Cannabis taxes are a challenge across the industry. Everyone working in cannabis knows that IRC Section 280(e) presents some big challenges for anyone operating in the cannabis space. But sales taxes are a huge expense for cannabis operators and need to be paid attention to closely for compliance.
State sales tax nexus has become increasingly complicated over the last decade, especially as online sales have increased. Businesses who previously did not have a sales reach outside their own geographic region can now operate global businesses, but with that comes new challenges, mainly where do these businesses have nexus?
More than 30 states now have “affiliate nexus” rules, which essentially allows them to capture remote sales to collect and remit sales tax. This is where our cannabis multi-state operators need to be careful. If you advise cannabis clients, especially those with licenses to operate in more than one state, beware the pitfalls.
Oklahoma is a great example where a multi-state operator who may be using a similar or identical brand in multiple different states could end up owing more in sales tax than they bargained for. Oklahoma’s affiliate nexus rules state the following: “Affiliate nexus may be established in Oklahoma when a person with substantial nexus in Oklahoma engages in certain activities in the state. These include using a similar trademark, service mark, or trade name as the out-of-state seller; selling a similar line of products under a similar name; or engaging in activities in Oklahoma that help the remote retailer develop or maintain a market for its products in Oklahoma.”
What does that mean? It could mean that I have a license to operate my grow and dispensary in Colorado and a separate license to operate my dispensary in Oklahoma. I keep the entities separate by having two separate legal entities, but the ownership is essentially the same. I trademark my products from both companies in a similar manner, keeping them all under one branded company name, logo, etc., so that my customer base starts to recognize me in an attempt to grow my business nationwide. Based on this, I most likely have sales tax nexus in both states. So, who cares? You operate in both. Yes! However, because the entities are under common ownership and essentially selling the same trademarked products, I may be tipping the scale on my sales tax thresholds MUCH faster.
Let’s walk through an example using the two states in my hypothetical above. Oklahoma and Colorado both have a sales tax threshold of $100,000. So, let’s say your two separate operations in each state are doing over $100,000 a year in sales in their respective states. We know each has to collect and remit sales tax. But most business owners assume their Colorado dispensary in this example does not owe any sales taxes to Oklahoma and vice versa. However, the affiliate nexus rules say that because the entities are under common ownership and using the same or similar trademark on the same or similar products, the Colorado entity could have sales tax nexus in Oklahoma and vice versa. It does not mean that both will necessarily have taxes to pay, but it could trigger a filing requirement or a need to file for sales tax exemptions. Failure to do so could still result in penalties and interest.
What does all this mean for us as preparers? We recommend an annual sales tax nexus study any time we have a multi-state operator or a client with online sales. Each state has its own sales tax thresholds and rules for defining nexus, which means each has to be analyzed individually. Further, you need to have clear and documented conversations with your client about the products being sold in multiple locations. Most multi-state operators want their products all under one trademarked brand for brand recognition purposes, but they should understand the potential sales tax consequences ahead of time. We also recommend that when you analyze a multi-state operator for sales tax nexus, you consider the combined sales of all the related parties to determine thresholds before diving deeper into the analysis of where sales dollars are actually coming from.