(CANNABIS, from 10)


IRC 61(a) gives Congress the authority to tax income from all sources, including illegal sources.15


Tis makes the income from


sales of federally illegal substances taxable income and subject to income tax. However, IRC 280(e) disallows any deduction for businesses trafficking controlled substances, which makes all illegal revenue subject to income tax without the benefit of ordinary expenses.16


IRC 1.163(a) does define gross


income and revenue less costs of goods sold and a tax court ruled that costs of goods sold is an adjustment to income and not a deduction as defined by the IRC.17


Since


costs of goods sold is derived from inventory, section 471 of the IRC also applies to this industry and identifies inventories as costs capitalized from direct material, direct labor and indirect manufacturing costs (i.e., overhead). Te IRS requires these businesses to file income tax returns and subsequently collects taxes on what it defines as illegal activities with proper costs of goods sold accounting required (beginning inventory + purchases + direct and indirect cost of producing – ending inventory). Tere is also a requirement for the nondeductible expenses denied by the IRC to be reconciled to the net income of the business. All allocations and assumptions must be documented because, in addition to the contradictory laws, this is a very tightly regulated market and subject to audit as well as to the interpretation of the high federal uncertainty of this new business model. At the state level, Oklahoma is currently one of 30 states allowing medicinal use only.18


Te state benefits by raising tax


revenue. To date, the State of Oklahoma has brought in more than $7.4 million in sales tax revenue, with an additional $6.4 million in patient licensing fee revenue and $9.4 million from commercial licensing fees, all of which is related to medicinal-use-only marijuana. From a CPA’s perspective, there are many benefits to offering services for clients in the cannabis industry; increased revenue and service to the public being two. However, there are also many risks with offering services to clients in the cannabis industry, including banking issues, policy issues, risk management considerations, client profile,


accountant-client privileges, federal income tax treatment, accounting treatment, an extremely complex industry, a heavily-taxed industry, risk to firm for legalities, current client views and possibly licensure, prone to audits, opportunity and justification for fraud, contract enforcement and potential errors.19


RESEARCH With our research, we intended to survey


CPAs in Oklahoma to find the consensus of the audience for the ethical and moral issues from this division in federal and state law. In conducting this research, we aimed to analyze and publish the results, as well as use the results to discuss ethics in the classroom. In an empirical investigation performed with a list of CPAs from the AICPA, Stanley20 found that CPAs favor some legalization of marijuana, the imposition of sin taxes and are accepting of marijuana usage in order to collect revenue dollars. We proposed to take Stanley’s study a step further and conduct a study in Oklahoma to assess the current level of understanding of how the cannabis industry operates, the challenges it offers, current offerings, future offerings, the impact on current business and legal counsel advice and analyze the data by demographics. We created a survey incorporating the


aforementioned topics and provided the link to the survey via email. We sent out 7,952 emails; 252 were returned undeliverable, 30 out-of-office replies and four retired CPAs who indicated they no longer wished to receive emails. We received multiple emails from CPAs requesting the results of our survey. At the cut-off, we received 257 responses, 81% were complete and the average time spent was three minutes. Questions were designed to filter based on responses to previous questions. Te initial results of our survey are presented on the previous page.


References 1


McVey, E. (2019). Exclusive: US retail marijuana sales on pace to rice 35% in 2019 and near $30 billion by 2023. Business Daily. Retrieved from https://mjbizdaily.com/ exclusive-us-retail-marijuana-sales-on-pace-to-rise-35-in- 2019-and-near-30-billion-by-2023/ 2


Dorbian, I. (2019). New cannabis report predicts legal sales to reach nearly $30 billion by 2025. Forbes. com. Retrieved from https://www.forbes.com/sites/ irisdorbian/2019/09/24/new-cannabis-report-


July/August 2020 CPAFOCUS 29


predicts-legal-sales-to-reach-nearly-30-billion-by- 2025/#6cd913871121 3


National Association of State Boards of Accountancy (NASBA). (2015). CPAs, marijuana, and moral character. Retrieved from https://nasba.org/blog/2015/02/18/cpas- marijuana-and-moral-character/ 4


American Institute of Certified Public Accountants (AICPA). (2019). An issue brief on state marijuana laws and the CPA profession. Retrieved from https://www. aicpa.org/Advocacy/State/DownloadableDocuments/ MarijuanaCPAsIssueBrief.pdf 5


Oklahoma Accountancy Board (OAB). (2018) July 2018 bulletin. Retrieved from https://www.ok.gov/oab_web/ documents/2018%20July%20Bulletin.pdf 6


Oklahoma Accountancy Board (OAB). (2019). OAB policy on CPAs providing services in the medical marijuana industry. Retrieved from https://www.ok.gov/oab_web/ documents/CPA%20MEDICAL%20MARIJUANA%20 POLICY_09202019.pdf 7


Oklahoma Medical Marijuana Association (OMMA) (2020). List of licensed dispensaries. Retrieved from http://omma.ok.gov/Websites/ddeer/images/documents/ OMMA%20Dispensaries%20List.pdf 8


Hildebrand, C. (2015). Hazy Ethics: Access to Legal Counsel for Marijuana Businesses. Georgetown Journal of Legal Ethics. Summer, 2015. Pages 583-595. 9


Bradford, Alina (2017). What is THC?. Live Science.


Retrieved from https://www.livescience.com/24553-what- is-thc.html 10


www.livescience.com/65811-what-is-cbd.html. 11


2018. 12


Agriculture Improvement Act of 2018. 115th Congress, Pharmacist’s manual. An informational outline of the


Controlled Substances Act. Revised 2010. Retrieved from http://www.deadiversion.usdoj.gov/pubs/manuals/pharm2/ pharm_manual.pdf. 13


United States. Department of Justice. Office of Public Affairs (2013). Justice Department Announces Update to Marijuana Enforcement Policy; August, 29, 2013, report. Retrieved from https://www.justice.gov/opa/pr/justice- department-announces-update-marijuana-enforcement- policy 14


Sensible Enforcement of Cannabis Act of 2019, H.R. 493, 116th Congress, 2019-2020. 15


Gross Income Defined. 26 USC § 61. 16 Expenditures in Connection with the Illegal Sale of


Drugs. 26. USC § 280E. 17


Interest. 26 USC § 163. 18 Oklahoma Government Official Site (Ok.gov). (2019).


Medical marijuana revenue. Retrieved from https://stories. opengov.com/oklahomastate/published/XKuMf5_Q1 19


Camico. (n.d.), Marijuana Business Clients: ‘Smokin’


Hot Issues for CPAs. Retrieved from https://www.camico. com/blog/Marijuana_Business_Clients_Smokin_Hot_ Issues_for_CPAs 20


Opinions of US Accountants. 9th Annual International Conference on Accounting and Finance.


Davis, M. (2019). What is CBD? Retrieved from https://


Stanley, C. (2019). Marijuana: Legalization and Sin Taxes


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