12 Apr Measuring Marijuana
Budding new industry brings challenges to assessment offices | by Ellie Moss
With the growing opioid crisis, legislators and medical practitioners have been evaluating alternative approaches to pain management. Medical marijuana has come to the forefront of those discussions as it has applications for pain management, appetite enhancement, and eye pressure reduction. Emerging new industries bring about many different “growing pains.” In the case of medical marijuana, valuing and assessing the property used in the cultivation and dispensing process is one of them.
The U.S. legal marijuana market size was estimated at 7.06 billion in 2016 and has grown substantially ever since. The medical marijuana market alone is estimated to be valued at 100.03 billion by 2025. Thirty-three states and the District of Columbia have passed laws broadly legalizing marijuana in some form. Several more have proposed legislation going through their House and Senate, with Georgia being the most recent example. Although the medical marijuana bill has been passed through the House, time will tell if the Senate will also pass the bill making Georgia the 34th state. Arizona legislators were at the forefront of this curve and passed legislation in 2010 allowing for the production and use of medical marijuana. Arizona’s first dispensary opened in 2012.
Maricopa County, Arizona (which encompasses the City of Phoenix) began investigating why their medical marijuana facilities were not reporting their business personal property. This open investigation led to the discovery of a very complex and multifaceted entity and ownership structure that ultimately resulted in the need to audit those companies operating in the industry. After launching a public awareness campaign, the Maricopa County Assessor’s Office engaged TMA to audit the facilities in their jurisdiction.
Originally there was some confusion amongst taxpayers as to whether or not they were required to file returns. Arizona law requires that dispensaries operate as a non-profit. Legally, however, they are not non-profit. At the state level these companies file non-profit income tax returns, but for federal tax purposes, they typically file an 1120 Corporate Return as they do not qualify for 501(c) status. With no returns rendered, the jurisdiction applied a mass appraisal style assessment using the square footage of the facility to generate an estimated full cash value. As the audit process began, the many layers of the industry started to unfold. The importance of site-specific financial information for the various entities became evermore accentuated.
Part one of the specialized audit process for the medical marijuana industry is establishing the type of facility in operation. As a general rule, there are three levels of trade in the medical marijuana industry: the certification facility, the dispensary, and the cultivation facility.
Prior to purchasing any product, patients must first receive their qualifying patient card from a medical marijuana certification facility. Typically, these are very small and specialized doctor’s offices that may or may not be owned by an entity or individual who also owns a dispensary.
Dispensaries are often only the “retail” portion of the industry. They may have a secondary license to operate a cultivation facility or may purchase the product from a licensed wholesaler. More often than not, the name listed on the sign outside the business was not the name of the entity responsible for the associated tax burden. Most companies created a separate management company, which tossed an additional curveball into the mix. Due to their non-profit operation on the state level, the only way for owners or investors to receive revenue from the dispensary was to create an additional company that owned the equipment and leased it to the dispensary. Once the legally responsible party was identified, the review of the information and visits to the facilities produced even more intriguing questions.
Cultivators, though in the same industry, were rarely classed the same for their business codes. Some were classed as manufactures, or support activities for crop production, while some were even assigned a business code as a pharmacy or drug store. Given the various different property tax treatments for agricultural properties when compared to manufacturers and pharmaceutical providers, the variations for assessment seem almost endless.
Would a state that exempts agricultural crop inventory still consider exempting the growing crop if the cultivation occurred in a warehouse for an entity designated as a manufacturer? Does a cultivation facility become entitled to exemptions or adjustments granted to a manufacturer? What if the “manufacturer” has an outdoor inground crop? Does soil in a pot or tray get treated as a taxable supply when soil from outdoor operations does not? Should the equipment life assigned relate to the identified industry segment? Or since the medical marijuana industry is so young, should the assessor’s office or department of revenue for a given jurisdiction evaluate the equipment for a separate industry class life identifier? These questions are just a few of the many challenges that plague the assessing industry.
Despite the difficulties, TMA has completed audits of the various marijuana facilities for Maricopa County. Most taxpayers have been pleased to work with us, as we help them better understand BPP and when to file returns.
“Our office conducted audits of all medical marijuana facilities working hand in hand with TMA. Many challenges exist with audits of this business, but TMA was able to work through and delivered our final audit report on time. This project is an example of successful collaboration between companies. Without working with TMA, we would not have been able to complete the audits in the allotted timeframe.”
– Paul D. Petersen, Maricopa County Assessor