When federal and state laws create confusion

So how exactly does a business file its taxes when it’s recognized as a legal entity at the state level but deemed illegal at the federal level? These are the kinds of puzzles that fuel Katye’s fire.

Unfortunately, because most state tax returns begin their tax position using federal numbers, cannabis-based companies face large financial setbacks. For one, they’re essentially taxed on gross margin rather than net income.

On top of that, Katye’s clients can’t write off operating expenses, creating another financial inequity.

“General operating expenses, under federal law, are not allowed [on returns] because the federal government does not want you to have an operating cannabis business. It wants to consider you a drug dealer,” Katye explains on the podcast.

Take a business with $1million of inventory and assume a 50% gross margin. Then dilute the company finances by factoring in $400,000 of operating expenses. The tax implications will be drastically different for a business in the marijuana industry.

“The long and short is [this]: in a scenario where at 21%, a $100,000 business would owe $21,000, at $500,000, you get to pay $270,000 for that exact same business simply because the government doesn’t like your inventory,” Katye says.

Then there’s the fact that most banks won’t do business with cannabis companies. As if this wasn’t trouble enough, many of Katye’s clients also face the unique challenges of being purely cash-driven operations.

“Where do you pay for your state sales tax? I literally have clients that make appointments with the Oregon Department of Revenue to bring forty, fifty, sixty thousand dollars in cash to Salem,” Katye tells Stuart. She’s grown accustomed to clients paying her in stacks of twenties, casually removed from a massive safe in the back room of a business.

“There are problems at every turn,” Stuart marvels.

It’s a wonder that anyone would even want to touch such a problematic industry, but Katye’s seen firsthand the passion her clients have for a product that they believe can change the world.

All Katye’s looking for is the opportunity for her clients to enter a level playing field with other small business owners.

The reality: the US hasn’t learned from Prohibition

Because the cannabis industry is so aggressively taxed, the reality is that some choose not to go the legal route.

“When I provide your tax return to you, I am your partner. But I must do that in a way that’s conservative, consistent, and defensible to both my license and to the laws of the country,” Katye says.

Sometimes that places the practitioner in a difficult spot. She recalls handing a 25-year-old a  $500,000 tax bill with tears in his eyes. She never saw him again.

“He tried to do it right,” she recalls.

She hopes that sensible tax laws can be implemented for the industry so that more people can follow their passion in legally and financially viable ways. While proposals like the Schumer, Booker, and Wyden Bill are far from perfect, Katye thinks the government needs some legislation that at least opens the door for her clients to run safe and successful businesses.

“We need to get something passed that protects small businesses—that dictates it as an agricultural product. It needs to have sensible testing and be made safe for an uneducated population. So there are good reasons to partner with the government in that regard,” Katye says on the podcast.

Although legalization will help increase safety and financial security for those in the industry, it unfortunately won’t be a panacea for the black market.

Joints and Post-it notes: unconventional client record-keeping tactics

Working with clients who’ve operated in the margins of society means that Katye’s amassed her fair share of stories.

She recalls one of her first cannabis clients who hired her for bookkeeping services. Katye sent her assistant to pick up his financial records, and she returned with two gallon-sized Ziploc bags stuffed with Post-it notes.

Noticing the different colors, she deduced that her client had a system, despite first appearances.

“Every seven days, they had stuck the Post-it notes together and then just stuck them in the bag,” she recalls.

Katye wasn’t sure she could manage the task at hand when she realized her client was missing dates and kept zero expense records. Fortunately, her assistant persevered, using her living room wall to sort and organize the client’s financial records.

At the bottom of the bag? Two joints and a small bag of marijuana.

“It became very clear, very quickly, that these guys have a very different set of problems—accounting, security, cash control, environmental—than I had ever experienced,” Katye recalls.

Recommended reading: Why soft skills are crucial in a modern accounting firm

Paving the way and paying it forward

Since she first dipped her toes into cannabis accounting in 2012, Katye has found herself educating clients. But these days, she’s also educating fellow accountants.

As the industry continues to grow, so does the demand for accountants who can navigate the nuanced world of cannabis finance. Katye’s doing her part to help those who want to pursue such a path.

Her latest venture is an online cohort for tax professionals eager to extend their services to cannabis businesses.

Endorsed by the National Association of State Boards of Accountancy, the program covers everything from engagement letters and insurance to finding the right clients.

In essence, Katye’s creating the resource she desperately needed when she first started out. She’s also building a community for cannabis accounting—one that’s “dynamic, conversant, always respectful, and moving.”

Despite her allergy to THC, Katye Maxson-Landis has become an “unintentional advocate” for the small business owners that drive America’s marijuana industry.