the fire starter: groundbreaking cannabis cpa luigi zamarra

“if they follow gaap in their accounting systems, income taxes will bankrupt them.”

by liz gold
cannabizcpa.pro

you might have seen luigi zamarra, cpa back in the first episode of weed wars, a 2011 discovery channel series about the day-to-day operations of oakland, california’s harborside health center. zamarra played himself, the chief financial officer of the world’s largest medical cannabis dispensary.

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it was during his tenure at harborside that zamarra noticed the cannabis industry was humming along without realizing the implications of irs code 280e. to bring the issue to light, he wrote an article in kush magazine warning those in the industry how he anticipated the code section being an issue.

“i think it was unfamiliarity with the tax law and that the tax law would be different for marijuana businesses,” zamarra said. “i think people thought they could operate as any other business.”

he later wrote a letter to the irs to suggest the agency deal with the issue administratively and – if it chose to – it could come out and say “hey, if you’re compliant with state law, we’re not going to apply 280e for you.”

instead, zamarra said, he received a response from the assistant commissioner’s general counsel saying that the issue could not be fixed by the irs administratively – it was a legislative issue.

“at the time, i was working at the largest marijuana retailer,” he said. “i wanted to make this industry transparent, professionally run and with everybody paying their taxes. the only difference between a black-market criminal and a legal company is taxes.”

zamarra left harborside in 2012, and struck out on his own launching luigi cpa, an oakland-based firm focused on the recreational and medical marijuana industry. he has clients in seven states who are involved in all aspects of cannabis – from cultivation to edible bakers to testing laboratories to dispensaries. dispensaries in california, he said, tend to be larger companies because of the way the law unfolded with prop 215.

“currently, retail dispensaries have a lot of market power,” he said. “they have larger businesses, more government oversight, more employees and they tend to be larger clients. most of my dispensaries are grossing 4 to 10 million dollars.”

when he first created his website during his launch back in 2012, zamarra said he started a google adwords campaign to be the first to use the words “accountant, cpa and marijuana” together. the adwords campaign was initially rejected but google later reversed its position.

cannabusinesses started googling for help with their tax and business issues, while 280e started to come to the forefront.

zamarra said he started to gain attention.

today, he mostly works with clients in california, though he has clients in in seven states including washington and arizona. most recently, california implemented its statewide taxation of cannabis and as a result, he’s been fielding questions to help his clients understand next steps.

“most of that work is for my clients to do, but they have questions about how to interpret some of the rules,” he said. “it’s not that complex. it’s largely procedural and i’ve been answering their questions of mostly transition issues.”

not surprisingly, the biggest headache for zamarra’s clients is dealing with the implications of 280e.

“the advice i give them is that they should not be thinking about gaap,” he said. “if they follow gaap in their accounting systems, income taxes will bankrupt them. they should close shop today.”

zamarra said the only way these cannabusinesses can survive is if they adopt an income tax method of accounting.

“i help them understand the difference between a period cost and an inventoriable cost,” he said. “it makes a big difference in their taxes, because under 280e, no expenses below the line are deductible. so, the question becomes, what can be put above the line? retailers have it hard. they are in trouble. 280e is designed to deny expenses for selling and if that’s your cost structure, those are the ones who need to be nervous.”

he works in an office behind his home in oakland and partners with three independent junior cpas who handle bookkeeping services. zamarra’s focus is mainly on income tax compliance and a consulting practice that is twofold – high-level entity structuring and reviewing legal documents as well as day-to-day business issues.

“they call me up any time they have a business issue,” he said. “i help them negotiate, play independent umpire, conduct informal business valuations and my latest practice now is making introductions between buyers and sellers of marijuana businesses.”

as for trends in the industry, zamarra points to greater consolidation. he says as taxes and more enforcement kick in, mom-and-pop shops are going to be under more pressure to comply and may want to sell their business.

in addition, while retailers have a lot of power in the marketplace, that will soon shift to distributors.

“distributing companies will have power because they will be dictating the cost in both directions,” he said. “and a small number of larger players will be controlling distribution.”

posted on march 9, 2018