Opening and running an Illinois dispensary to sell legal cannabis products begins and ends with regulation, and failing to comply is fraught with peril, attorneys from FoxRothschild told participants in this weekend’s Sparklist Summit.
“Disclose, disclose, disclose,” attorney Bill Bogot, co-chair of the cannabis practice at FoxRothschild, said during a Saturday webinar titled, “Legalized Cannabis in Illinois: Key Legal and Regulatory Issues,” which was directed toward new cannabis business owners and dispensary license applicants.
Disclose to bankers, disclose to regulators and disclose to tax accountants, the attorneys advised. They added that COVID-19-related delays in awarding new licenses in Illinois’ Adult-Use Cannabis Social Equity Program has resulted in those applications receiving even more scrutiny from state examiners.
Reinforcing the message that the cannabis business requires a clear head, Bogot said the first thing for a dispensary owner to think about is 280E taxation. “This is not your average business,” Bogut said, referring to the Internal Revenue code that disallows businesses from deducting ordinary business expenses from gross income associated with the sale of Schedule I or II substances.
Taxation “has a huge impact on your business and profitability,” Bogut said. Expenses on your ledger — items that include moveable fixtures like furniture and equipment, and even health insurance, for example — may or may not be tax deductible, he said.
In addition, since cannabis is currently a cash-based business, banking can be a problem, Bogut said, adding that any cash-based business is closely scrutinized by the IRS. Once open, businesses need a place to deposit their money, so license applicants should establish a banking relationship now, he advised. “When they ask what kind of business you are doing, you have to be candid.”
Michael Neville, a partner at FoxRothchild, addressed another common problem: Counting inventories, and how to account for excess inventories. The issue is when the employees don’t know what to do and, for example, just drop the extra into a customer’s bag, he said. On that topic, business owners also have to make sure all employees have security clearance, and know how to maintain vendor logs — failure to do so can mean an investigation down the road, he warned.
Finally, Bogut warned against businesses selling marijuana or hemp making unsubstantiated advertising claims — such as false claims that a cannabis product is a cure for cancer. Claims like that have proven to be a source of major litigation, he said.