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February 6, 2023 Focus: Accounting

Cannabis companies under ‘magnifying glass’ as state hires industry auditors

HBJ PHOTO | STEVE LASCHEVER An employee at cannabis grower CTPharma’s Rocky Hill plant rolls joints for recreational sale.
By Andrew Larson

As the state Department of Revenue Services works to ensure compliance and reduce the tax gap – the difference between taxes owed and the amount that is paid on time – Commissioner Mark Boughton said in an interview with the Hartford Business Journal that his agency has hired five cannabis auditors.

The new DRS examiners will not only enforce the state’s tax laws, but help cannabis companies ensure they’re collecting the correct amount and remitting it properly and on time — generally the month after the end of the month to which the tax applies, said Robert Lickwar, a partner in national accounting firm UHY LLP’s Farmington office.

The pay-as-you-go model is meant to help companies avoid situations where they owe a larger-than-expected amount at the end of the tax year.

“They’re hiring people number one for enforcement, but also number two, to get people through the process,” Lickwar said.

The state projects $4.1 million in tax revenue from cannabis sales in fiscal 2022, with that number expected to grow to $73.4 million by fiscal 2026, according to an Office of Fiscal Analysis report.

By design, the state’s cannabis tax scheme is cumbersome.

There are three taxes on retail sales:

  • The state’s usual 6.35% sales tax;
  • A 3% sales tax dedicated to the city or town where the sale occurs;
  • And a tax based on THC content that will cost about 10% to 15% of the sale price, according to the Department of Revenue Services.

The total tax on retail sales is about 20%, the same as in Massachusetts, where recreational pot legally hit the market in 2018.

“Just to deal with that administrative burden of calculating out those taxes for the consumer and then finding a way to incorporate that automatically into your point-of-sale system was certainly a challenge for retailers,” said Sarah Westby, co-chair of Hartford-based law firm Shipman & Goodwin’s cannabis industry practice.

Many companies are working with attorneys and accountants to ensure compliance.

“You have to treat your tax compliance like you treat your operational regulatory compliance, which is, you need to dot your I’s and cross your T’s because the industry is under a magnifying glass, especially as new states come online,” said Jeremy Shaw, a partner with national cannabis law firm Vicente Sederberg.

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