Chris Piazza and Steve Moskowitz discuss the many aspects to having a cannabis business when the product is illegal, interstate business, and will working remotely survive? Will there be an office space “crash” or will people want to come back to work?

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

Chip Franklin:

Welcome to Practical Tax with Steve Moskowitz, our tax attorney extraordinaire. I'm Chip Franklin. Steve, good to have you here as always.

Steve Moskowitz:

Always a pleasure.

Chip Franklin:

It's interesting to talk about the many different things that surround tax. In fact, it's almost impossible to find subject matter that's not affected by the government and the internal revenue service, right?

Steve Moskowitz:

It's funny, but anybody that goes out to dinner with me knows that no matter what you say, somehow that reminds me something about tax.

Chip Franklin:

Right. Well, this is a topic that we talk about a lot and you've actually done videos before on this, but it's constantly changing. And that is a business of cannabis in the United States, a business that has a built-in irony. The fact that cannabis is still a schedule I controlled substance. Or THC anyway. And so joining us right now is Chris Piazza from Cannabis Devices. And here, Chris, good to have you here with tax attorney, Steve Moskowitz, with Practical Tax.

Chris Piazza:

Thanks for having me. Thanks for having me. Yeah, Chris with CannaDevices.

Chip Franklin:

So in just a couple years, your company's done incredibly well. You supply 10 publicly traded cannabis companies, along with a lot of other operators in that business. And throughout all this growth, you guys have supported small businesses, and Steve and I love to talk about the success of small businesses in this country. It is the backbone of this country. You're also a founding member of a nonprofit startup syndicate as well. So let me just pose this question to both you. And I'll start out with, how would you describe the state of America's cannabis success right now? We'll start with you, obviously, Chris.

Chris Piazza:

It's a growing industry. It's going to keep growing, and ever changing from here. What I think we're starting to see is a little bit more consolidation. We're starting to see some more bigger players taking a little bit more foothold. Now we're starting to see brands where the cannabis dispensaries were before. We're starting to see a lot more brands build, and companies a little bit like mine and the accessories, the non plant touching. It seems to me that the plant itself, the gold rush is over and now the licenses have value. But we're starting to see a lot more consolidation. The east coast is spreading west, and that's my view of the state of it currently.

Chip Franklin:

Steve, how does that work, if a cannabis business in Illinois wants to work with a cannabis business in California? Does the fact that it's a schedule I controlled substance affect that relationship?

Steve Moskowitz:

So I got to use the technical term, as a lawyer. So I'll use the proper technical term. There's total craziness here. And what happens is that you have a business that is illegal on the federal side, it's legal in some states, and there's all kinds of problems. And of course, me and taxes, the first thing I look at is, well, what's the taxability? Okay, so number one, all income is taxed, legal or illegal. So if you were in the murder for hire business or a bank robbery business, legally, you'd still have to pay tax on your bank robbing proceeds, murder proceeds.

Chip Franklin:

Get out of here. Really?

Steve Moskowitz:

Honest to God.

Chip Franklin:

Wait, that's been settled in court, that if you steal a $1,000-

Steve Moskowitz:

That is well settled.

Chip Franklin:

Oh, that's funny.

Steve Moskowitz:

But if you go out and rob a bank, don't forget to put those bank proceeds on your tax. So as to the cannabis business, you say, well, all right, I understand. I have to report all my total gross revenue. But can you deduct expenses? And here the Congress, in their infinite wisdom said, you can only deduct cost of goods sold, not operating expenses. So you say, well, okay, what's cost of goods sold? So for example, if you had a store and you have chips... A cannabis store. And you say, all right, I took in a million dollars of gross revenue, and the product cost me 300,000, I could deduct the 300 of the cost. But what about your rent? Well, that's an operating expense, you can't deduct that. So what some businesses did, said, well, wait a minute, let's go ahead and besides selling cannabis, let's sell T-shirts. It's legal to sell T-shirts. So now in Chip's store, you can walk in, you can buy some cannabis. Or you can buy a T-shirt.

So now we can deduct the rent for the portion of the store that we use for selling T-shirts. And then we also, when we're classifying our expenses, what can be classified in cost of goods sold? Because we get all of that. And that's one of the things that we have here. So it's really complex, but that's what happens in the income tax on this.

Chip Franklin:

Can I ask you both a question? First Chris, do you sense the momentum moving towards the federal government declassifying cannabis? And is that bringing the big players in?

Chris Piazza:

The declassification is a big question. My eyes are more on the safe banking act and the changing of the banking laws, which I just saw another thing just got put to vote.

Steve Moskowitz:

That's a big deal, the banking, yeah.

Chris Piazza:

That's what I'm really watching even more so. I think that's where the big players, they're going to come in when that changes, more than anything else. That's my opinion.

Steve Moskowitz:

And Chip, when it comes to law, it was basically what... I'm going to answer that by what I used to say to my law students when I was a law professor. Unlike physical science, it is because it is, law is what those in power at the time say it is.For example, Roe versus Wade. Well, it was legal for 50 years. Now what do we have? And what's the administration. Are you going to have an administration that is favorable or unfavorable to this? What do the voters want? What are their politicians saying? And that's one of the things that you have to take a look at. So we wait and see. But also the problem with the people in the cannabis business is they're in that uncomfortable position that any day, your store that is perfectly legal in your state might get raided by the feds.

Chip Franklin:

Wow. Steve, how much is the federal government losing in tax revenue by not declassifying this, and then taxing the hell out of it?

Steve Moskowitz:

Well, here's the problem. If everybody complies with the law, not only are they losing nothing, they are getting way more than from another business. So suppose for example, Chris opens up next to my law firm. And he has Chris's cannabis business and I have my law firm. And I get to deduct all my expenses. I get to deduct all my rent. I get to deduct everything.

Chip Franklin:

Oh, I see.

Steve Moskowitz:

Chris doesn't. So the bottom line is, if Chris and I have identical financials, our gross revenue is identical and our expenses are identical, Chris will pay way more in taxes than I do because he can't deduct his operating expenses, where I, like most other businesses, can. That's what is something that is so unfair. And the problem is, and I'm going to quote from former president Reagan now. Now, again, as an attorney, my advice and counsel is always comply with all laws. When President Reagan took office, the top tax rate was 70%. He dropped it down to 28%. And what he said is the lower you make the tax rate, the less incentive people have to cheat and vice versa. So the problem with the tax rate as it is now, there are some people that might say they don't want to comply with the law or whatever. Just like with, you take a look at the states and the cities, they all put their hands in there. [inaudible 00:08:58], well, you know what? You got to pay special tax for this and special tax for that.

So what you have is even though in a lot of areas, cannabis has been legalized, there's still a big illegal market because of the price differential. So again, as an attorney, what I would like to see is all this being legal, everybody's on a legal playing field. And then you can have the regulation of the product for just like a restaurant, safety health, use the bank and have the same taxes as everybody else.

Chip Franklin:

But Steve, if there were more businesses in the long run, wouldn't the state and federal government's coffers be bigger because there'd be more-

Steve Moskowitz:

Of course, they would. Because the problem that I see now, there is such a large illegal market and the government gets zero taxes if somebody is doing something illegally. So even though I told you that legally even if you murder somebody, you're a hitman, you're supposed to put that on your tax return. Let's face it, most hit men and bank robbers commit another felony and don't do that on-

Chip Franklin:

Well, that's how they got Capone, right?

Steve Moskowitz:

That's the only way. And actually the IRS has a big poster up about that. They said only the IRS could get Al Capone.