A February 2018 article in Calcalist cited a study by the IVC Research Center finding 68 companies in Israel focusing on medical cannabis and cannabis-related technologies (no doubt there are even more now). These companies have their eyes on the US market where revenues could reach $55.8 billion by the year 2025.
One company that caught our attention is Cannibble part of the growing cannabis food tech market. The company has premixed baking CBD & THC formulas for cakes, cookies, brownies, donuts, muffins, and more. It also has premixed hot and cold beverages like coffee and tea and fun and finger food spices and flavors for toppings and more. With so many companies focused on medical and the more “traditional” cannabis products, we found it interesting, and a bit whimsical, to see just how creatively entrepreneurship runs in this emerging field.
In the US, production or sale of marijuana is still illegal under Federal law. It is listed as a Schedule 1 narcotic (although the Justice Department has not shown a willingness to prosecute outlets that dispense treatments in the 29 states that have so far legalized medical use). However, for US tax purposes this prohibition means that a business that produces, distributes or sells such substances will not be allowed any deductions in computing taxable income. (Internal Revenue Code Section 280E).
There is a “loophole” of sorts. Cost of goods sold can be deducted (although determining which costs are included able is a complex analysis – as only certain direct costs are considered as a part of the cost). Thus, it is important for these companies to understand their tax and operating structures and to determine where best to produce the product. This becomes even more complex in the international environment, where there is an added layer of transfer pricing considerations.
In addition to US tax issues, the individual states present a wide range of excise taxes, sales taxes, and even special marijuana taxes. Of course, there is also a web of exemptions relating to where the business is in the chain (manufacturer, reseller, retailer) and the use of the product (recreational or medical).
The US licensed lawyers and CPAs in MasAmeica’s business boutique services can provide the US tax solutions for the Israeli high-tech industry. Contact us for a consultation.
MasAmerica has no relationship with any company mentioned in this post.
