In prior blog posts (see here and here), I described how we have been fielding regular inquiries regarding international cannabis, both from companies inside the U.S. looking internationally and from international companies looking to the U.S. market. This post deals with taxation issues for international companies seeking to enter the U.S. market.
Tax Treaties. The first level of taxation inquiry when looking to do business in the U.S. is to determine whether your home country is one of the 68 that has a bilateral tax treaty in place with the U.S. (see here for the IRS’ definitive list). The “tax” purpose of these tax treaties is to ensure taxable income is accounted for so that it can be taxed. The “treaty” part of the tax treaties refers to the agreement between the countries that their respective taxing authorities will apply certain reduced tax rates or entirely do away with other tax rates so as to avoid double taxation, fostering a more favorable business environment between the two countries.
IRC Section 280E. In the U.S. where cannabis as marijuana (> 0.3% THC content) continues to be illegal at the federal level, the IRS (Internal Revenue Service) keeps an eye on cannabis company taxation issues, particularly Section 208E of the Internal Revenue Code that deals with acceptable business deductions (cost of goods sold or COGS) for illegal enterprises (See 26 USC Section 280E. Expenditures in Connection with the Illegal Sale of Drugs). Section 280E is extremely important to cannabis (marijuana) companies, and their CPAs have the code section memorized.
Section 280E is less crucial for companies that are purely working with cannabis as hemp (< 0.3% THC). This is due to the 2018 Farm Bill that effectively legalized hemp by removing it from the definition of marijuana as a scheduled controlled substance. So companies that are purely dealing with hemp will find that their U.S. federal taxation issues are not significantly different from any other legal business industry in the U.S. That does not make U.S. taxation simple – only less complicated and more profitable due to the tax savings from being able to deduct normal business expenses.
State Tax Issues. For international cannabis companies looking to sell at retail in the U.S., whether through brick-and-mortar or through e-commerce sales, most of your (non-employee) U.S. tax concerns will center on U.S. state sales tax. Each state within the U.S. has its own sales tax rate, and each city and town generally has its own additional sales tax, so your U.S.-based accounting firm’s assistance will be crucial in ensuring you are withholding and paying the correct amount of sales tax for each transaction.
This helpful graphic and chart from the Tax Foundation will give you a good overview of US sales tax. Fortunately, U.S. sales tax is rarely as high as many international jurisdictions (for instance, 20% sales tax in Switzerland compared to 10-12% in some parts of Washington state).
You may owe business income tax in many U.S. states, depending on your level of activity in those states. Basically, wherever your customer is located, you will be responsible to collect and remit sales tax in those states.
Cannabis-Friendly CPA Firms. Lawyers are risk-adverse by nature. Accountants are the even more risk-averse cousins of lawyers. So you can imagine that finding a good CPA firm that understands international tax issues, federal tax issues (including IRC Section 280E), the difference between a marijuana business and a hemp business, state income tax, state sales tax, state and federal employment tax, etc., AND has a good head for business is as difficult as it is important. I know a few, but they are rare.
Are Lawyers More Important than CPAs? I love to ask my CPA friends this question. Obviously, the answer is yes if I am answering the question, but we are really two straps to the same pair of suspenders. When you as an international cannabis business owner are looking at the U.S. market, you need to find a good law firm and a good CPA firm, and you need your CPA firm involved at least as early as your lawyers. You need to do this so that both your lawyers and your CPAs can strategize with you regarding your business plan to take advantage of the optimal intersection of state cannabis laws, regulations, and enforcement regarding your cannabis activities, as well setting up operations in the states with a favorable business environment where corporate and franchise taxation are low or nonexistent.
In the next blog post in this series, I will address more U.S. legal considerations for international cannabis companies looking to capitalize on the U.S. market.