Tuesday March 26, 2019
When it comes to the cannabis industry and compliance, things are pretty serious. Cannabis businesses are subject to some of the most restrictive tracking and accounting regulations in retail commerce. Advanced tracking through every stage of product development and sale through state-run programs like METRC (known as seed-to-sale tracking) and elaborate accounting restrictions can make the industry a logistical nightmare. In order to stay ahead, companies must be vigilant in their efforts to stay compliant, and thus keep the doors open. Despite the many challenges cannabis businesses face surrounding regulations, there are solutions to weathering the storm of regulation.
Understanding Seed to Sale
Tracking cannabis from seed germination to the point of sale of the final finished product is a standard among the majority of states that have legalized retail sales of cannabis for adult use. Essentially, when a plant is germinated, it is assigned a unique identification number. The plant is tracked as it is grown and moved to different stages of the cultivation center, from seedlings to adult plants. When the plant is cut, dried, cured and harvested, it is tracked at each step. Tracking in this way allows for every subsequent gram of product to be accounted for.
Why All the Effort?
One of the goals of the legalized cannabis market is to compete with black-market sales. As a federally illicit substance, cannabis fostered a large and thriving black market to meet the incredibly high-demand.
Seed-to-sale systems were established to help give legitimacy to the burgeoning legal market, and ensure that legal cannabis does not wind up on the illegal markets and vice versa. Just as with food safety regulations, seed-to-sale tracking also helps prevent contaminated product from entering the market, and helps with recalls when it does.
While such detailed tracking allows for better accountability and safety, it also adds multiple logistical steps to doing business. Stopping to make sure everything is accounted for during the pace of business can be difficult, especially when accounting for losses, refunds, sales, and any mistakes in inventory accounting that must be fixed, usually by the end of each month. Small errors, like a product breaking or cannabis needing to be thrown away, have elaborate reporting and destruction requirements. When companies fall behind, it can become a difficult spiral to break out of.
What is METRC?
A number of legalized adult-use and medicinal-use states, including Alaska, California, Colorado, DC, Louisiana, Maryland, Massachusetts, Montana, Michigan, Nevada, Oregon and Ohio, accomplish their government-run cannabis tracking using a system called METRC, quickly establishing itself as the frontrunner for a standard national system.
How does it work?
According to the METRC website, “METRC uses RFID (Radio Frequency Identification) technology combined with serialized item tracking to create an end to end surveillance system where the municipality has real-time visibility at any given time into the inventory at all the locations.” RFID not only allows for easy scanning and confirmation, but makes such accounting difficult to counterfeit as well. The company, owned by software giant Franwell, is a great tool for the cannabis industry to maintain its legitimacy, however, it doesn’t come without any challenges.
Benefits and Challenges
While METRC allows for detailed tracking and transfer of cannabis product between entities, it also adds an extensive layer of logistics to business procedures. Due to industry regulations, a simple error, such as a broken product, comes with extensive tracking and disposal requirements, which in turn require time, effort and ultimately money from a company to address. Many cannabis businesses sink hours of resources into METRC each and every day and still face challenges with maintaining accuracy.
Accounting for 280E
Cannabis industry woes are further complicated by unique tax rules. Due to cannabis’ federally illicit status, cannabis businesses cannot claim many of the usual tax deductions that companies typically take. This is due to title 26, section 280E of the Internal Revenue code, which forbids businesses from recording tax deductions or credits for income associated with Schedule I and Schedule II substances as mentioned in the Controlled Substances Act, which considers Cannabis a Schedule I substance. Due to this, cannabis companies wind up having a significantly higher tax rate than standard businesses, sometimes as much as 70%.
Cannabis businesses are taxed at higher rates not only on profits, but also on ancillary spending like marketing and advertising. In efforts to comply with the law, cannabis businesses are barred from partaking in normal parts of commerce without paying steep fees. For smaller businesses this can sometimes be the line between keeping compliant and keeping the doors open. While there are ways to mitigate 280E, it often requires someone with unique experience in the matter to make any headway.
Getting Ahead of the Curve
In general, prospering in any cannabis business is mainly an act of logistics and management. As businesses scale, so do the levels of complexity associated with maintaining accurate tracking and accounting. These of course are on top of keeping up with extensive labeling and regulatory compliance, in addition to the standard challenges of running a business. At the end of the month, ready or not, those numbers must be reported to the state to remain compliant. In order to stay on top of the chaos, many cannabis companies turn out outside consulting firms for help. Companies like Higher Yields Consulting offer expertise and assistance in dealing with METRC and 280E accounting regulations, as well as a number of other services to both aid companies that have fallen behind, and help rising companies stay ahead.
Utilizing outside help from a consulting firm can be a great way to save time and money without taking energy away from managing the business. Plus, with services like METRC reconciliation, business owners can rest easy knowing their information is accurate, up to date and in accord with the law. Making sure these critical compliance aspects are running smoothly can be increasingly difficult for new businesses too, and that’s where companies like Higher Yields can really lend their expertise.
We spoke with Leane Mysliwy of Garden Remedies in Massachusetts to illuminate how tracking and accounting have affected the business as it prepares to begin recreational sales alongside the state’s existing medical cannabis infrastructure. Garden Remedies has been operational for two years as a medical dispensary, and has taken advantage of the state programs that allow for converting an established dispensary to allow adult-use sales. Massachusetts recently adopted METRC along with recreational sales, so Leane is having to learn a whole new system of tracking.
“We’ve had good tracking procedures in place from the beginning,” she tells me, “so this is a matter of pivoting and learning a new way.” However, the unique quirks of METRC are all-new; of the company's roughly 100 employees, almost none have worked in cannabis in other states. “Some people may think of us a ‘big cannabis’ in the state, but in a lot of ways we are really a grass-roots operation.” Because of this, Garden Remedies cannot rely on METRC familiarity that other Massachusetts dispensary chains have (as most are multi-state operators).
Partnering with the savvy and experience of a consulting firm like Higher YieldsConsulting has allowed them to keep pace. “Higher Yields Consulting has been helping with a solid foundation during the transition, bringing in some understanding, it helps with getting things off the ground.”
While dealing with METRC support has been a generally positive experience for Leane thus far, troubleshooting can be time consuming. Even with help, Leane anticipated needing to dedicate one or two employees to monitoring METRC full-time. Additionally, 280E compliance is no walk in the park. It has been an issue “since the beginning,” Leane recounts. “Hundreds of lawyers have been trying to figure it out for years, it’s a challenge.” With Higher Yields there to help, Leane remains hopeful they can keep it all in order. “Coming from a vertically integrated model has helped us insulate from that a bit, we’re starting to get to the size now that we can figure out better solutions to dealing with it.”
At the end of the day, Leane says, “Compliance is number one for us. Other shops have been shut down. When you’re a business owner, people rely on you. I don’t want it to be my fault that rec sales stop.” By outsourcing some of those responsibilities to a specialized outfit like Higher Yields, Leane is able to focus on the many other pressing issues with her rec roll-out and ensure that Garden Remedies is operating in 100% compliance with the law.
On Track for the Future
As it stands now, the cannabis industry hopes that 280E will eventually become a thing of the past, with multiple legislators seeking to overturn the section. In the meantime, mitigating the damage of tax overreach will continue to be an issue for all cannabis ventures. Using consulting companies like Higher Yields can also help companies expand, helping with license applications, grow management and more, and plan these additions within a framework of 280E compliance.
As more states look to legalize adult use of cannabis, METRC is likely here to stay. In time, that may become a fluid, easy to use system, but in its current iteration, the extensive amount of regulation it is used to cover will likely require devoting resources directly to its management, just as Leane anticipates. Companies looking to stay afloat are increasingly looking to intersectional cooperation in order to better address specialized needs, ultimately allowing each sector to do what it does best. It certainly is an exciting time to be involved in the industry!
What are your thoughts about the meticulous nature of cannabis industry regulations? Share them in the comments below!