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AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s
PUBLISHER:  CANNABIS LAW REPORT

We have noted on a number of occasions a properly organized Cannabis Cooperative Association (“CCA”) is the most financially efficient structure for engaging in business in California’s cannabis industry.  Utilization of a CCA to engage in business in California’s cannabis industry creates a financial advantage over any conventional business structure.  The advantages of utilizing a CCA occur at every stage in the movement of cannabis from cultivator to consumer.  [See

We decided to illustrate the financial efficiency of moving cannabis from cultivator to consumer through a fully integrated CCA for the benefit of all California residents.  Every California resident is impacted by this industry regardless of social, moral or political viewpoint relating to cannabis, and regardless of economic standing.

The movement of cannabis from cultivator to consumer through a fully integrated CCA is so financially efficient a CCA can compete financially with underground cannabis businesses if reasonable allowances are made for the risks associated with illegal activities.  Fully integrated CCAs are a more effective deterrent to the underground cannabis industry than increased criminal prosecution.  The underground cannabis industry exists because the rewards outweigh the risks to the participants perceive.

A fully integrated CCA is a CCA that is a single entity from cultivator to consumer for financial reporting purposes.  It is difficult, but possible, for a CCA to become fully integrated from cultivator to consumer.  The benefits of conducting business through a CCA occur at each step in the movement of cannabis from cultivator to consumer.  Consequently, a CCA that is not fully integrated from cultivator to consumer will always be a more financially efficient structure than any comparable conventional structure.

The first spreadsheet illustrates the division of a total of $10,000 paid by consumers for cannabis flower, including Sales Tax of 8.75% and a Local Cannabis Tax of 10.0%, among taxes other than income taxes, and a cultivator, distributor, and dispensary, through conventional business structures.  The first spreadsheet illustrates the division of the retail sale of 125 packages of flower at $40 per 8-gram package, including all taxes other than the income taxes.

In the first spreadsheet, we have converted all of the slices of the $10,000 pie into taxes other than income taxes, and the costs, profits and income taxes of the three businesses, into dollar amounts for ease of understanding.  A mark-up by the dispensary of 60.0% of the wholesale cost from the distributor is reflected in the first spreadsheet.  We have assumed the cultivator and distributor each have a profit before taxes that is one-half of the profit before taxes of the dispensary.  The before-tax profit of the cultivator and the distributor in the first spreadsheet is reasonably close to a 30% profit margin.  We have also assumed a 40% income tax rate is applicable to the profits of the three businesses.

 

The foundation for the first spreadsheet is a sale of one kilogram of flower by a cultivator at a price a little over $1,100 per pound including Cannabis Cultivation Tax (“CCT”).  The distributor assumes the CCT and the net to the cultivator is a little over $950 per pound.  We further assumed the cultivator has a production cost of $1,410 for the flower which produces a $766 before tax profit per kilogram for the cultivator.  For the distributor, we assumed additional costs of $1,278 and a profit of $766 per kilogram.  For the dispensary, we assumed additional costs of $1,226 and a profit of $1,531per kilogram based on the 60.0% mark-up of the wholesale cost.

In the preceding spreadsheet a total of $10,000 paid by the consumers for cannabis flower, which includes Sales Tax and Local Cannabis Tax.  The $10,000 is allocated as follows: (1) governmental agencies for taxes other than income tax, 30.2%; (2) dispensary revenue, 27.6%;  (3) distributor revenue, 20.4%; and (4) cultivator revenue, 21.8%.

In the second spreadsheet, we have assumed the cannabis flower moves from cultivator to consumer through a fully integrated CCA.  We have also assumed the profit to the cultivator as the owner of the CCA is doubled and that the reductions in costs and profits of conducting business through a fully integrated CCA at the distributor and dispensary level are passed on to the consumers.  We have also assumed in the second spreadsheet that the costs at the distributor and dispensary levels remain the same with an additional assumption that any income tax liability to the dispensary is included in dispensary’s costs of $1,226.

In the preceding spreadsheet a total of $7.916 paid by the consumers for the cannabis flower, including Sales Tax and Local Cannabis Tax, for the same 125 8-gram packages of flower.  The total amount paid by the consumers is allocated as follows: (1) governmental agencies for taxes other than income tax, 31.2%; (2) dispensary revenue, 15.5%; (3) distributor revenue, 16.1%; and (4) cultivator revenue, 37.2%.

In the second spreadsheet, the costs for the cultivator, distributor, and dispensary are the same as in the first spreadsheet.  The tax rates also remain the same.  The shifting of the amounts to which the tax rates are applied produces dramatic savings for the consumers.  The utilization of a CCA in the second spreadsheet shifts the distributor’s profit in the conventional structure to the cultivator and passes on the profit of the dispensary to the consumers in the form of a reduced price.

The preceding spreadsheets illustrate that the total cost of the flower to the consumers, including taxes, can be reduced by over 20%, and the profit to the cultivator can be doubled, through the use of a CCA.

The financial benefits from the use of a CCA to move extracted oil from cultivator to consumer are even more dramatic.  The movement of extracted oil through a CCA produces more benefit because the costs added to extracted oil between the cultivator and the consumer are a larger percentage of the total costs of production than the costs added in the processing of flower.

The preceding analysis is based on the sale of adult-use cannabis.  The use of a fully integrated CCA to move cannabis from cultivator to patient as medical cannabis produces an even more dramatic price reduction for the patient without decreasing the profit for the cultivator.  As soon as we can get to it, we will publish a similar analysis illustrating the movement of medical cannabis through a fully integrated CCA.

CCAs are unique to California.  The Legislature specifically created CCAs for California’s cannabis industry.  The analysis above is based on unique aspects of California’s laws relating to cannabis.  The principles we utilized to apply California law may achieve similar results in other states.  A careful analysis of the relationship between the cannabis taxes and cannabis regulatory laws of a particular State as well as all other applicable laws is required in order to determine what benefits may be achieved through the selection of the optimal operating entity for a particular state.