on these days? Like, because I mean, I don't know, most people are on a layer cake of drugs most days, and like you just want to know if they're safe to be on the road or not. So, like, let's use the technology that we have. Like, we have AI, we have augmented reality, we have all sorts of shit coming out of out of Silicon Valley. Like, just think differently and and solve the actual problem that you're trying to solve. Like, stop trying to put it into this archaic box. Sorry, like this. I hate it that this comes up all the time.

AnnaRae Grabstein 10:38

The idea of of innovation is like, oh wow, they were able to detect THC in the breath, as if that's exciting. But the reality is that the THC could stay in your body for so long that you're completely not intoxicated, but could have THC get flagged all the time.

Ben Larson 10:54

And everyone's endocannabinoid system is so different, it doesn't actually identify your impairment.

AnnaRae Grabstein 10:59

Yeah, so let's see how to identify intoxication. That makes a ton of sense.

Ben Larson 11:05

Ton of sense.

unknown 11:06

Yeah, definitely.

Ben Larson 11:07

Logically not apply at the federal level. Well, let's get into our conversation today.

AnnaRae Grabstein 11:14

It is it is a great segue. Why don't you cue up our guest for us, Ben?

Ben Larson 11:18

Oh man, my my honor. Okay.

Meet Cannabis Tax Attorney Nick Richards

Ben Larson 11:21

Uh so yeah, uh Nick Richards. I'm finding it. Okay, today's guest is Nick Richards, uh partner and co-chair of the cannabis law practice group at Greenspoon Martyr. With everything happening federally in cannabis and hemp right now, uh, we wanted the person with the deepest cannabis tax knowledge we could find. That is Nick. He has more than 20 years in tax law and started his career at the IRS as a trial attorney and chief counsel advisor. Then he switched sides and represented a Colorado cannabis company in one of the first IRS audits in the legal industry. Since then, he's handled audits, trials, and MA for cannabis companies across the country. He's also one of the go-to experts on 2ADE and BSA cash reporting. He also teaches tax attorneys and CPAs nationwide and has taught as an adjunct professor at the University of Denver. Nick. That was a mouthful. Welcome to the show.

SPEAKER_00 12:20

Thank you, Ben. Thank you, Anna Ray. Thank you, high spirits. But uh really fun to be here. Oh, cool. Cool. Right. I'm interested in that party, by the way. That sounds like a lot of fun. I know uh um boy, what an adventure the Vegas um week is uh for all of us in the industry, right?

AnnaRae Grabstein 12:43

No, we're gonna have a good time, and I think that we'll let you in as long as you have a good conversation with us today. We'll see how it goes.

SPEAKER_00 12:49

I'll wear a better shirt. How's that sound?

AnnaRae Grabstein 12:51

And that sounds perfect. Well, so I I have joked that taxes are not the sexiest topic, but that you actually did make it sound pretty interesting when we talked to you last week to prep for this an interview. And I'm curious, just how does an IRS trial attorney

What 280E Really Does

AnnaRae Grabstein 13:10

become the cannabis tax guy? What happened?

SPEAKER_00 13:13

Yeah, I was, you know, in the right place at the right time. As Ben said, I was uh one of the handled one of the first audits here in Denver uh when the adult use industry was just starting in in, I can't remember, I think it was at 13 or 14, or it might have been medical only at that point. It was really early on. And um there was this code section called 280E. What 280E does is it disallows all the deductions of a cannabis company. So you end up paying a tax on much, much more money than you actually made. Uh and it's brutal. Uh and um it's also we're really weird to disallow deductions. It doesn't really make sense in our system. Uh and uh I got lucky I was in the right place at the right time and started doing some teaching around the subject and um started to uh expand my practice just from the Denver area into uh every new state that popped up along the way and and and here we are today.

Ben Larson 14:08

Amazing. And and where are

Rescheduling And The Meaning Test

Ben Larson 14:11

we today? I mean like it's been a it's been a crazy year uh with the the rescheduling uh announced in in April, I think it was. And then we went through the the trial and adult uses up in the air, and there's all these questions about when is it actually schedule three? Does is it the DEA or HHS or or the IRS that's determining this? Just kind of give us a lay of the land and in how the cannabis industry, and we'll get to hemp later, how the cannabis industry in particular should be thinking about their taxes this year.

SPEAKER_00 14:43

How can one plant wear so many hats, right? Wow, it's it's medical, it's adult use, it's it's hemp, it's marijuana. Um and that's really true. Uh um, according to the federal government, it has all these different statuses. Uh and you know, on the 280E piece, what 280E says is it applies to trafficking in substances that are, and I'm gonna use my little quote fingers to die I dive age myself here, huh? That are within the meaning. Within the meaning is the key statutory term of two uh of a schedule one or two drug within the meaning. And so that has prompted the industry to believe that the actual schedule isn't what determines if 280E applies, but whether it is within the meaning. And this rescheduling process has really established that marijuana is not within the meaning of a schedule one or two drug. And there's been multiple instances over the last at least four years where we'd have official government determinations that marijuana doesn't meet the definition of Schedule One or two drug. Uh, and so the industry has kind of taken the position that the regulated marijuana industry has taken the position that 280E doesn't apply. Um and a lot, and that's that we Ben, you mentioned that those giant tax debts that all these companies have. That's what that's about. That's about taking the position that 280E doesn't apply. And different companies have taken it starting at different times. Um, and I know we want to talk about hemp, and of course, that I wanted to get that out real quick because that's the background that should hemp become a schedule one drug that would that we're backing into, right?

Trulieve Refunds And Disclosed Positions

AnnaRae Grabstein 16:30

So let's talk about let's pull the curtain back a little bit about when regulated cannabis companies started saying that 280E doesn't apply to them and what that meant. Um, the big story was TrueLeave that kind of broke away from this case that they were a part of with a number of other cannabis companies. They filed amended returns and then they announced a extremely large refund of taxes that they had previously paid. It was over a hundred million dollars. Um, and that got everyone really paying attention of like, how did they do this? And people talked a lot about the position that they were taking, but that nobody really knows exactly what that position is, but there's some sort of position. So can you explain how a company is able to go about claiming a refund on over $100 million of taxes that they already paid, and then what happened since then that other companies have done um to get similar refunds, maybe not as big as True Leaves, but same idea.

SPEAKER_00 17:36

And Ray Ben, you're not getting those refunds? Yeah.

AnnaRae Grabstein 17:42

Um refund, personally, just away IRS.

SPEAKER_00 17:47

And array, you're right. That got a lot of people's attention. And I believe it was a hundred and almost 50 million, 148 million or something of that sort that they got a refund from for the tax years 19, 20, and 21, I think is right. Um at that time, there were a couple of different things going on. There was a group of large cannabis companies that were sponsoring a challenge to 280E, and that's a case called CANA provisions that got filed right about the same time in U.S. district court in Massachusetts. And that case would equal the argument in that case was under the U.S. Commerce Clause. And I'm not going to go into it, it's complicated. But essentially the federal, the it's interesting, the Controlled Substances Act, the jurisdictional power that the federal government has to have a Controlled Substances Act and other things like environmental regulations comes under the Commerce Clause. And so the argument was that they couldn't regulate marijuana under the Commerce Clause. So that that was filed right about the same time. And then at the same time, the HHS report, and this was 2023, came out saying marijuana wasn't Schedule II drug. Uh so all of that happened, and that became the basis of the positions that were used by a large part of the industry. A lot of the big companies in that first year, this would have been um uh 23, uh to support their their position that they could file a return without 280 applying. And that, and Anne Ray to get real geeky on you. What that requires is that you establish that the position is reasonable, and and that's a legal argument. That's a lot of things that go into establishing that it's reasonable or not. That can't be frivolous. And then you have to disclose it on your tax return. And if you do those things, then the system recognizes that you've been responsible around taking a position that could be wrong or that the IRS could disagree with, and you shouldn't be subject to penalties for it. Uh and so that's kind of how it all got started. Kind of move forward.

Lawsuits, Dismissals, Ultra Health Pending

SPEAKER_00 19:48

That first position has fallen away. What happened with that case that got filed, Canada provisions, it moved through the courts and it was dismissed because a case called Gonzalez V. Reich, the very first case out of the legal marijuana industry from California. Uh the case of Gonzales V. Reich was still good law, and only the Supreme Court could overrule it. And it went all the way up to the first circuit, and they applied for cert, and the Supreme Court said no. So the Supreme Court basically said that Gonzales v. Reich is still good law. And at least that case was the wrong case to challenge it. The Supreme many on the some some on the Supreme Court had said it needs to get challenged, but that case count provisions wasn't the right case. And that's because of two things adult use and um multi-state operations, right? Uh that that that uh commerce clause provision, uh, the problems around that apply better to a single-state medical uh company. And so that that is now still at issue in another case out there called Ultra Health, um, that is in the tax court right now, along with the second argument about rescheduling.

Ben Larson 20:58

Yeah, truly always comes out ahead in these conversations.

SPEAKER_00 21:02

Well, keep super smart company, right? Uh really, really smart people for sure. Apparently, yeah, yeah.

Ben Larson 21:07

Uh can you talk about Terrace End a little bit? Because they had eight million dollars and now they're being sued to return it. And I'm just kind of wondering where that puzzle piece kind of fits into all this.

SPEAKER_00 21:18

There's different ways to um claw back a refund. Uh, and it has to do with the timing uh that the government has to do it. Uh and there's a three-year statute of limitations on filing a return that applies, and the government can't make adjustments uh if it doesn't act within those three years. And but in the case of a refund, the government can go to district court and sue in district court to get that refund back if it doesn't have those other procedures to prevent it, like auditing and those kind of things.

AnnaRae Grabstein 21:56

And so is there a risk if Terracenda is now being sued? Over the refund that they got that that that big settlement or the big refund that we're talking about from TrueLeave and many of the other MSOs, the public MSOs, have been disclosing publicly all of their refunds. And there's probably other refunds that we're not hearing about from private companies that you work on. Are they at risk? Are people going to be taken to court and need to pay it back?

SPEAKER_00 22:24

For sure. For sure. I could be wrong. It's absolutely a risk. It's in the courts right now. In that case, Ultra Health is at that point where all the briefs have been filed on it and it's with the court. That actually happened. We got to that point before right just before the rescheduling order that came out in what April of this year. And then the court asked for additional briefing. And then the and now it's in the in the judge's hands. It takes the tax court usually quite a while to write an opinion, about a year or so. But there could be good reason that this one moves a little quicker with rescheduling moving and all that kind of stuff as well. And so that's all pending. We'll see what happens there. We did file a what's called an amicus brief in that case. We don't represent the plaintiffs in that case, but we have filed a brief in in support of their position.

Ben Larson 23:18

So it seems like there's a fair amount of uncertainty and then there's like case law being built like as we speak. What do we anticipate the fallout of like rescheduling being as we kind of get into 2027? You know, as kind of the like the cards start to fall. Maybe the IRS starts to provide their opinions. Like, you know, what do you what do you expect to be be happening?

SPEAKER_00 23:39

Well, so I think it's interesting to look at um uh the rescheduling order

Schedule III Timing And 2026 Retroactivity

SPEAKER_00 23:44

that came out, right? That moved medical marijuana to schedule three, and the IRS issued an announcement saying that it would issue regulations making that change for 2AD purposes retroactive to the beginning of 2026. Okay, that happened. Um adult use, meanwhile, is uh has has had hearings, right? Uh and then what about three weeks ago or so? Uh we got the DEA brief. Suddenly the DEA is our friend. Uh they like marijuana now. They're like, oh, we got no choice. What do you mean, of course? It's schedule three. What are you talking about? Uh pretty amazing right now. Um we could end up in a situation where a company that is multi-use um uh is both subject to 2 ADE for some things and not subject to 2 AD for the other things. And we're advising a lot of companies on kind of the things to start to do uh if that happens. It should it what should happen is that adult use should also get moved to Schedule III. And if that happens, then the the IRS statement being retroactive to tw beginning of 2026 should apply. Um hasn't happened yet. Uh, but we we we're hoping that that it will. The thing about schedule three, it's sort of I'm sorry if I can't use four letter words on this program, but it it's it's sort of bullshit, right? Uh really it should be descheduled completely. Uh and there shouldn't be marijuana drugs that are schedule three. Uh that would be the right way to do it in my mind. Um, but we're stuck in this weird thing, and it's really all about taxes. Really, the schedule three for the industry doesn't really matter other than the taxes. That's the only real big deal uh that Schedule III gets it, and that's a huge deal.

AnnaRae Grabstein 25:36

Well, in this retrospective question, you brought up that retrospective could mean a lot of things, and that as far back as 1972, the government found medical uses for cannabis. Um, even though Nixon buried the report, when we start talking about what retrospective means, there could be a lot of different interpretations of that term, right?

SPEAKER_00 26:02

That's really important. And then thank you, Anna Ray, for for reminding me of that because I I did want

Retrospective Relief Versus Retroactive

SPEAKER_00 26:08

to talk about that. That was also part of the order earlier this year, right? Uh and what the DA said is that that is that the IRS should consider retrospective relief from Section 280E for medical marijuana licensees, uh, period. Um retrospective, like you said, in retrospective is not retroactive. It's it's fundamentally different. Retrospective means go back to the beginning uh and provide relief. Uh and that's a huge deal. And and it and a ray, Ben, that came out as this fight around whether 280 is within the meaning or not, as this fight is going on, right? And then you have to think that that's a bit of a nod to the valid argument that's being made um by the plaintiffs in these cases.

Ben Larson 26:59

Well it's gonna get more complicated very soon. And maybe I should ask Anna Ray, Anna Ray, do we feel complete on the foundation here? Because like I think we do.

AnnaRae Grabstein 27:10

I think it's time. Yeah, let's break it open.

Hemp THC Ban Could Trigger 280E

Ben Larson 27:12

Because like there's also the you know, the conversation around medical hemp, the CMS program, and a large swath of of hemp that is about to become Schedule One, barring any, you know uh rabbit out of the hat, like legislation that gets put into place by December. Um and so I guess just to kick things off, you know, if everything goes through as currently written, you know, there's a there's a tightening of the funnel in mid-November, and then everything kind of like starts to shut down unless you're 0.4 milligrams of THC or less? There's been a lot of talk in the space because states have moved ahead and created regulated hemp programs, and they're like, oh, we'll just go to state level hemp programs similar to how there's state-level cannabis programs. Does that mean hemp uh will all of a sudden have to consider 280E? Or uh does it enter the same argument where we can get legal opinions and just kind of pretend that 280 doesn't exist?

SPEAKER_00 28:22

Yes to both. Okay, yes, to both. Currently, yes to both. Awesome. Um uh and yeah, I think so the the reality is that 280 applies to trafficking in a substance that's within the meaning of one or two. Trafficking is defined as buying and selling. So if you're a store that's buying and selling hemp now that's gonna convert to to a Schedule One drug, now you're subject to 280E. How much your store is subject to 280E is another question. Um, it could be that portions of it are. There could be, you know, it's 10% of your sales, 10% of your store costs are subject to 280. There could be some things like that. Uh there could also be some ways there that the industry that, you know, the legal, the licensed industry is currently using uh to help um reduce 280e. Uh and of course, the position that it doesn't apply at all until we have an opinion out of the courts.

Ben Larson 29:24

Well, you you mentioned a few things. Yeah, you mentioned a few things in there uh that seemed a bit ambiguous, and we have a lot of questions around them. And uh we recently had on uh Jason Dayton from Trail Magic episode 149, if you want to go see that. Um and his co-founder, David O'Neill, sent us an email this morning. Uh, I think that kind of touched on all of those. And Anna Ray, do you want to kind of like take us into the first one?

Separate Entities And Why C Corps Matter

AnnaRae Grabstein 29:48

Sure, yeah. And thank you to David O'Neill for these questions. And they really did inspire this because Minnesota is one of the states that is leading the way in creating these state-level hemp programs. And the operators there have a ton of questions. So I know that they're listening intently. And uh yes, from David O'Neill, he says, separate entity or one entity? When should a business put its hemp operations in a separate legal entity instead of keeping everything together and allocating costs between the legitimate business and the Schedule One business? Does a clean tax history for the legitimate business count as an argument against creating a new entity?

SPEAKER_00 30:32

The reason why you want to separate them, and I believe you do, is because of personal risk uh and business risk, right? Any any company that is engaged in trafficking in a schedule one or two substance has a really big risk and needs to be isolated. You don't want to put that risk in your successful, you know, non-trafficking business. So absolutely. And then NRA, Ben, and and uh David and folks in Minnesota, hey, the thing that's that you need to think about, and I'm not saying this is absolutely what you have to do, is what you need to think about are C Corps. Because when you have a when you're an owner of a company that has risk, uh in this space, what 2AE does is it creates phantom income. That means you get personal in personal income tax, but no income. Uh that's a real bummer. Uh, particularly if that business fails and you can't pay those taxes. Now there's a lien on your home and your spouse is upset and all that. Uh um the other reason is audits. If you are the an owner of a company, then that company is what we call flow through. So that's not a C Corp. That's means you get a K1. Um uh if you're the it and that company gets audited, uh you personally are under audit. And if you own other companies, now those companies are under audit. So a C Corp stops that.

Ben Larson 31:58

Okay, and so let's uh let's pick apart the word separate, because separate entity.

How Separate Is Separate In Practice

Ben Larson 32:04

Um, and we can talk about retailers, we can talk about distributors, you know, driving trucks. Like, are we talking about separate trucks, separate footprints, separate entrances, separate reach uh separate uh registers, or can you do it by the book, so to speak, and and separate it on the ledger? Like or does it depend?

SPEAKER_00 32:26

It's it's complicated, right? Um I mean you could see separating out a single business that's just a store and has all you know things on the shelf, it would be really tricky. Uh and really that's what the cannabis industry has been facing uh over the years as well. Um You know what I what I counsel on that is you know it it is about risk uh and it is also but but it's also about practicality. You could take the costs and separate them. You can do things like that. Sometimes what's on the tax return, you know, it's supposed to accurately reflect the business exactly, but sometimes it doesn't. Uh and you know, in the in the legalized, the other thing that happens in the cannabis world is banking, right? And one of the things that's happened in the licensed space is the use of management companies to deal with banking problems. You can't get a bank account in your you know, mycannabislc.com company. Um, but you might be able to in ABC consulting. And that also, if you if your bank accounts in ABC consulting, your your employees aren't going to lose their bank accounts when they get a depot of deposit that's from, you know, the cannabis company. And so the thing that happened there though, that there were very legitimate business reasons to do that. But what happened is that people thought they could get away and and use that to get around 280E. And that was the real problem was the was the use of that structural thing to get around 280E. And so when you're doing managing these concepts, one of the big things is 280E that you're trying to reduce, of course. But if you go too far, now you just got in trouble and your structure is now set is now at risk of being challenged by the IRS. Man.

AnnaRae Grabstein 34:04

Explain the difference between separating the entities like you had described initially, and having a management company that has some functions and then other cannabis functions in this other company. How how different are those two structures?

SPEAKER_00 34:22

Yeah, they're quite different, right? Um, I think in the separating the two companies, of course, you'd want to have the names owned, you want to have the IP separate, you'd want to have separate bank accounts, you'd want to try to manage it that way. Uh in the cannabis space, the use of the management company was this convenience that many actually many businesses do this. Uh, they use it for payroll. Uh, if you have companies in different states, it's nice to be able to centralize payroll uh and handle that from a single source, right? So it's a very common tool to set up a payroll company or management company in some way in connection with an operating business. The thing you can do with that with that structure, though, is use it to get around uh certain taxes that would otherwise apply. Uh that's that's the tricky part. Um and then it's not just in this space. If you were it, let's take cannabis out of it. A clad the classic example is you're a business, you're a manufacturing company, and you also own the land. You can get me. I I own all that. Uh and I'm like, and I own the land, so the company pays me rent. And I own the land in an LLC, that's direct flow through no double tax, but the the factory is in a C Corp because that's risky. Uh and I go, you know, I'd like to get single tax on all that money that's coming from that C Corp. Why don't I just triple the rent? That doesn't work, right? Because that's getting around that tax that would otherwise apply. Uh, and that's that's the limitation around these different companies in the tax world.

Ben Larson 35:52

Yeah, man, it's bringing back all the old feelings. Complicated corporate structure, arm's length contracts, multiple bank accounts for every entity. Uh fair market billing. It's not having employees lose mortgages and and all that. It's I mean, it's brutal use of it.

AnnaRae Grabstein 36:11

Yeah, geez. Well, so one of the things that I've become pretty familiar with as it relates to 280E from all my years in cannabis is how 280E is the most challenging for the retailers and that kind of up supply chain businesses like cultivation and manufacturing. And now in this new hemp world, applying

Cost Of Goods Sold And Section 471C

AnnaRae Grabstein 36:31

it to Minnesota and our our um our our caller, David, um, who uh makes beverages for manufacturing companies have have kind of shifted the way that they manage their chart of accounts to really push a lot into cost of goods sold, but that that is a lot more challenging for retailers. And I'm wondering if you could talk about that within the context of you know the Minnesota case study of someone that's making beverages and maybe 10% THC beverages are being made and 90% is being used, their canning line for ciders or beers compared to the same allocation but at retail, somebody that's selling 10% THC beverages and 90% um chips and sodas and beers at retail. And and how might 280E mechanics look different for those two companies?

SPEAKER_00 37:25

Yeah, so um I wanna I don't want to talk much about this, but I want to say real quick, a person in in David's shoes that's a manufacturer might want to really take a close look at section 471 C. Um The real difference why producers, let's call them manufacturers and and cultivators, producers, are different than a store is because a code section called section 471 treats them differently. 471 is the code section that says what is and is not cost of goods sold. And if you're just a reseller, it's just a store, you're under the 470, I'm getting geeky here, 471-3 regs. And if you're a producer, you're under the quote-11 regs. And the dash 11 regs allow a lot more to be put into cost of goods sold. Um, so that creates this fundamental difference. The reason why I say 471C is really worth looking at is because that those strict rules coming from 471A don't apply in 471C. Uh, and so that has been used by a lot of manufacturers in the cannabis space over the years to try to reduce the the impact of Section 280E. Um, also President Trump President Trump 2017 income tax code law uh is what 471C is.

Ben Larson 38:49

Is there is there a revenue threshold with with with any of the yeah, I think it's 29 million right now, gross receipts.

SPEAKER_00 38:56

Uh it has been on last on last check. Um and uh there's certain rules about using it, um, but it has been effective in the in the cannabis space for smaller businesses, and it might be what made the big guys pissed off and truly to take what it did and all this kind of stuff.

Ben Larson 39:13

Yeah, I I I I I sense more complicated corporate structures coming along to diversify into a bunch of $30 million businesses or 29, sorry.

SPEAKER_00 39:23

There are rules. There are rules.

AnnaRae Grabstein 39:26

So as we're approaching the end of the year and this is something that people are looking at, um, if you are a combined Bev Alc business that is also operating in Hemp THC, what do you think people should be watching right now? And what do you think that they

Year-End Planning For Mixed Product Businesses

AnnaRae Grabstein 39:46

should be doing right now, especially if there's something before the end of the year uh or at the beginning of the year that people should be planning for?

SPEAKER_00 39:55

Yeah, I think you want to start to look to what you need to do to be safe at 280E applies. You need to talk to your lawyer about your and your CPA about your risks. Uh, you need to look at your corporate structure, you need to take a look at your at your banking processes and what that all looks like and what kind of records you're creating. Um, are you are you creating separate records? Are you creating individual records? Can you separate out a PL? Can you do all those things? Um and um, you know, I think that in in an analyzing how 280E might apply, the way you try to do it is first let's peel up those pieces that aren't 280, and then let's look at what's left over. And if some of those expenses are shared expenses, for example, your rent for your facility where both THC and non-THC products are sold, what's the proper allocation for that? Uh and you might think about, oh, well, gee, we're just selling those THC things right over there in that spot. And, you know, it's a machine the in the early cannabis days, they talked about doing vending machines and things like that, right? To keep keep this big separation between those spaces going. And, you know, you might look about at that. What's your facility like? How easy would it be to establish a separate presence? What that what would that look like? How easy is it to track? All that kind of stuff.

SPEAKER_02 41:17

Hmm.

Tax Opinions And Disclosure Thresholds

Ben Larson 41:18

And and when it comes to getting like legal opinions and letters written, you know, there's the there's the famous cookies letter about their THCA. Um how should be people be thinking about that? Like, how many letters do they need, like what parts of their business? Because I I I people are coming in very green, part of the pun. Um, but like yeah, I uh at what point do they engage someone like you uh and and get that legal opinion written?

SPEAKER_00 41:48

So tax opinions have to be um reliable, so they have to be by a little legitimate firm and a lawyer with the expertise in the area. Um they have to be kind of robust, right? They have to consider both the good and the bad and and uh their their complex legal documents. What they are needed is to establish the various levels of certainty that are used to determine whether you also have to disclose or not. So if you can get to what's called reasonable basis, uh then you have to disclose, and now you've satisfied the laws about what you need to do to take an uncertain position. If you can get to sub and reasonable basis is a 20 to 40 percent level of certainty. If you can get above that, but not uh not more likely than not, that's called substantial authority. Still, substantial authority is not more likely than not. You still have more likely to lose, right? Um, then you don't have to disclose if you can get to substantial authority. And if you can get to more likely than not, now you don't have to keep an uncertain tax position disclosure on your public disclosures for public companies. Uh so that that's all how that works, and all that's based upon an opinion from a lawyer that says, I'm at this level of certainty.

AnnaRae Grabstein 43:08

Well, there you have it, folks. I think that that we just got to the 101 or the 201 version of what hemp operators need to be thinking about. Um, I'm sure that you're gonna be getting phone calls after this, Nick.

SPEAKER_00 43:21

Happy to talk to anybody. Happy to talk to anybody.

AnnaRae Grabstein 43:25

Yeah. Um, I'm I think that it's that there's other things related to 2ADE that people just don't talk about a lot. And you have brought some of them up um when when we've chatted. And so just as we kind of close out the episode, I think it would be interesting to to hit on some of those things that people don't talk about a lot as it relates to

The Sackler Example And Government Discretion

AnnaRae Grabstein 43:49

this. And I was wondering if you could tell us about some of the history related to um the Sackler family and Purdue Pharma and what how 280E may or may. not have applied in um the opiate situation there, just for some historical context.

SPEAKER_00 44:06

Yeah. Anna Ray, I uh this was something that Ben made me uh made me uh very upset. Uh and um as a person who is you know neck deep in 280e when the opioid crisis and the Sackler family was all in the news, what I what I learned is one of the first things that happened was the U.S. government conceded that 280E didn't apply. The Sackler family was trafficking in a substance Schedule 102 substance and there the way they were doing it was illegal under the Controlled Substances Act. And there's a very good chance that 280E should have applied there. And that's that that would have crushed that company right um uh just like it's crushing the cannabis industry uh and I think it's really telling that the federal government uh conceded it in that situation uh despite the Sackler family's um wrongdoing can we get specific what what were they doing that was illegal uh according to the CSA yeah I believe that the argument would be that they were um they were they were they were advertising or promoting or putting um it's just in I think a schedule two substance opioids uh um which is another story all on its own right um versus schedule one cannabis uh put uh uh uh for for uh um uh in in a way that wasn't approved by under the Controlled Substances Act for their Schedule II license uh and I and I believe that was the there was a a case that was filed and ultimately settled right uh on that on that basis. If that case one I think two AE should have applied. Yeah.

AnnaRae Grabstein 45:52

And then the lesson from all of this is that you know whether or not we believe that the Sacklers should have been subject to 280e or not is that the government did concede. They did put it aside and so they have the ability to do that. And with all of the back and forth between cannabis companies and and now hemp has come into the table uh there is there is precedent for the government getting creative about the way that 280e applies it isn't as black and white as as some things are it seems that's right that's right one of those you know iterate retrospective relief right retrospective relief and and what's the path to that there's a lot of different ways to try to try to get there.

Options To Settle Crushing Tax Debt

SPEAKER_00 46:35

One of the things that I want people to know and to think about is if you have a giant 28 tax liability there's a process you you're driving around late at night uh looking for um good chili dogs in LA and you hear that commercial settle your taxes for pennies on the dollar that's real that happens uh that commercial is a little misleading but that is real there's different kinds of settlements one of them is for something called effective tax administration doesn't matter how much money you have it matters whether it was fair or not for you to bear this horrible burden of this tax liability uh and the federal government is now kind of saying in multiple spaces that it wasn't fair uh and the IRS should wake up to that. I'm sorry Ben I got a little on my podium there.

Ben Larson 47:20

No no this is great. I'm thinking a big California class action soup from the cannabis industry. I'm your man all right one last one because it's kind of related to trafficking of illicit substances uh called into question this year because of all the conversations around hemp uh are seeds and seeds have largely gone under the radar there's the jokes of in the old days about like the immaculate conception and um is that conversation actually being revisited or people are just going to continue to turn a blind eye like what are your what are your thoughts on this one?

SPEAKER_00 47:58

It's starting to show up a little bit in because the the the pool of of agents that are uh interacting with cannabis companies uh are are now a bunch of new new agents and but there are friends right but they're trying to understand the industry and this is the IRS and I I imagine I don't handle DEA audits although I could um but um I handle a lot of IRS audits and IRS site visits and things like that. I've interacted with the IRS a lot around marijuana oftentimes in marijuana facilities uh and you know they're trying to learn the industry and that was a question early on that I think they avoided and now they're asking you know where do you get your seats? Um and I maybe it's just curiosity. I don't know. Um it's it's a valid question after all um but it's interesting that it's kind of showing up at this point when you know gosh what what was my 2012 is my first audit we've been doing this for 14 years and now they're asking this question all of a sudden uh it's kind of strange.

AnnaRae Grabstein 49:03

Yeah indeed so

Seeds, New Agents, New Audit Questions

AnnaRae Grabstein 49:06

before you jumped over to the side of cannabis companies you did work for the IRS and I have often thought that 280e would not be struck down until there was some other way for the government to get there. So it's like nothing is free in life and in some ways 280e seemed like the tax because there was no federal licensing and and now we're looking ahead at this DEA registration process there's talk about these fees to be able to sell your cannabis to the DEA for them to middleman it for you back into the industry.

SPEAKER_00 49:43

I mean have I said it wrong yeah like what what's what's what's going on what does the IRS really think like what are the people like inside the IRS and what is their position on 28 um from your experience with them and Ray the IRS is full of lovely people lovely people um I just want I just want to go on the record with maybe maybe good at sarcasm it they have a tough job they really do right they have to they have to deliver very tough a very tough area of our law uh and um I know a lot of them well and uh you know IRS is full of personalities um the IRS is one of the more sort of military like non-military agencies and so there's a I think there's a very strong um you know resistance to to marijuana being legal and a lot of dislike of marijuana uh in the IRS you just wonder they like the the 280 is about power right they have this power to take away this thing that every other company gets to enjoy and they are not giving up that power right um but they're not collecting any of that that money you see those giant balances that Ben mentioned those are on the balance sheet because they're not getting paid uh and it's it's silly to try to collect a tax for dollars that aren't there and it really is not what our system is set up to do and it and it really could be unconstitutional uh if we can get away our fear of this horrible plant uh uh uh that seems to crop up in every cannabis case

What The IRS Thinks About 280E

SPEAKER_00 51:23

that hits the courts I think that was sarcasm right with the horrible awesome well well Nick now now that you're kind of on the the emotional thread here uh and we're approaching the top of the hour let's uh let's move on to our our last call Nick what's your final message for our listeners any advice call to action closing thoughts uh cannabis or otherwise mic is yours don't get desperate right um uh you see a lot of companies that made some sort of big desperate moves early on in the cannabis space and those moves came out to really be tough down the road uh so think things out get good get good advisors um good a good cpa a good lawyer or three or four or five uh do your homework um make smart decisions uh and um you know watch high spirits yeah nice watch high spirits get good advisors like nick richards from green spoon martyr nick thank you so much for spending the last hour with us it was truly uh a masterclass really grateful for for your time thank you thank you ben thank you an array see you in vegas yeah in vegas all right okay folks if you've enjoyed this episode please stop don't don't don't don't turn us off do us a favor follow us on youtube we were doing it on the side we didn't realize it was a thing it turns out it was a thing uh just search up high spirits podcast we're at just over 300 subscribers today we're trying to hit 500 by the end of the year help us achieve our goal uh you can catch us live on youtube as well or here on LinkedIn where we also release a higher quality edit of the video podcast as well as shorts and maybe other content in the future obviously you can get the audio on Apple Spotify and podcasts wherever you listen to them.

Ben Larson 53:23

Again uh keep an eye out for more info regarding our fourth annual high spirits morning mixer in Vegas during

Final Advice Plus How To Support

Ben Larson 53:30

Vegas week uh we're doing it with Ordo Verde, Yakitan and the team uh the link for our December 4th morning event in Vegas will be live this week so keep an eye out uh request and invite do not miss the event yada yada yada unless we tell you to um sorry not sorry thank you for listening as always folks stay curious stay informed and most importantly keep your spirits high until next time that's the show