Preparing for legal cannabis in Minnesota
Happy 4/20, Minnesota!
With Minnesota set to join the growing number of states legalizing cannabis for both medical and recreational use, it is important to know how to get and stay prepared for the changes ahead. Being a Minnesota-based CPA firm, we are absolutely thrilled about the opportunities that lie ahead for this state. Legal cannabis in Minnesota will be a game-changer.
And, our experience working in other new, growing, and mature legal state cannabis markets gives us a unique insight on what is to come in Minnesota. Many in the cannabis industry think about their time in the industry like “dog years”–truly, every three months does feel like a full year to us. While every state is unique, we want to share with you some of the major areas that license-holders and consumers will need to watch for as the legal market materializes.
Here are the things to think about when preparing for legal cannabis in Minnesota.
The legalization of cannabis in Minnesota presents significant economic opportunities for entrepreneurs and businesses. The new market will create jobs and generate tax revenue for the state. According to the most recent Minnesota Department of Revenue estimate, the industry could generate up to $130 million in total tax revenue by 2027, creating a new economic driver for the state in many ways.
For entrepreneurs looking to enter the cannabis market, there are several opportunities to explore. These include:
Cultivation and processing: Businesses can apply for licenses to cultivate and process cannabis for sale to consumers and dispensaries. These businesses, depending on how the market plays out in the state, can provide a major, major role in providing the state quality, locally sourced inventory. (Remember that cannabis products legally cannot cross state lines due to the illegality of interstate commerce due to the Schedule I status of Cannabis.)
Dispensaries: Businesses can apply for licenses to operate retail dispensaries where consumers can purchase cannabis products. While dispensaries typically have fewer tax deductions available to them, having one of a few different cannabis licenses in particular municipalities could present a tremendous long-term business opportunity for the right license-holder. (Example: the only dispensary in Marshall, MN could serve many customers and quickly become a trusted location.) The right dispensary with the right mix of products with the right focus on high-margin products could be an excellent business.
Ancillary services: Entrepreneurs can also provide ancillary services such as marketing, packaging, and consulting to support the cannabis industry. For people who want to be involved in the cannabis industry but don’t have a green thumb or a mind for retail, there will be ample opportunities to provide services. (Our advice: be yourself, be genuine, think win-win. Cannabis business owners appreciate an honest service provider and can see through anyone trying to make a quick buck.)
That said, there are numerous challenges that new licenseholders will need to navigate.
Banking: Banks who work with cannabis are subject to high scrutiny and risk due to cannabis current status as a Schedule I drug on the Federal Controlled Substances Act. The risk for banks is such that bank branch managers can be found personally liable if businesses are found to be laundering money at their banks. That said, finding a bank that works with cannabis businesses can be challenging. Find banks that understand and work proactively with legal cannabis businesses. (Also: be ready to upload many documents to them on a very regular basis–from your cannabis licenses and renewed licenses, to your monthly income, and much more. Keep your scanner handy.) For legal cannabis businesses in Minnesota, this will be a key element of success.
Cash Flow: Once you have a bank account, you’re going to want to make sure you don’t burn your cash. Having a cannabis business with a positive cash flow is very challenging. Assume you will need more cash than you expect to get the business off the ground, and expect that maintaining a positive cash flow going forward will be one of your most important areas to maintain.
Payroll and HR: No matter what type of business you run, you will likely need to hire employees. Remember that while independent contractors can help fill gaps, the IRS has strict rules on who can be classified as an employee, and payroll tax penalties are very harsh. Make sure you have a payroll partner and are keeping up to date with your payroll filings.
More importantly, you need to have at a minimum a human resource policy. Better yet, consider hiring an outsourced human resource department in order to ensure you have a workplace that your employees want to come to, and one where your business is protected from legal and regulatory threats surrounding employment law.
Compliance: Like it or not, every state requires some sort of inventory compliance system. This is primarily to ensure consumer safety and in order to protect the legal market. Be prepared to have monthly inventory counts and get used to using an inventory compliance system such as METRC, the system most frequently adopted by states for monthly compliance. Additionally, be prepared for regular licensing updates, answering regulator questions, facility visits, and so on. You are running a complex business, so be prepared to have complex and well-documented answers to those regulator questions.
Taxes: Most cannabis business owners know a little about the dreaded 280E, so we won’t regurgitate the information you can find anywhere on Google or ChatGPT about it. (Let me google that for you.) That said, we will say that businesses should prepare for more tax than they expect, that businesses should create a liability on their balance sheets to ensure Federal and State tax liabilities are valued on a balance sheet, and that “playing the shell game” with using tax entities can be risky. If you do consider more aggressive tax strategies, just know that if you get selected for audit, you’re not only paying more tax, you’re paying attorneys and accountants much more money to help protect you and to serve the audit.
Full legalization of cannabis in Minnesota will provide a revolutionary opportunity for consumers. The 2022 bill that legalized low-dose edibles and beverage products helped to usher in a market for cannabis products that is truly unique to the entire country. Just ask your friends from other states who have legal cannabis, and they will be blown away by the fact that you can order a cannabis beverage with a meal at restaurants, or purchase edible products at your local coffee store.
As a consumer, there are several important considerations to keep in mind when purchasing cannabis products in Minnesota. These include:
Product safety: It is important to purchase cannabis products from licensed dispensaries to ensure product safety and quality. A primary outcome from legalization is the creation of an Office of Cannabis Management which is to primarily protect consumers and ensure that quality products are shelved at licensed dispenaries that follow the regulatory compliance they are required to follow.
Dosage: Consumers should start with low dosages and increase gradually to avoid overconsumption. As cannabis educators will tell you, “low and slow” is the way to go. Be safe and have fun. Do some research on some of the benefits of cannabis usage, and know that cannabis usage has risks as well.
Legal restrictions: While cannabis is legal in Minnesota, it is still illegal under federal law. This means that it cannot be transported across state lines, and there are restrictions on where and how it can be consumed. It will likely stay this way for the forseeable future, at least until the Federal law changes to allow interstate commerce. Don’t be cavelier with cannabis even if it is legal in the state. And remember the people who have been harmed by the war on drugs in Minnesota and around the country and the world.
The legalization of cannabis in Minnesota presents significant economic opportunities for businesses and entrepreneurs. As a consumer, it is important to understand the legal framework and purchase products from licensed dispensaries to ensure product safety. With the creation of a regulatory framework, Minnesota’s cannabis market has the potential to become a major contributor to the state’s economy and improve the quality of life for its residents. We cannot wait to see what is in store!