• Sales and use tax requirements and exemptions vary from jurisdiction to jurisdiction but purchases for cultivation and manufacturing activities are often fully or partially exempt – even for cannabis taxpayers.
• A reverse sales and use tax audit is a proactive measure to help your organization identify overpaid sales and used taxes, recover overpayments, and devise strategies to reduce future sales and use tax burdens.

For organizations operating in the cannabis industry, complying with applicable state and local tax authorities is critical to maintaining the business because they are often the same agencies that issue operating licenses. As a result, cannabis operators may find themselves “over-complying” with sales tax rules and neglecting potential savings when it comes to purchase exemptions. Specifically, many states provide agricultural and manufacturing exemptions from sales and use taxes, which you can take advantage of by presenting the appropriate sales tax exemption certificate form to your vendors. And for taxes that have already been paid (and that are still within the statute of limitations), you can submit a claim for refund – through a process that is often referred to as a “reverse audit.”

While the term “audit” might have a negative connotation for business owners, a reverse audit can uncover potential savings. Let’s explore how our State and Local Tax team leverage agricultural and manufacturing exemptions and perform a reverse audit to improve your bottom line.

What are agricultural and manufacturing exemptions to sales and use tax?

Exemptions from sales and use tax may be based on the following:

1. The type of property being sold,
2. The identity of the purchaser (such as a non-profit organization or the federal government), or
3. How the property will be used.

The last category includes agricultural and manufacturing exemptions. These protections are based on the premise that the purchase of certain goods and services used directly in the production process should not be subject to sales and use tax.

States offer these exemptions for any number of reasons: to stimulate growth in these sectors, encourage manufacturers to begin or continue manufacturing operations in their jurisdictions, or keep food prices low for consumers.

The types of transactions exempt from sales and use tax vary by state but generally include:

• Supplies and raw materials. Most states exempt raw materials used in manufacturing or agriculture from sales and use taxes as long as the materials are incorporated into or become an ingredient or component part of the manufactured product. Many states also provide sales and use tax breaks for feed used for livestock and seeds, roots, bulbs, small plants and fertilizer planted or applied to land.
• Machinery and equipment. Many states exempt machinery or equipment used exclusively for agricultural or manufacturing operations from sales and use taxes. However, limitations on these exemptions are common and vary by state. For example, in California, farm equipment and machinery purchases are only partially exempt from sales tax if the equipment is used exclusively or primarily (50% or more of the time) in producing and harvesting agricultural products.
• Fuel and utilities. More than half of states don’t levy sales tax on fuel or utilities used in manufacturing and agriculture, although some states have specific requirements. For example, a state may allow taxpayers to exempt the cost of electricity used in manufacturing if it exceeds 5% of the cost of production.
• Packaging materials. Most states do not tax sales of packaging materials for manufactured goods and containers and other items used to package and transport agricultural products. However, some states limit this exemption to nonreturnable packaging, and others limit exceptions to certain types of packaging or packaging materials for specific types of agricultural products.
• Pollution control equipment. Many states offer tax breaks for pollution control equipment used to control air or water pollution.
• Sales to resellers. All states provide a resale exemption, which exempts sales to retailers or distributors who will resell taxable goods to consumers or other distributors.

These exemptions vary by jurisdiction and are subject to frequent changes, whether from legislative changes or evolving Department of Revenue interpretations. In addition, while a handful of states provide guidance on sales and use tax exemptions for cannabis cultivation, other states have not explicitly addressed whether certain aspects of cannabis cultivation qualify for these exemptions. This makes compliance — and taking advantage of all available exempt transactions — challenging for businesses in the cannabis industry.

What is a reverse sales tax audit?

A reverse sales and use tax audit is a specialized financial examination conducted by a state and local tax professional to identify overpaid taxes and comply with state and local tax laws. Unlike many other types of audits, the goal of a reverse audit isn’t to uncover underpayment of tax liability and levy penalties.

Instead, conducting a reverse audit is designed to uncover overpayments stemming from inaccuracies in tax calculations or overlooking applicable exemptions, including those for agricultural and manufacturing purchases and sales, and then submit claims for refund or credit towards future tax liabilities.

The goal of a reverse audit is not just to identify and recover these overpayments but also to implement strategies to reduce the burden of remitting sales tax in the future. It’s a proactive measure that companies can take to improve their bottom line, ensuring they only pay what is legally due and take full advantage of available tax exemptions.

What does a reverse sales and use audit entail?

The exact process for conducting a reverse sales and use tax audit depends on your unique business needs and attributes. However, it generally requires:

• An initial scoping phase to get a sense for how large of a potential claim might exist. This involves gaining an understanding of your business activities and purchasing processes, identifying the location of those activities and the corresponding assets, and sampling your invoices to see how you were charged tax by vendors.
• Claim development stage, if it is determined that a material claim is feasible. This entails a detailed review of past tax forms, tax returns, invoices, accruals, and additional information, aimed to uncover instances where the business likely overpaid its sales tax liability. This information must be compiled and workpapers created, not only to calculate the amount of claim but to prove it at a later stage.
• Claim submission to the relevant tax authority (-ies) must be completed prior to the end of the open statute of limitations period for the oldest claim refund in the package. Each state will have specific procedures and forms for how the claim must be submitted, and frequently an audit of the claim periods will commence either before or after the claim payment.
• Finally, it is best practice to avoid being charged the tax in the first place. So it makes sense to train you staff on how to determine when the company has potentially exempt purchases and what is needed to ensure vendors do not assess the tax.

The lookback period for a reverse sales and use tax audit will vary because the statute of limitations varies from state to state. Many states allow taxpayers to claim refunds of overpaid sales and use taxes for three years, while others have a four-year lookback period. Additionally, the lookback period may be extended if your company is currently undergoing a sales tax audit by a state or local tax authority.

How we can help

Performing a reverse audit can be a powerful tax savings tool for any business with agricultural or manufacturing activities – but especially cannabis operators. Accessing potential tax overpayments can bolster cash flow and fixing the underlying system will improve your bottom line. If you’d like to learn more about whether a reverse state sales tax audit might benefit your organization, call or contact MGO online today. We’re happy to discuss your taxable purchases, potential exemptions, and the overall reverse audit process to see if the potential for money back in your pocket outweighs the time and effort required.

• Companies face tax burden challenges related the classification of cannabis as a Schedule I controlled substance and IRC 280E.
• To navigate this, companies may be able to utilize vertical integration strategies and incorporate transfer pricing best practices to minimize tax exposure.
• A transfer pricing study will help identify and risks or opportunities for improvement.

As the cannabis market continues to grow, in the United States cannabis operators continue to face difficulties related to an excessive tax burden due to IRC 280E. One of the most effective strategies for mitigating tax exposure under 280E has been to leverage the benefits of vertical integration.

Since IRC 280E affects the various verticals differently, some cannabis companies are able to isolate activities within distinct business units and maximize Cost of Goods Sold (COGS) calculation to mitigate the impact of IRC 280E.

The potential downside is two-fold. First, IRS tax court cases have made it clear that isolating business units is not a universal solution. And secondly, if not optimally established and documented, transactions between the business units can be problematic and create issues with the IRS.

This article breaks down the impact of IRC 280E, demonstrates the potential benefits of vertical integration, and describes how a proactive transfer pricing strategy can help you maneuver the specific tax and regulatory considerations that affect the industry.

What IRC 280E means for your tax liability

Section 280E penalizes traffickers of Schedule I or II drugs by prohibiting the deduction of “ordinary and necessary” business expenses after reducing gross receipts by COGS, essentially resulting in your federal income tax liability being calculated based on gross income, not net income. For a cannabis operator, COGS typically consist of the cost of acquiring inventory by purchase or production.

Not only are these cannabis companies facing high federal taxes, but there is now an intense level of scrutiny in both federal and state tax audits on intercompany arrangements.  

Impact of vertical integration on IRC 280E calculations

Many cannabis companies have become vertically integrated, i.e., combining production function (i.e., cultivation and manufacturing) of cannabis with retail or resale (i.e., distribution) or sometimes all three. Since Section 280E is directly related to selling or the “trafficking” of cannabis-related products, it has the biggest potential impact on retail operations. This means that if a producer can support a higher selling price to its retailer, the retailer will have more COGS from the producer, and the producer will have more costs to deduct because of the allowance of indirect costs.

The business motivation for vertical integration is to better control the supply chain and the end user’s experience. From a tax perspective,  cannabis taxpayers want to dis-integrate  activities subject to 280E from those for which a position can be argued that they are non-280E activities, such as management services. The Internal Revenue Service (IRS) uses transfer pricing to challenge such segregation and to make allocations between or among the members of a controlled group.

How a transfer pricing study can help your cannabis business

Whether its receives the recent budget infusion or not, the IRS is likely to conduct more transfer pricing audits of the cannabis industry, compared to other industries.  These audits frequently result in much higher tax adjustments and significant penalties. In addition, since several states have had budgetary shortfalls due to COVID-19 and other factors, multistate businesses are more frequently being audited by individual states’ tax authorities.  If your business has international or domestic intercompany transactions, you’re facing a difficult and uphill battle amid current local, state, and federal tax regulations. The best defense against an IRS transfer pricing audit is a comprehensive transfer pricing study.

A robust transfer pricing study provides the basis with which a company can refute and push back against federal and state claims that their intercompany transactions have no economic or operational substance.  As part of a transfer pricing study we will work with you to identify key classes of intercompany transactions, document the pricing of such transactions and reference comparable benchmark data sets to support qualifying transactions.  Where transactions fall outside norms, we will work with you to identify differentiating characteristics and seek other data if available, or recommend policy and pricing changes, along with an assessment of the potential exposure.

Taxpayers with inadequate or out of date transfer pricing policies risk an increased likelihood of controversy and transfer pricing adjustments. Thus, even if you have had a transfer pricing study performed in the past, it is important to have it reviewed and updated. 

While a transfer pricing study directly reduces a company’s risk of tax assessments and liabilities resulting from tax audits, they also indirectly reduce execution risk when a company is considering an M&A transaction, a capital raise, or go public transaction.

How MGO can help you integrate transfer pricing for the cannabis industry

MGO’s transfer pricing practice has significant experience with the various transfer pricing concerns of the cannabis industry. We also work closely with our federal and state tax practices to assist many cannabis companies with their specific tax and regulatory considerations, which include:

• Section 280E disallowance of ordinary business expense deductions;
• Common supply chain concerns for operators, like state restrictions on inventory and separation of cannabis and industrial hemp;
• Non-plant-touching structures that operate independently from the 280E-affected business lines; and
• Sales and excise taxes specific to the cannabis industry.

To learn more about how we can help support establishing, optimizing, and documenting transfer pricing policies so your business can grow in this dynamic industry, contact us.

• California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses. 
• The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.  
• To claim it, you must make a “tentative credit reservation.” 
• Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety. 

While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return. 

Who qualifies for the HRCTC 

To be eligible, you would need to meet three basic requirements.

Which expenditures qualify for the HRCTC 

There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses. 

Wages for full-time employees

Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment. 

In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.  

Safety-related equipment, training, and services 

Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria: 

• Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers. 
• Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.) 

Workforce development and safety  

Qualified training for your employees includes: 

• Joint labor management training programs 
• Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).   

Available credit

The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million. 

To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.

How do I make a tentative credit reservation — and when?  

You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.  

How we can help

The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry. 

Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save. 

See these stories, quotes, and more in the MGO Cannabis 50. 

Garden Society

Though native to California — more specifically, Wine Country — in 2022, Garden Society executed a capital raise that will help it expand its footprint across more of the United States. Amid a historically tight capital market, this company was unafraid to live its diversity ideas and baked a unique set of conditions into its raise. In the end, it secured a $7 million Series A, including an oversubscribed Special Purpose Vehicle comprised of strategic female investors and BIPOC angel investors. With the surge of capital in hand, this female-owned and -led operator plans to lean into its mission of catering to the power women play in educating and driving the acceptance of cannabis It has continued their mission in earnest, already expanding into Ohio and New Jersey.  

Christine De La Rosa

As a Latina woman whose company, The People’s Ecosystem’s, leadership is primarily comprised of people of color and women, Christina De La Rosa understands how important it is to challenge stereotypes and speak directly to underserved minority consumers. She’s been tireless in her pursuit of widespread diversity, equity, and inclusion, advocating for BIPOC cannabis representation, as well as more easily accessible capital. The founding and managing member of The People’s Group, founder of The People’s Dao, and The People’s Ecosystem, she also serves on the California Cannabis Advisory Committee and the New York Cannabis Industry Association Special Advisory Group for Social and Economic Equity and Social Justice.  

Vangst (Karson Humiston)

Hiring qualified talent has always been difficult in the cannabis industry — especially in tight labor markets like the one in 2022. And Vangst understands the complications that can arise when trying to staff a rapidly growing industry. The Denver-based company matches short-term and full-time workers with job openings at cannabis companies around the country. Vangst focuses on more than simply providing labor; the organization prides itself on building a network, as well as communities, of its employees in the greater scope of the industry. Its annual Cannabis Industry Salary Guide is an essential resource for human capital management. In 2022, it explored new ground and released the LGBTQIA+ Representation in Cannabis Report, leveraging its insights in staffing to show where the industry is improving and where it can close the gaps. 

Nancy Whiteman (The Wana Brands Foundation)

When cannabis titan Canopy Growth Corp. acquired Wana Brands for a whopping $297 million, CEO Nancy Whiteman wasted little time in putting those funds to a greater use. With the launch of The Wana Brands Foundation, Whiteman is making a major impact. In November 2022, the Foundation announced its most generous donation yet: $3 million to Johns Hopkins University to conduct extensive research on the therapeutic benefits of cannabis and psychedelics, including for autism. The Wana Brands Foundation also made additional gifts to Out Boulder County’s “We All Belong” campaign; 16 Colorado organizations working to end hunger in their communities; nonprofits focused on social justice, including the Reentry Initiative, Last Prisoner Project, Expunge Colorado, and National Expungement Works; and research and education organization Realm of Caring. 

Women entrepreneurs forging a path

While the cannabis industry hasn’t traditionally seen many women leaders getting involved, it’s clear many are now paving the way with a vision for a better future — and the progress they’ve already made is tangible. We work to honor their contributions as we celebrate the entrepreneurs, visionaries, educators, and philanthropists currently making history in cannabis.  

Minority disruptors are innovating and changing the cannabis industry with one distinct thing in common: perseverance. While the road to success hasn’t been easy, we’re proud of the work these leaders have done against the challenges they’ve faced. Go here to learn more about the Cannabis 50. 

High cost of debt + high effective tax rate = cash crunch and tough decisions 

How did cannabis companies arrive at this decision point? The current cash crunch in the industry has been building for years, precipitated in part by banking regulatory constraints and an abnormally high effective federal tax rate. 

As the below chart illustrates, cannabis companies lack access to traditional banking and market rate loans and have turned to alternative, expensive sources of debt financing bearing effective interest rates as high as 20%. In addition, Internal Revenue Code Section 280E essentially taxes the industry on gross margins, such that even a company that would otherwise be in an overall tax loss position may still owe taxes. 

Caught in this double bind, even an operationally successful cannabis company may face a difficult choice: service debt timely at the expense of keeping current with taxes, risking tax liens that threaten the license, or pay taxes when due at the price of defaulting on debt and risking the viability of the business overall.  

The tax impact of debt restructuring

Restructuring debt is one route for cannabis companies in distress to remain operational, but debt modification carries potential tax traps for the unwary – both borrower and lender. Depending on the relative value of the debt exchanged, the borrower can realize cancellation of debt income. The insolvency exception to recognizing and paying current tax on this income may not be available to a cannabis company, as the fair value of its assets – including intangibles – may still exceed its liabilities. A lender may also experience a taxable event on the refinancing, either in the form of interest income, or gain due to the valuation of equity received in the exchange.  

In any debt refinancing situation, both the borrower and the lender should anticipate and plan for complex tax calculations involving debt discounts (I.e., original issue discount, or OID) and the fair value of company equity in order to determine correct tax treatment. To avoid any last-minute surprises or deal delays, both the borrower and the lender should model the tax treatment on both sides. 

Sales of distressed assets and the tax impact

Considerations for the borrower: 

• Are the assets to be sold in a different tax filing entity as the borrower? 
• Will the flow of cash between entities create a taxable event? 

Considerations for the lender: 

• What is the borrower’s anticipated cash position after paying tax on the sale? 
• Can cannabis business assets be sold in the jurisdiction’s regulatory environment? Or is a sale restricted to equity? 

Assignment of income receipt of equity

If the borrower and the lender agree on a debt workout based on assignment of income, or equity ownership, both parties should understand the borrower’s existing tax structure and the impact the restructuring will have on both sides.   

The borrower should assess whether a “change in control” has occurred for tax purposes, as the use of tax attributes may be limited. If an assignment of income is structured as a fee, consider the tax treatment of the payment and deductibility under 280E.  

A lender who becomes an owner or part of management should consider:  

• Depending on how the agreement is structured, the assignment of operating income and participation in management may turn the lender, or the lender’s entity, into a “trafficker” subject to 280E.  

The lender should also be cognizant of the borrower’s standing with the taxing authorities and whether the operator can afford both paying down tax liabilities and payments under the terms of the workout. The retention of the cannabis or reseller license that the lender is depending on for cash flow is tied to staying current with state and local taxes. An IRS liability that has progressed to the lien stage unbeknownst to the lender could result in a “sudden” drain of cash from a bank account. 

“Workouts” with taxing authorities

Given the current cash crunch in the industry, companies have been known to delay remittance of sales and excise taxes to state and local governments. Companies should be aware that non-payment of these “trustee” taxes can cause a loss of standing to operate legally and carries personal liability for officers and owners of the company. Taxing authorities may have limited sympathy for a distressed taxpayer who falls behind on these types of taxes and taxpayers should pay down any outstanding balances as soon as possible. 

If income taxes are past due, it is important to continue to make payments toward the balance on a regular basis. A taxpayer cannot apply for a formal IRS payment plan until a revenue officer is assigned to the case. Also, a taxpayer must usually pay all outstanding taxes that are not overdue and remain “current” on all future taxes in order to establish and remain on an installment agreement. Federal and state revenue officers are generally willing to work with taxpayers in financial distress who act in good faith throughout the process. Engaging a professional representative who understands tax controversy practice and procedure and how to work with revenue officers can make all the difference between establishing a payment plan and facing a tax lien.  

How MGO can help

A cannabis company navigating financial distress should engage a tax professional with both industry experience and a high level of tax technical skill to navigate the complex tax impact of a workout or restructuring. MGO’s Cannabis Tax team has both the industry experience and the technical knowledge to assist companies of all sizes during this challenging time. 

Publicly traded and based in Chicago, Cresco Labs Inc. is the leading wholesaler of branded cannabis products in the United States for 2021. Consistently earning the top spot on the BDSA top-five brand list, the company has operations in ten states where marijuana has been legalized for adult and medical uses, as well as a diverse array of products to meet its customers’ needs and the ability to place these products on its owned retail and third-party shelves, increasing accessibility. We sat down with Charlie Bachtell, the founder and CEO of Cresco Labs, to learn more about how he transitioned from the mortgage banking industry to the cannabis industry, what landed on Cresco’s biggest highlights of 2021, and how he thinks the industry needs to evolve in 2022.

MGO: How long have you been involved in the cannabis industry? What inspired you to get involved with cannabis?

Charlie Bachtell, Founder and CEO of Cresco Labs: We founded Cresco Labs in 2013 after I spent a decade in the mortgage banking industry watching it go from unregulated to hyperregulated overnight because of an economic downturn. Its regulatory framework was structured state-by-state. Illinois was different than California, which was different than New York. At that time, the mortgage industry had a ton of negative stigmas associated with it—and it mandated that businesses like ours focus on an executive business model heavily rooted in compliance and simply doing the right things. This included transparency and building trust with your customer base—all under the umbrella of absolute guidance with regulations.

I read the guidelines and application process for Illinois’s pilot cannabis program, and I realized it mirrored the industry I currently worked in! Cannabis, too, was an industry going from unregulated to hyperregulated overnight on a state-by-state basis because laws were state-based and siloed from each other. So, I’d done this before, and I would say most of the lessons, strategies, and experiences I developed in the mortgage banking space gave me a roadmap of exactly how we would be successful in this new industry. I applied what I learned in my previous industry here, and I’m proud of Cresco’s successes thus far.

MGO: The cannabis industry saw several trends emerge in 2021. What do you think was the biggest one for Cresco Labs?

Bachtell: One of Cresco Lab’s biggest themes was executing our vision of strategic breadth and depth in the most strategic states. We expanded our wholesale and retail footprints, which increased our leadership position as the current number one U.S. wholesaler of branded cannabis products. According to BDSA, our Cresco cannabis brand was the top-selling cannabis brand nationwide, and in both Illinois and Pennsylvania, we provide the top portfolio of brands.

Many of our Sunnyside stores around the country continue to deliver revenue exceedingly more than respective state averages, outperforming their fair share of sales. Today, our geographic footprint is comprised of the most valuable states, seven of which are already over a billion-dollar run rate, and five of which are medical markets that are likely to introduce adult use in the near term. Overall, it’s been an incredibly productive year investing in our strategic footprint, and in 2022, we’ll continue investing in our markets to bring our industry-leading portfolio of brands to more consumers.

MGO: What were some of the biggest obstacles you faced in the industry in 2021? How did you manage and overcome these issues?

Bachtell: One of the biggest obstacles for every cannabis company is access to affordable capital. The passage of cannabis policy reforms like the SAFE Banking Act would be a big step forward, allowing for more affordable access to capital, the ability to use credit cards, normalized banking, and the possibility of listing on major U.S. exchanges. These are essential steps for an equitable industry—not just for large publicly traded cannabis companies, but also for private operators who will create the much-needed diversity in this industry. At Cresco Labs, we’ve focused on succeeding under the current regulatory framework while also preparing for what we believe the normalized future framework will look like.

MGO: What were the biggest highlights and most positive changes for Cresco Labs in 2021?

Bachtell: Nearly 70% of Americans now support legalizing cannabis, according to the latest Gallup poll. For the cannabis industry, 2021 saw four states in allowing recreational cannabis: New Mexico, New Jersey, Virginia, and Connecticut. Many states like Ohio and Florida began discussions surrounding legalization, and states like New York expanded existing medical programs, providing greater consumer accessibility to cannabis products. Another highlight was the wealth of discussion and policy ideas in Congress targeted at ending cannabis prohibition—I truly think it’s a matter of when and not if at this point, and I’m excited to be at Cresco Labs at such a pivotal time to witness the laws change in this country. I’m hopeful we can make this a vibrant industry for everyone to be able to participate in.

Cresco Labs has seen the industry growth from a consumer standpoint remain incredibly strong. We’re proud of ourselves and our ability to have a diverse portfolio of products to meet the needs of all consumers—and our ability to get that portfolio on the shelves of third-party stores. In 2022, we’ll keep executing on what makes us successful: a strong product assortment, quality and consistency at each price tier, and a robust innovation pipeline focused on providing customers new and exciting products.

MGO: What should the cannabis industry be focused on in 2022—and beyond—to keep it moving forward in a positive way?

Bachtell: We all want to see legalization at the state level, with all states building out regulatory frameworks that will make cannabis accessible to more people. We remain focused on our mission to normalize and professionalize cannabis, so we hope to see the end of federal prohibition—the descheduling of cannabis—as well as federal decriminalization and expungement. Congress’s enactment of the SAFE Banking Act will provide greater access to capital for both large and small businesses in the United States.

MGO: How do you think the cannabis industry will continue to evolve in 2022? What are you personally most excited about?

Bachtell: We shouldn’t forget the fact that the U.S. easily remains the largest source of worldwide cannabis revenues and the largest contributor to growth in 2022. We’re in the early stages of converting an estimated $50 billion illicit market in the United States while still expanding our legal market to consumers who’ve never participated in the category. Beyond this increasingly large addressable market, the best companies are driving efficiencies in their operations and distribution and retail networks. The entire value chain is getting better and is poised to capture that growth.

Our Academy was launched by Our Dream in Los Angeles with the sheer purpose of offering resources designed to uplift and empower underrepresented founders in the United States. It is volunteer-run, and its 13-week program encapsulates workshops, mentorships, and valuable networking opportunities with companies, service providers, investors, and social equity programs with the goal of helping BIPOC independent cannabis entrepreneurs thrive. Hilary Yu, the nonprofit’s founder, made time to sit down with us and discuss how Our Academy is making a difference, how we as an industry can demystify social equity, and what’s next on the horizon for cannabis.

MGO: How long have you been involved in the cannabis industry? What inspired you to get involved with cannabis?

Hilary Yu, Executive Director of Our Academy Presented by Our Dream: So far, I’ve worked in cannabis for nearly 5 years, but I spent the first 3-4 years observing as an advisor so I could learn as much as I possibly could about the industry. This helped me build Our Dream. I noticed the lack of brand diversity on the dispensary shelves, which led me to conduct interviews with social equity applicants and founders in a series called “How I Got Here” (HIGH). These stories all shared a few common struggles in the industry: a lack of educational resources, being a part of the community, knowledge sharing among others, and early-stage capital. In 2020, Our Academy was born out of a desire to tackle these challenges head-on and support equity founders in the industry.

In cannabis, we have this unique opportunity to carve out generational wealth opportunities for the communities who have been harmed by cannabis legislation. The dream of creating a collaborative community to support new leaders is what originally inspired me to get started.

MGO: The cannabis industry saw several trends emerge in 2021. What do you think was the biggest one?

Yu: Buying habits are shifting towards representative cannabis brands, over simply choosing the more cost effective option. In California, BIPOC owned and operated brands have started hitting the dispensary shelves and delivery menus and are commanding notable price premiums. This trend is strengthening the value proposition of social equity operators and BIPOC founders in the space, who are more likely to partner with brands that share these values.

This industry really is the first of its kind to be so deeply intertwined with diversity and inclusion from day one, so we can demonstrate to other industries how to better support BIPOC founders. As the industry continues to grow, consumers will only become more knowledgeable about why representation is especially important when it comes to cannabis, and they’ll pay attention to which companies are actively supporting these efforts. I think this trend will continue to snowball in 2022, especially in newly legalized states.

MGO: What were some of the biggest obstacles you faced in the industry in 2021? How did you manage and overcome these issues?

Yu: Figuring out dilutive and non-dilutive financing solutions for our mentees has been a challenge. If your friends and family don’t have capital to spare, how do you raise a friends and family round? We know how little venture funding goes to minorities in cannabis. It’s bleak, so what’re we going to do about it?

We haven’t fully overcome the issue; however, we’ve launched a syndicate of early stage, social impact-minded investors that our mentees can reach out to when they go-to-market or win a license. We also collaborated with JourneyOne Ventures, Life Development Group, and SEOWA to create a “handbook”, which is essentially a white paper to educate more investors on the nuances and opportunities when diligencing social equity licenses.

MGO: What were the biggest highlights and most positive changes for Our Dream/Our Academy in 2021? What about the cannabis industry at large?

Yu: I’ve loved seeing the long-term success of the community we’ve created with the founders now launching their brands in dispensaries, receiving licenses, and working together. Four companies that came through Our Academy recently took in their first angel cheques. And aside from fundraising outcomes, one of our top metrics for success in the program is if the mentors and mentees stay in contact after the program ends. We’re proud that the majority have!

Our Academy had several big highlights from our alumni this year—for example, Morgan Underwood (of Ganja Girl, a mentee) was awarded an events license in Michigan. Neighborhood Essentials (mentee) collaborated with SF Roots (mentor) to launch in California and Michigan. Tess Taylor, a mentee, launched an infused condiment brand called Saucy with Sweet Flower and has quickly grown into 10 retail locations. And that’s just a few of those who participated in the mentorship program and had access to our workshop and materials!

MGO: What should the cannabis industry be focused on in 2022—and beyond—to keep it moving forward in a positive way?

Yu: Investing in and finding creative financing solutions for social equity founders and BIPOC legacy operators should be a priority. They’re some of the hardest working and creative people you’ll ever meet, and their businesses are purpose-driven—it’s their key ingredient, not just an afterthought. These founders have a ton of experience and are often overlooked. They understand consumers better, have a stronger demand because the consumers resonate with them, and they’re able to market their companies in ways that build stronger brand loyalty—something that the rest of the industry is struggling with. By filling the early-stage capital challenges BIPOC founders and legacy operators face, we can ensure generational wealth is created for communities of color who have been disproportionately harmed for decades by unjust cannabis legislation.

MGO: How do you think the cannabis industry will continue to evolve in 2022? What are you personally most excited about?

Yu: Community-driven collaborative capitalism will be a key theme, especially among equity businesses. As the California industry continues to mature, economies of scale are increasingly necessary to remain competitive. While the most common path is to merge or acquire, equity businesses are beginning to recognize that partnerships and pooling arrangements can have the same advantages while allowing them to maintain control of their business.

The shared challenges and incentives of equity businesses create a natural alignment that outpowers the traditional knee-jerk reactions to view everyone else in the space as a competitor. In 2022, I believe this trend toward strength in unity will increase exponentially and protect equity businesses and programs.

MGO: Who else in the cannabis industry inspires you by making a positive impact?

Yu: There are several. Morris Kelly, an equity applicant and founder of SF Roots, San Francisco’s first equity brand currently in 56+ dispensaries in California. Kimberly Dillon, the founder of Frigg and former CMO of Papa & Barkley. Tess Taylor, founder of Saucy. Marie Montmarquet, the legacy operator of MD Numbers, an equity advocate, and an educator through SUCCESS Centers. Kika Keith, a social equity operator and the founder of Gorilla RX Wellness, LA’s first Black woman-owned dispensary.

Fab 5 Freddy is one of the primary architects of the street art movement and wears many hats—visual artist, filmmaker, and hip-hop pioneer are just a few. He can also add cannabis collaborator and educator to this list with B NOBLE, a company formed to raise awareness and create funding to defend and aid the victims of cannabis-related criminalization. We sat down to talk with Fab 5 Freddy, aka Fred Brathwaite, to hear more about his passion for giving opportunities to those imprisoned for cannabis and how the industry can continue to give back.

MGO: How long have you been involved in the cannabis industry? What inspired you to get involved with cannabis?

Fab 5 Freddy: B Noble has been on shelves for six months. I made my film, Grass is Greener, in 2018, and that experience was also a vast learning experience and a call to action for me to follow my passion and get involved in the industry.

MGO: The cannabis industry saw several trends emerge in 2021. What do you think was the biggest one?

Fab 5 Freddy: To me, the big theme was more Americans waking up to the benefits of cannabis, as several new states including my home state of New York which has the most progressive cannabis legislation in the country. Theres still a lot of work to do but more and more Americans are realizing the medical benefits cannabis and that the war on drugs, specifically nonviolent cannabis criminalization, needs to be stopped

MGO: What were some of the biggest obstacles you faced in the industry in 2021? How did you manage and overcome these issues?

Fab 5 Freddy: Deprogramming people to realize that their preconceived notions of cannabis are false and largely based of the non-stop cannabis miss-information we’ve been flooded with—and opening their eyes to the benefits of the plant. This goes hand in hand with getting the ball and chain of cannabis criminalization expunged from records, as well as getting others released from prison and a seat at the table. Racial equity and social justice is another obstacle that must be solved so people of color can benefit—they’ve been the most victimized.

MGO: What were the biggest highlights and most positive changes for you in 2021?

Fab 5 Freddy: Creating the B Noble cannabis brand and partnering with the biggest MSO in the country, Curaleaf, was a huge 2021 highlight considering we developed the brand and negotiated the deal through the pandemic. Together, we use quality cannabis and raise awareness about the harm inflicted on hundreds of thousands in America from the failed war on drugs.

MGO: What should the cannabis industry be focused on in 2022—and beyond—to keep it moving forward in a positive way?

Fab 5 Freddy: Hands down, equity and inclusion!

MGO: How do you think the cannabis industry will continue to evolve in 2022? What are you personally most excited about?

Fab 5 Freddy: I predict that my home state, New York, will eventually become the biggest money earner in the country with a strong contingent of people of color getting a piece of the cannabis pie. I’m excited that B Noble is now in 11 states—with many more to come—as more and more states head towards legalized adult use.

MGO: Who else in the cannabis industry inspires you by making a positive impact?

Fab 5 Freddy: There are so many inspiring figures in the industry right now. Weldon Angelo with his Mission Green, Dr Rachel Knox and her family working in healing through cannabis, Kareem Webb and 4th MVMT, Women Grow, Dr Chanda Macias, Minorities for Medical Marijuana, Jesse Horton & LoUD, and Mario & his Sherbinskis brand, the great cannabis geneticist we’ll be working with are some that come to mind!

TILT Holdings is a combination of leading cannabis companies delivering products and services to businesses in 36 states and a variety of countries, including Canada, Israel, Mexico, South America, and the European Union. Some of the core businesses include Jupiter Research, Standard Farms, and Commonwealth Alternative Care, Inc. MGO talked with Gary Santo, the CEO of TILT, to talk about their groundbreaking partnership with the Shinnecock Indian Nation of New York, the maturation of the cannabis market, and how the industry’s own internal demand for change drives it forward.

MGO: How long have you been involved in the cannabis industry? What inspired you to get involved with cannabis?

Gary Santo, CEO of TILT Holdings: I started looking at the cannabis industry around 2017-2018 after working with startup companies and companies going through massive transformations in industries ranging from consumer credit and financial services to gaming, leisure, and specialty pharma. At that time, cannabis was obviously an emerging and complex space, and I saw an opportunity to help the businesses in the industry tell their stories and establish themselves operationally in a pragmatic way. At the end of the day, there are business rules that apply across all industries. I joined Columbia Care in 2019 and helped take it public, and in July 2020, I joined TILT. The company was in a prime position for a turnaround with a B2B story that aligned with almost every aspect of my career and experience up to that point.

MGO: The cannabis industry saw several trends emerge in 2021. What do you think was the biggest one?

Santo: In 2021, we definitely began to see the beginning of the maturation of the cannabis market. One theme that stood out in was the speed at which packaged goods and brands began to take hold. It’s not just about price or potency anymore; it’s about consumers seeking out specific products and the brands behind them. Brands are now finding new, creative ways to stake their claim in multiple markets, building greater consumer bases and brand loyalty. This is where the core of TILT’s business lies—helping businesses expand their brands. It’s also where we differentiate ourselves from other MSOs. We take a strategic and intentional approach to helping cannabis businesses identify their niche in a certain market and work with them on a SKU-by-SKU basis, guiding them through the specific compliance and regulatory nuances of that market, from packaging to distribution. A few of the brands we successfully helped to expand into new markets in 2021 included 1906, AIRO, Her Highness, and Old Pal.

MGO: What were some of the biggest obstacles you faced in the industry in 2021? How did you manage and overcome these issues?

Santo: I think perhaps the biggest obstacle for the entire industry in 2021 was supply chain issues. To overcome these, we had to be even more strategic and tactical with our working capital, leveraging our longtime expertise in this area. The other challenge came from additional biomass and flower supply coming online in previously supply-constrained markets. TILT’s business model was designed to offset the resulting price compression as we quickly moved from selling bulk to packaged goods and strategically leaning into our brand partnerships to bring products and form factors that consumers are demanding.

MGO: What were the biggest highlights and most positive changes for TILT Holdings in 2021?

Santo: For TILT, it was about moving from being a holding company to a unified entity focused on a more B2B approach—while also working to drive synergies across our business divisions and eliminate operating silos inherent to the cannabis industry. Equally as important was our dedication to building trusted partnerships with the brands, MSOs, and LPs that we work with. None were bigger than our historic partnership with the Shinnecock Indian Nation on Long Island, New York, which we entered to support the development of its vertical cannabis operations. The project, Little Beach Harvest, is wholly owned by the Shinnecock and is a true social equity partnership in every sense of the word. It’s a huge step forward in creating equity for indigenous communities in the cannabis industry and will serve as a driving force for continued economic growth for the nation. We’re extremely proud to be a part of such a meaningful relationship and hope that our Shinnecock partnership might serve as a potential framework for other social equity initiatives in the industry in 2022 and beyond.

MGO: What should the cannabis industry be focused on in 2022—and beyond—to keep it moving forward in a positive way?

Santo: We’re encouraged by the market’s ongoing development and expansion. It’s important that companies focus on responsible, intentional, and pragmatic scaling. They also need to put more strategic initiatives into action surrounding diversity, equity, and inclusion that go beyond capital. We anticipate that the discounting and pricing pressures that were a hallmark of many state markets in the second half of 2021 will continue into 2022. This holds for the limited license eastern states, where TILT has a meaningful physical presence, as well as California with its well-publicized imbalances between supply and demand.

MGO: How do you think the cannabis industry will continue to evolve in 2022? What are you personally most excited about?

Santo: It’s always exciting to watch emerging industries move from being considered “niche” to becoming more mainstream. What makes this industry unique is that, unlike most other emerging sectors, you would be hard pressed to find someone who does not have some knowledge of cannabis—whether it’s about the plant’s medical virtues, its counter-culture aspects, or the 100 years of prohibition and injustice. Instead of educating the market about what cannabis is, operators have had to work almost as hard to address these preconceived notions, and rightfully so. Seeing cannabis declared as an essential service during the early days of the COVID-19 pandemic was a clear signal that this is not a fad industry, but one that is here to stay.

I’m excited to watch both TILT and other operators who have embraced this notion continue to evolve as true operating organizations built to last with a laser focus one stablishing a foundation built on business fundamentals. This is great news for consumers as well as those who choose to invest. The value proposition is off the charts right now. Unlike several industries that have suffered from the pandemic’s effect on the economy, cannabis continues to grow, adding jobs to the economy. Public sentiment is favorable, consumer demand is growing, and states are continuing to adopt. Given the current political climate, I think this could be the election year where cannabis is legislated at some level.

MGO: Who else in the cannabis industry inspires you by making a positive impact?

Santo: One of the most inspiring things about this industry is the demand for change and equality that comes from within. Despite companies having to navigate and operate within layers of complex regulations, without access to traditional banking options, and weighted down by the burden of significant taxation, the cannabis industry is only becoming more steadfast in its demands for social justice, criminal justice reform, social equity, and inclusion.

And it’s not just activist voices and nonprofit organizations demanding and making change. Cannabis consumer brands are going the extra mile to make a difference, whether that means helping others to become part of the legal industry or educating consumers who are looking for a brand they can support. The depth of true cause-based and backed brands like Her Highness or Farmer and the Felon (both of which support the Last Prisoner Project) gives consumers a reason to get involved in a way that goes beyond brand loyalty and actually makes a difference.

It’s not often we’re giving the chance to be on the leading edge of an industry so focused on incorporating social equity and inclusion from the very beginning. Together, we’re bringing back the truth of cannabis and what it meant before prohibition—whether it was used for medicinal, religious, or even celebratory reasons, cannabis meant community. And rebuilding that sense of community, that sense of inclusion and equality, is truly the most inspiring part of this industry.

An AmLaw100 law firm with more than 60 attorneys working from coast to coast to represent its cannabis practice, Fox Rothschild LLP is nationally ranked and works with prominent cannabis businesses to structure landmark multistate deals and facilitate mergers and acquisitions that shape the industry. In 2021, it acted as a U.S. legal counsel to some huge transactions, including one with Trulieve and Harvest. Joshua Horn, partner and the cannabis practice co-chair, talked with MGO about the trends he’s seen unfold firsthand in the industry, why regulatory compliance should be a focal point in 2022, and why risk takers inspire him.

MGO: The cannabis industry saw several trends emerge in 2021. What do you think was the biggest one?

Joshua Horn, Partner and Cannabis Practice Co-Chair at Fox Rothschild LLP: The most significant trend I saw in the past year was a maturation of the cannabis industry in certain markets. With that came significant consolidation through mergers and acquisitions. Thanks to that maturity, we’re now seeing more states online with medical programs and a corresponding push for adult-use legislation.

MGO: What were some of the biggest obstacles the industry faced in 2021? How were these issues overcome?

Horn: I see two primary obstacles faced by the industry in 2021. The first was access to capital. This has always been an issue due to the dearth of traditional financing services in a very cash-intensive industry. In the past year, we worked on several financing arrangements. The challenge we always faced was getting the most favorable terms as possible. The second obstacle was a tightening by states over regulatory issues in areas where these same states had not raised an issue in the past. Our clients know they need to be as forward-thinking as possible to anticipate issues and get in front of them with the regulators.

MGO: What were the biggest highlights and most positive changes for Fox Rothschild in 2021?

Horn: To me, the major highlights included seeing more and more states rolling out medical and adult-use cannabis programs. This reflects a growing acceptance of this industry and an appreciation of the tax revenue that states can generate by permitting the industry to function within their borders.

Personally, my 2021 highlight was having the opportunity to work on some industry-transformative transactions, such as the Trulieve merger with Harvest, and Cronos’s acquisition of an option to acquire an equity interest in PharmCann upon the satisfaction of certain conditions.

MGO: What should the cannabis industry be focused on in 2022—and beyond—to keep it moving forward in a positive way?

Horn: Regulatory compliance should be the primary focus because it further justifies that this is a legitimate industry with serious companies intent on doing the right things in a highly regulated environment. By focusing on this issue, the naysayers will have less to naysay.

MGO: How do you think the cannabis industry will continue to evolve in 2022? What are you personally most excited about?

Horn: I’m most excited about additional states coming online in this industry through medical and/or adult-use programs. As for predictions, I think we’ll see further consolidation in more mature markets through mergers, acquisitions, and financing arrangements.

MGO: Who else in the cannabis industry inspires you by making a positive impact?

Horn: This is truly an entrepreneur-laden industry. It’s full of risk takers. They’re the inspiration. At the same time, they’ve worked hard to become vital participants in their communities, and they understand the importance of giving back to those communities. For example, many of these companies have focused on creating jobs for historically disadvantaged populations.