CBD OIL

Licensed cannabis companies pay more than their fair share of taxes thanks to the business deduction restrictions placed on them by IRS Tax Code Section 280E. That tax law prevents cannabis producers from taking any deduction or credit unrelated to the cost of goods sold (COGS). With some well-thought-out corporate structure, however, cannabis cultivators can find ways to reduce their overall tax burden.

The Research and Development (R&D) Tax Credit is one such vehicle that potentially is available to cultivators, according to Jonathan Storper and Daren Shaver, attorneys with California-based Hanson Bridgett.

“What the R&D credit is designed to do is reward innovation and problem-solving. And there’s really no industry limitation,” Shaver tells Cannabis Business Times and Hemp Grower. “Any business that is eliminating technical uncertainty in the development of products or experimenting and relying on science to really develop a product [is] a very good candidate for an R&D credit.”

Expenses relating to breeding programs, equipment modification and/or design, and developing novel or innovative consumer products can all be used to apply for an R&D tax credit, the attorneys say, as long as the corporate structure separates the plant-touching business from the R&D business. “The corporate structure is extremely important in this kind of thing,” Storper stresses.

Having multiple corporate entities is not new to the cannabis industry and is highly common in other industries. For example, some cannabis companies have created separate corporate entities under which real estate assets are held. That real estate company, which leases the property to the cultivation operation, can then take deductions (as it is a federally legal business) that would not have been available if the cultivation operation held those assets. Thus, that structure lowers the overall tax burden for the cultivation business.

The same idea applies to the R&D credit, the attorneys say.

“The better approach for somebody who’s looking to take the R&D credit is to achieve as much separation [between companies] as possible,” Shaver says.

Easier Path for Hemp Companies

Hemp cultivation companies have an easier path to applying for and receiving these R&D tax credits since hemp cultivation is legal at the federal level and 280E has not applied since the 2019 tax year.

However, Storper and Shaver both emphasize the importance of excellent bookkeeping to keep track of what qualifies as an R&D expense and what does not. “Recordkeeping becomes very important on something like this. … Bifurcating expenses between good R&D expenses and otherwise is very important,” Shaver says.

For example, if a hemp (or cannabis) company has an employee whose sole job is to oversee and conduct research and analysis, that employee’s salary could be used in applying for an R&D tax credit, Shaver explains. If that employee is a part-time researcher, then the company should keep track of how much of that employee’s time is spent on R&D and only use that portion of the employee’s salary when applying for the credit.

Costs for supplies and equipment also can be eligible as long as the research being done is science-based. “I don’t think throwing some extra fertilizer, for example, would be enough [to qualify for an R&D credit],” Shaver says.

If cannabis and hemp cultivators structure their corporate entities correctly and apply proper due diligence in tracking expenses, the IRS is more likely to grant the credit, especially if the research has benefits outside of the cannabis industry (e.g. a new way to emulsify cannabinoids (hydrophobic compounds) into water would have applications to the entire beverage and supplement industry). With that in mind, they advised companies interested in applying for R&D credits take the time to plan out their efforts early in the tax year. “It’s always better to do early planning than try to look back and ask for forgiveness,” Storper says.

Anyone looking to leverage the R&D tax credit also should consult with their legal and accounting team, they say, to ensure the corporations are properly structured and separated.

Maryland-based vertically integrated cannabis operator Curio Wellness has announced a new funding program that will provide $30 million in startup capital to up to 50 minority business owners to allow them to open a Curio franchise in one of multiple states.

“At its root, it was born of an interest in making a statement about diversity,” Jerel Registre, managing director of the Curio WMBE Fund, told Cannabis Business Times and Cannabis Dispensary.

Curio CEO Michael Bronfein started thinking about ways to support diversity in the industry back in 2018, Registre said, and worked with one of the company’s key investors to move beyond Curio’s focus on a diverse employee base to create business ownership opportunities for women, minorities and disabled veterans.

RELATED: More Than Medicine: How Curio Wellness is Redefining Its Marketplace

Access to capital is a key challenge for many prospective business owners, Registre said, due to the cannabis industry’s limited access to banking, as well as diverse communities historically having a more difficult time accessing capital to build businesses.

“That is where the idea for a fund was born,” Registre said. “Then, as we looked at how to make sure that both the fund and the entrepreneurs were successful over time, we wanted to be able to provide operational support that went beyond advice, really. … We settled on franchising because that really enabled us to partner with the franchisees or the entrepreneurs to drive both the performance and the brand of the store in a way that created sustainable business and business models.”

How to best address diversity remains an important challenge as the cannabis industry matures and faces the prospect of federal legalization, Registre said, and in taking a stab at solving this issue, the Curio team hopes to bring industry stakeholders together on what a diverse marketplace really means.

Curio hopes to provide entrepreneurs access to franchises in up to 10 states, which will be chosen based on their regulatory structures and the overall health of their medical cannabis programs. Curio is largely a medical company with a clinical approach to cannabis, Registre said, and plans to launch its franchisees’ businesses primarily in medical markets.

The company is currently awaiting regulatory approval for its franchising model, but once it has the green light, it will establish an application process for prospective franchisees in early 2021. Registre will work with Curio’s president of retail services, Andy Cohen, to develop specific criteria for applicants.

“[We want potential franchisees] to be a great leaders, but there’s also an aspect of being excited for regulation,” Registre said. “We really need people who … are willing to color inside the lines, to really make sure that compliance is at the forefront of the management of the store.”

Curio will require franchisees to appoint a clinical director for each store, he added. “In a lot of cases, we expect that a clinician will seek to be the franchisee themselves and serve as the clinical director, and then [will hire a team with] experience around retail, marketing, sales and all of those other skills that will make for a successful store.”

As the franchisor, Curio will provide launch support to franchisees for the first six months to a year, including help in the licensing process, initial employee hiring and training, site selection, and the buildout of the dispensaries. In the longer term, Curio will help develop standard operating procedures for its franchisees, as well as provide day-to-day guidance in running the stores.

The company also offers Curio College, which will educate franchisees and their teams about the clinical aspects of medical cannabis.

“We need a mechanism to keep our franchisees and their employees current on the latest in research and development in the space,” Registre said.

Curio is currently fundraising for the program and is about halfway to its $30-million goal, which will ultimately allow the company to help launch 40 to 50 minority-owned dispensaries.

Curio’s franchising model ultimately leads to 100% ownership for entrepreneurs, Registre said, as the fund is structured as a launch vehicle rather than a permanent investment in each store. The franchisee will purchase the fund’s ownership over time, he said, and as capital is returned to investors, it will be reinvested in even more minority-owned businesses.

“From our perspective, when we looked at the opportunity to make a statement about diversity, it’s hard to assemble all the components to drive a long-term impact,” Registre said. “Even if you’re able to support an entrepreneur in receiving a license, there’s a need for ongoing support so they can get their business established, let alone operate successfully over time. So, we’re really enthusiastic and we have a lot of conviction around the idea that pairing the financing with the franchise element creates … a long-term relationship.”

Updated: 1:51 p.m. Eastern Standard Time, Dec. 4

The U.S. House of Representatives has passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, H.R. 3884, to remove cannabis from the U.S. Controlled Substances Act. It passed 228-164.

The bill will now go to the U.S. Senate, where Congress members expect it will not pass.

Cannabis’ removal from the U.S.’ list of controlled substances, said U.S. Rep. Sheila Jackson Lee (D-Texas) in a Dec. 2 Rules Committee hearing, “means that going forward, individuals could no longer be prosecuted federally for marijuana offenses. This does not mean that marijuana would now be legal in the entire United States—a very important point. It will simply remove the federal government from the business of prosecuting marijuana cases and will leave the question of legality to the individual states.” Jackson Lee is an original cosponsor of the act.

RELATED: UPDATE: UN Votes to Remove Cannabis From List of Most Dangerous Drugs 

In addition to descheduling and decriminalizing cannabis, the MORE Act creates a “Criminal Justice Office,” which will, among other things, create a grant program to provide job training and reentry services; and provide legal aid, including for the “expungement of cannabis convictions.”

The act places a 5% federal tax on the sale of cannabis products; that tax will then increase by 1% each year and cap at 8%, according to Congress members who spoke during the Dec. 4 full-floor U.S. House debate.

It also directs the Small Business Administration to create a “Cannabis Opportunity Program” that would “assist small business concerns owned and controlled by socially and economically disadvantaged individuals.”

Vice President-Elect Kamala Harris originally introduced the MORE Act in the Senate, and Jerrold Nadler (D-N.Y.) introduced the bill in the House.

In the Dec. 4 House debate on the MORE Act, original cosponsor Barbara Lee (D-CA) expressed her support for it.

Matt Gaetz (R-Fla.) is the only Republican in the U.S. House or Senate to cosponsor the MORE Act, according to Congress.gov.

RELATED: How U.S. House, Senate Results Could Influence Cannabis Legislation

The Dec. 4 vote was bipartisan, with five Republicans and one Independent voting in favor of the act. Six Democrats voted against it. 

Gaetz said in the Dec. 4 hearing that Congress members who oppose the act are not aligned with the opinions of a majority of Americans.

“I’m going to vote for the MORE Act,” Gaetz said during the hearing. “It won’t pass the Senate. It won’t become law. But then we should come back in the 117^th Congress, and we should truly do more for our people.”

Numerous opponents of the MORE Act expressed concerns in the Dec. 4 hearing, as well as in the Dec. 2 House Rules Committee hearing, that Congress should not prioritize cannabis legalization over a new COVID-19 relief package. Supporters of the bill have indicated that the two initiatives are not mutually exclusive.

The Minority Cannabis Business Administration (MCBA) stated in a press release that it supports the bill but opposes specific provisions.

“Although Minority Cannabis Business Association (MCBA) supports and applauds the social equity provisions including the expungement of records and the establishment of an Opportunity Trust Fund and the Cannabis Justice Office, we have grave concerns over the provisions in this bill that we believe would have an immediate chilling effect on individual members in our community and minority business owners more broadly,” stated the release.

A recent U.S. House amendment changed the MORE Act. Alterations include limiting cannabis expungement to people who have been charged with nonviolent federal offenses and to those who have not been sentenced with an “aggravating role adjustment” for directing or overseeing federal criminal activity. It also directs the U.S. Comptroller General to include, as part of broader research on cannabis, the “uses of marijuana and its byproducts for purposes relating to the health, including the mental health, of veterans.”

A little over a year ago, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement (MORE) Act by a 24-10 vote, marking the first time in history that a congressional committee approved a bill to legalize cannabis. Fast forward a year, and the bill is making history again.

Rep. Earl Blumenauer (D-OR), a co-sponsor for the bill and co-chair of the Congressional Cannabis Caucus, donned a cannabis leaf mask as he presided over the floor debate in the House of Representatives on the morning of December 4. After the debate on the floor, the House of Representatives voted 228 to 164 to pass the MORE Act.

While this vote is historic and should certainly be celebrated, it is unfortunately a mostly symbolic win. During the Post-Election Analysis episode of the Cannabis Quality Virtual Conference, Andrew Kline, director of public policy at the National Cannabis Industry Association (NCIA), told attendees that this bill always had strong support in the House, but not enough support in the Senate. “You know I think there is pretty much a 100% chance of it passing the House,” Kline said back in early November. “I don’t think they would’ve scheduled the vote if they didn’t have the votes.”

Kline told attendees that Republican priorities are most likely to blame when the MORE Act fails to get enough support in the Senate. “The bigger question is what happens when it reaches the Senate and I think it is all but dead when it gets there,” says Kline. “Mitch McConnell has been reluctant to move any legislation over the past four years. He’s really ignored most legislation and particularly any legislation he doesn’t like. He doesn’t like cannabis and it appears to me he barely even likes hemp. He’s really not even fighting for the hemp industry.”

While the MORE Act likely doesn’t have a chance in the Senate, it passing the House is still a monumental moment in cannabis legalization history. This marks the first time in 50 years that Congress has revisited cannabis prohibition, according to Justin Strekal, political director of NORML. “This is a historic day for marijuana policy in the United States,” says Strekal. “By establishing this new trajectory for federal policy, we expect that more states will revisit and amend the archaic criminalization of cannabis, establish regulated consumer marketplaces, and direct law enforcement to cease the practice of arresting over half a million Americans annually for marijuana-related violations – arrests which disproportionately fall upon those on people of color and those on the lower end of the economic spectrum.”

Along with all of the success that cannabis had on Election Day, including five states legalizing it, the House passing this legislation is a symbol of shifting attitudes toward cannabis and serious progress on the federal legalization front.

The real question that should be asked is what will the 117^th Congress do? If Democrats gain control in the Senate following the runoff elections in Georgia, it could reinvigorate the momentum behind this bill and offer a renewed breath of life.

Editor’s Note: This article was originally published in the November 2020 State of the Lighting Market, produced by Cannabis Business Times and made possible with support from Fluence by OSRAM. Read the full report in the November issue of CBT.

As chief scientist for LivWell, Andrew Alfred’s priorities include testing any potential facility update or growing change before implementing it at scale.

For the past seven years, one of the inputs Alfred has researched extensively is lighting. Alfred was interested specifically in light-emitting diode (LED) technology for its energy-saving potential, but before considering a widespread change for the vertically integrated company’s 2-acre canopy in its flagship cultivation facility in Denver, he wanted to be sure plant performance wouldn’t suffer.

“Seven years ago, one of the LEDs that we had in our flower rooms looked like a car engine. It weighed 80 pounds,” Alfred says. “We didn’t know how to use the LED light. We didn’t know that you had to raise the temperatures in your room to account for the loss of radiant heat.”

Another common mistake cultivators made in the early days was simply swapping out one grow light for an LED light without calculating lighting density, which was “a growing pain that the industry had to reconcile.”

However, both LED technology and cultivator knowledge have improved dramatically and quickly, Alfred says, and that includes everything from the lights to the mounting hardware. Working with nearly 20 North American and European LED lighting manufacturers, LivWell has conducted multiple cannabis trials over the years, adjusting environmental conditions to optimize plant performance.

Because of the improvements in yield and energy savings, for the past five years, the company has been incrementally converting its entire Denver facility to LED lighting and has almost completed the transition.

Here, Alfred shares some key takeaways he’s learned and tips for cultivators who are considering a lighting retrofit in an existing facility.

1. Experiment before implementing any sweeping change.

Before updating lighting, Alfred recommends requesting samples or investing in a few lights and testing them first, comparing them to current fixtures and observing metrics like yield. Ensuring all parameters are adjusted for new lights, especially temperature, is also important when running trials “to make sure it’s a fair fight,” he says.

“The important thing to remember with temperature is that it is all about the plant, not just the temperature of the air. You can use tools like infrared thermometers to measure canopy temperature,” he says. “Given the same air temperature, a plant under LED could easily be 5 degrees [F] cooler than a plant under HID [high-intensity discharge],” which could negatively impact yield. Raising the air temperature, targeting ranges in the low 80s, can be a successful strategy for growers.

2. Create detailed plans and review them with all involved.

Replacing existing growing lights for LEDs has been a five-year-plus project for LivWell, and in a few months, the transition will be complete. Creating a plan was integral for success, Alfred says, as was reviewing those plans with the lighting manufacturer and engineers. “You have to bring a lot of people to the table to plan that transition,” he says. “We had to coordinate with all parties involved, such as the lighting manufacturers, electricians, [environmental] controls company, permitting office and our production staff.”

3. Establish a relationship with your utility company account manager and ask about rebates.

Once LivWell reviewed and finalized the plans with the lighting manufacturer and engineers, they sent the details to their utility company for rebate pre-approval. Establishing a relationship with your utility company account manager is important for many reasons, whether you are planning on updating lighting or not, Alfred says. When LivWell first explored converting to LEDs, Alfred contacted his account manager to discuss the project and if they qualified for custom rebates.

Colorado was still a young market then, and the electrical engineers from the utility company were accustomed to measuring light using lumens, not photosynthetically active radiation (PAR), Alfred explains. By establishing a partnership with the company, he was able to demonstrate the importance of PAR and the significant savings from LEDs.

Now, engineers from the utility company regularly visit LivWell to review the lighting work and measure energy usage. And for every LED light LivWell has purchased, the utility provides 25% to 40% cash back on the investment.

“It takes a big burden off their power grid,” he says. “It’s better for our business, and it’s better for the utility company.”

4. Install incrementally to minimize downtime.

Once a rebate program is established, the operations team steps in to coordinate the installation, permitting requirements and construction details.

Minimizing the time that cultivation areas are offline is the most challenging aspect of a retrofit, but LivWell was able to do this by working through careful logistics and installing new lighting incrementally. For LivWell, sometimes that meant using a flowering room as a vegetative room temporarily while the actual vegetative room was being converted.

“If all equipment is staged and permits are in order, it can easily be done in under a month. If any of those pieces are missing, it can take a lot longer,” Alfred says. “We had to be flexible with what kind of cultivation we did where to keep our production cadence going.”

Because LivWell runs a perpetual harvest, sometimes they worked row by row, converting lights as each bench was harvested, using tarp barriers as temporary walls to protect plants.

“It really is kind of a monumental effort, and when it’s done too casually, it might result in lost production,” he says. “A good general contractor can quarterback the coordination.”

5. Recalculate sensible loads, and consider other important measurements.

Because HVAC equipment is designed and set to work at specific sensible and latent loads, LivWell needed to work with engineers to recalculate the ratios based on the new lighting that does not emit as much radiant heat.

“A more technical challenge was figuring out how to keep our humidity setpoints while removing 40% of our sensible heat load,” Alfred says. “We worked with our engineers to assess our HVAC’s equipment to handle this change and, in some instances, found that we needed to upgrade our units. It’s very important that anyone considering retrofitting to LEDs do this calculation beforehand.” In some cases, it will require an equipment upgrade, or, at the very least, a setpoint change. “You don’t want to go in blind without having thought through that first,” Alfred says.

6. For vertical systems, calculate humidity, temperature, and extra floor space required.

Because LEDs emit far less radiant heat, growers who convert to this technology sometimes explore using vertical (tiered) growing systems, as lights can be closer to the plants. Although “the sky is the limit” regarding how many tiers cultivators could theoretically have, Alfred recommends caution here. LivWell sticks to two tiers in flower and stops at three in veg.

“The higher you go, the more challenging it gets,” he says. “It can be difficult to make sure temperature, humidity and air movement are equivalent across all tiers. You don’t want your top tier to be a different temperature than your bottom tier, which can happen, especially as you get taller and taller cultivation systems. You can get these stratifications of environment. It’s just like switching to LED, and if you’re switching to vertical growing and LED at the same time, there’s an extra layer of making sure that you do your homework.”

Cultivators must account for extra floor space needed for equipment in multi-level systems, as well, Alfred says.

“Consider how aisle and bench widths need to change between single-level and multi-level systems. You’re going to need wider aisles for bringing a roller ladder … and you’re typically going to want narrower benches to access the plants,” he says. “This means that going vertical doesn’t simply translate to two times or three times more canopy.”

7. Have backup plans–and lights.

With all that’s involved in a lighting conversion, unexpected problems can come up, and that includes issues with lighting equipment.

“Have a tough conversation with your lighting manufacturer about their equipment failure rates,” Alfred says. “Less than 1% is a bare minimum starting point. Then, make sure the manufacturer sends surplus inventory to anticipate the need to immediately swap out lights that have issues. If a manufacturer can’t speak to what their failure rates are, that’s a red flag that they don’t have a lot of experience with quality control and field installations at scale.”

Retrofitting an existing facility with live plants can be challenging, Alfred says, but it’s been worth it for LivWell.

“The LEDs often pay for themselves in 12 months just in energy savings alone,” he says.

Licensed cannabis companies pay more than their fair share of taxes thanks to the business deduction restrictions placed on them by IRS Tax Code Section 280E. That tax law prevents cannabis producers from taking any deduction or credit unrelated to the cost of goods sold (COGS). With some well-thought-out corporate structure, however, cannabis cultivators can find ways to reduce their overall tax burden.

The Research and Development (R&D) Tax Credit is one such vehicle that potentially is available to cultivators, according to Jonathan Storper and Daren Shaver, attorneys with California-based Hanson Bridgett.

“What the R&D credit is designed to do is reward innovation and problem-solving. And there’s really no industry limitation,” Shaver tells Cannabis Business Times and Hemp Grower. “Any business that is eliminating technical uncertainty in the development of products or experimenting and relying on science to really develop a product [is] a very good candidate for an R&D credit.”

Expenses relating to breeding programs, equipment modification and/or design, and developing novel or innovative consumer products can all be used to apply for an R&D tax credit, the attorneys say, as long as the corporate structure separates the plant-touching business from the R&D business. “The corporate structure is extremely important in this kind of thing,” Storper stresses.

Having multiple corporate entities is not new to the cannabis industry and is highly common in other industries. For example, some cannabis companies have created separate corporate entities under which real estate assets are held. That real estate company, which leases the property to the cultivation operation, can then take deductions (as it is a federally legal business) that would not have been available if the cultivation operation held those assets. Thus, that structure lowers the overall tax burden for the cultivation business.

The same idea applies to the R&D credit, the attorneys say.

“The better approach for somebody who’s looking to take the R&D credit is to achieve as much separation [between companies] as possible,” Shaver says.

Easier Path for Hemp Companies

Hemp cultivation companies have an easier path to applying for and receiving these R&D tax credits since hemp cultivation is legal at the federal level and 280E has not applied since the 2019 tax year.

However, Storper and Shaver both emphasize the importance of excellent bookkeeping to keep track of what qualifies as an R&D expense and what does not. “Recordkeeping becomes very important on something like this. … Bifurcating expenses between good R&D expenses and otherwise is very important,” Shaver says.

For example, if a hemp (or cannabis) company has an employee whose sole job is to oversee and conduct research and analysis, that employee’s salary could be used in applying for an R&D tax credit, Shaver explains. If that employee is a part-time researcher, then the company should keep track of how much of that employee’s time is spent on R&D and only use that portion of the employee’s salary when applying for the credit.

Costs for supplies and equipment also can be eligible as long as the research being done is science-based. “I don’t think throwing some extra fertilizer, for example, would be enough [to qualify for an R&D credit],” Shaver says.

If cannabis and hemp cultivators structure their corporate entities correctly and apply proper due diligence in tracking expenses, the IRS is more likely to grant the credit, especially if the research has benefits outside of the cannabis industry (e.g. a new way to emulsify cannabinoids (hydrophobic compounds) into water would have applications to the entire beverage and supplement industry). With that in mind, they advised companies interested in applying for R&D credits take the time to plan out their efforts early in the tax year. “It’s always better to do early planning than try to look back and ask for forgiveness,” Storper says.

Anyone looking to leverage the R&D tax credit also should consult with their legal and accounting team, they say, to ensure the corporations are properly structured and separated.

Licensed cannabis companies pay more than their fair share of taxes thanks to the business deduction restrictions placed on them by IRS Tax Code Section 280E. That tax law prevents cannabis producers from taking any deduction or credit unrelated to the cost of goods sold (COGS). With some well-thought-out corporate structure, however, cannabis cultivators can find ways to reduce their overall tax burden.

The Research and Development (R&D) Tax Credit is one such vehicle that potentially is available to cultivators, according to Jonathan Storper and Daren Shaver, attorneys with California-based Hanson Bridgett.

“What the R&D credit is designed to do is reward innovation and problem-solving. And there’s really no industry limitation,” Shaver tells Cannabis Business Times and Hemp Grower. “Any business that is eliminating technical uncertainty in the development of products or experimenting and relying on science to really develop a product [is] a very good candidate for an R&D credit.”

Expenses relating to breeding programs, equipment modification and/or design, and developing novel or innovative consumer products can all be used to apply for an R&D tax credit, the attorneys say, as long as the corporate structure separates the plant-touching business from the R&D business. “The corporate structure is extremely important in this kind of thing,” Storper stresses.

Having multiple corporate entities is not new to the cannabis industry and is highly common in other industries. For example, some cannabis companies have created separate corporate entities under which real estate assets are held. That real estate company, which leases the property to the cultivation operation, can then take deductions (as it is a federally legal business) that would not have been available if the cultivation operation held those assets. Thus, that structure lowers the overall tax burden for the cultivation business.

The same idea applies to the R&D credit, the attorneys say.

“The better approach for somebody who’s looking to take the R&D credit is to achieve as much separation [between companies] as possible,” Shaver says.

Easier Path for Hemp Companies

Hemp cultivation companies have an easier path to applying for and receiving these R&D tax credits since hemp cultivation is legal at the federal level and 280E has not applied since the 2019 tax year.

However, Storper and Shaver both emphasize the importance of excellent bookkeeping to keep track of what qualifies as an R&D expense and what does not. “Recordkeeping becomes very important on something like this. … Bifurcating expenses between good R&D expenses and otherwise is very important,” Shaver says.

For example, if a hemp (or cannabis) company has an employee whose sole job is to oversee and conduct research and analysis, that employee’s salary could be used in applying for an R&D tax credit, Shaver explains. If that employee is a part-time researcher, then the company should keep track of how much of that employee’s time is spent on R&D and only use that portion of the employee’s salary when applying for the credit.

Costs for supplies and equipment also can be eligible as long as the research being done is science-based. “I don’t think throwing some extra fertilizer, for example, would be enough [to qualify for an R&D credit],” Shaver says.

If cannabis and hemp cultivators structure their corporate entities correctly and apply proper due diligence in tracking expenses, the IRS is more likely to grant the credit, especially if the research has benefits outside of the cannabis industry (e.g. a new way to emulsify cannabinoids (hydrophobic compounds) into water would have applications to the entire beverage and supplement industry). With that in mind, they advised companies interested in applying for R&D credits take the time to plan out their efforts early in the tax year. “It’s always better to do early planning than try to look back and ask for forgiveness,” Storper says.

Anyone looking to leverage the R&D tax credit also should consult with their legal and accounting team, they say, to ensure the corporations are properly structured and separated.

Editor’s note: This story was updated at 5:30 p.m. Dec. 2 to include further detail on the vote, including statements from cannabis companies and CND delegates.

In a historic vote, the United Nations Commission for Narcotic Drugs (CND) voted narrowly Dec. 2 to remove medicinal cannabis from Schedule IV of a 1961 treaty on narcotic drugs.

The CND, a commission based in Vienna with members from 53 different countries, voted on six different cannabis-related recommendations presented by the World Health Organization (WHO). Those recommendations outlined protocol for internationally regulating the medical use of different parts of the plant, including cannabis as a whole, cannabidiol (CBD) and tetrahydrocannabinol (THC). (Kenzi Riboulet-Zemouli, a Barcelona-based independent researcher and cannabis advocate, has a breakdown of what each recommendation would do on his blog.) 

During its meeting Dec. 2, the CND also rejected a recommendation from WHO to schedule medical CBD, leaving it outside of treaty controls. 

However, the vote to classify cannabis remained the main topic of the recent meeting. The CND voted 27-25 to reclassify both cannabis and cannabis resin for medicinal purposes from Schedule IV to Schedule I, removing them from being regulated like some of the world’s most dangerous drugs. (The CND’s scheduling system works in an opposite sequence when compared to the U.S. Controlled Substances Act.)

In an article on Fundación Canna, Riboulet-Zemouli writes “WHO’s recommendations were unprecedented since the Single Convention on narcotic drugs passed in 1961.”

Experts say this move could not only improve accessibility to medical cannabis across the world, but also affirms international support of scientific evidence on cannabis as a medicine.

“The removal from Schedule IV is … phenomenal news for millions of patients around the world and a historical victory of science over politics,” Riboulet-Zemouli says in a press release.

What the Vote Means for Cannabis in the U.S.

Global accessibility, however, still depends on individual countries’ laws, as each member of the UN holds the power to determine its own cannabis regulations.

As Joshua Horn and Jonathan Dolgin of Fox Rothschild LLP write on Cannabis Business Times, the U.S. has proven to have an influential role in international drug regulations. The U.S. voted for the cannabis reclassification—a move that could signify the country’s interest in moving toward cannabis decriminalization or all-out legalization. (Relatedly, members of the U.S. House Rules Committee also voted Dec. 2 to advance an act that would remove marijuana from the federal Controlled Substances Act.)

“If I had to predict, I think the lower hanging fruit in this country to address is further decriminalizing cannabis as opposed to removing it altogether tomorrow from [the Controlled Substances Act],” Horn tells Cannabis Business Times and Hemp Grower.

U.S. cannabis businesses have embraced the reclassification from the CND. While the move was largely symbolic, cannabis business leaders say they are hopeful for what it represents.

“We welcome the rescheduling of cannabis to only [Schedule 1], as this recognizes the positive impact cannabis has today for thousands of suffering patients,” says Dirk Heitepriem, Canopy Growth’s vice president of government and stakeholder relations for Europe, the Middle East and Africa. “We hope this will empower more countries to create frameworks which allow patients in need to get access to treatment.”

Other recommendations that failed to pass were removing extracts, tinctures and THC isomers from Schedule I status, as well as removing delta-9 THC from its status as a Schedule II substance. (The U.S. voted to remove extracts and tinctures, but voted against removing delta-9 THC.)

“…Government’s failure to accept the more advanced WHO proposals is disappointing and represents a lost opportunity to make the treaty best fit [its] purpose,” Riboulet-Zemouli points out in a press release. “However, none of today’s negative votes will result in any worsening of controls over cannabis whatsoever.”

What the Vote Means for CBD in the U.S.

It’s important to note that the CND was only voting on cannabis and its derivatives that are used for medicinal purposes. Recreational marijuana, hemp and its derivatives, and CBD added to food, topicals and dietary supplements were not subject to CND’s vote. (Hemp and its derivatives are only considered controlled substances by the CND when they are used for medicinal or scientific purposes.)  

This is an issue that became muddled even among members of the CND, Riboulet-Zemouli writes on Fundación Canna, contributing to the commission’s long-delayed vote.

CBD medicinal products, such as Epidiolex, were up for vote because these medications can contain up to 0.2% THC. WHO’s recommendation proposed that these medications be exempt from CND’s purview—specifically, that “preparations containing predominantly cannabidiol (CBD) and not more than 0.2 per cent of delta-9 tetrahydrocannabinol are not under international control.”

As such, the hemp and CBD industries in the U.S. and elsewhere are largely unaffected by the vote.

The U.S. delegate said they rejected the CBD proposal “on legal and procedural grounds.”

“Cannabidiol has not demonstrated abuse potential, and it is not our position that cannabidiol should be or is under the control of the international drug conventions,” the delegate said. “…We believe the member states are capable of determining for themselves what should be considered a ‘pure’ cannabidiol preparation for domestic enforcement purposes based on analytical capacity, abuse liability, and prioritization of prosecutorial resources.” 

 

Cannabis infused products manufacturing is quickly becoming a massive new market. With companies producing everything from gummies to lotions, there is a lot of room for growth as consumer data is showing a larger shift away from smokable products to ingestible or infused products.

This is the fifth and final article in a series where we interview leaders in the national infused products market. In this final piece, we talk with Lisa McClung, CEO, and Glenn Armstrong, senior advisor at Coda Signature. Lisa got started with Coda in 2019 as a board member after transitioning from an executive role at Wrigley. She now heads up the company as CEO and President. Glenn has deep experience in product development and innovation with brands such as General Mills, Whirlpool and Wrigley.

Aaron Green: Okay, great let’s get started here. So we’ll start with Lisa. How did you get involved at Coda?

Lisa McClung: I was lucky. Based on my experience, I was originally asked to be on the board of Coda. I’ve served on nine company boards in addition to my career as an executive at General Electric and at the Wrigley Company where I was heavily involved with innovation. The Board then asked me to consider stepping in as CEO after I’d been working there for six months. I was just overwhelmingly complimented that they considered me and I feel incredibly lucky to be here.

Aaron: Okay, great. Glenn, how did you get involved in Coda?

Glenn Armstrong: We’ve known each other for a long time at Wrigley. I was in innovation for the confectionery side and worked very closely with Lisa. When she became a board member, she asked me to do some advising for her. I’m new to the cannabis industry so, I was really excited about doing something different. When Lisa became CEO, she asked me if I would help her.

Aaron: How do you think about differentiating in the market?

Glenn: I spent 90% of my career on the innovation side working with companies like General Mills, Quaker Oats and Amway. When I think about how to differentiate almost any company I always focus on innovation. In the cannabis industry, everybody’s got gummies and chocolates but you’ll hear people talking about “gummies are going away.” No, you’ve just got to innovate, right? It’s like the carrot peeler from 20 years ago. It used to sell for about 25 cents, and it was all steel and now they sell for $10.99. Who would have known?

I believe anything can be innovative. When I looked at the gummies I asked, “what we learned at Wrigley, can we bring into Coda that currently is not in this industry?” Think about various gums and how they can change flavors over time like Juicy Fruit which dissipates really quickly and that’s just how the flavor is.

Or, there are other ways like spearmint. You can get an initial boost and then extend that flavor by encapsulations. I don’t see much of that in the cannabis industry. It’s just taking what’s out there from flavor companies that people like and getting them into this market.

Aaron: Awesome. Do you have any particular technologies or work or products from other industries that really interest you?

Glenn: I would say it’s going to be from the pharmaceutical industry. You think about THC and CBD being so hydrophobic. With chocolate, it’s not such a hard thing to get into. If you try to get those kinds of compounds into aqueous solutions though it can be a challenge, the drug industry has been doing it for years! So, to me, delving into some of their patents and some of their ideas, that’s one of the most powerful industries I see where we could utilize their technologies to advance the industry. I expect big pharma to get into this. We can start looking at what they’re doing that we can leverage quickly to get into Coda products.

Lisa: We’re not necessarily a pharmaceutical brand, but we are committed to helping people live and feel better. It really is about how you weave cannabis into everyday life?

We have a platform of very indulgent products, which is our chocolates ranging from truffles to bars. We also are building our non-chocolate portfolio to include other ways to enjoy cannabis in their daily life. And then to Glenn’s point, I think there’s ideas and technologies from the pharmaceutical area, there’s also things that have been in the food industry for years that provides sensations and experiences.

I think part of our goal is “how many of the five senses can we touch from people in creating product?” The feel of something in your mouth heating, cooling. Not just the psychoactive aspect of it, but the complete end-to-end experience.

These are all dynamics of us delivering the “live and the feel” piece of it. Then people can either use them from a lifestyle perspective for enjoyment, or a medical perspective. Our job is to provide consumers choices and options that provide those type of experiences.

Glenn: If you have a product that’s supposed to “reduce anxiety” why not start with the slight warming of the mouth? Something that feels calming long before the THC or CBD kicks in? Then have a flavor come up that just feels warm and comfortable. By combining all five senses, you have a product that really does something for your consumer.

Aaron: Thanks for that! What’s your process for creating a new product at Coda?

Lisa: Well, I think everybody talks about brainstorming sessions like innovation is something that just pops up. I think innovation has three legs to it. One is really customer-driven. So, we have to produce products that help our retailers make money, and that deliver really good experiences to consumers that we jointly serve.

The second piece of it is thinking about the discipline of innovation. So, when we make a product, what technologies do we bring to bear, can we scale them, and can we produce them at the right price point and delivery?

Then the last piece is the fun piece, trying to listen to what is and isn’t being said in the market to really try to be a solutions company.

We spend a lot of time listening and watching the market to figure out where we can anticipate things. We used to call it “problem detection” at Wrigley.

One project that Glen and I worked on was a mint that was designed really around adult usage in more professional situations. So, meaning the shape of the mint needs to be tucked in your cheeks so you couldn’t see it. And the packaging of it was something you could surreptitiously pop underneath the desk because we were designing it for people to use as really a business tool. You don’t think of mints as a business tool, but they really are, they give you more confidence with breath-freshening and you don’t necessarily want to hold that out with everybody else.

Some problems are about how to make a product more fun with our fruit. I can put pineapple jalapeño in my mouth and have a literal popping experience, which adds to my enjoyment of that experience.

The last piece is not to do too many products. One of the things that I think of in cannabis is that everybody’s still learning. It’s such a wide-open space, in some cases, that you also have to kind of pick what you do well. So, sticking close to our brand and what we stand for is also something that we’re trying to do. We’ve actually pulled in our SKUs recently and are trying to focus on a platform of indulgent experiences and of lifestyle products. We try not to do everything that we see out in the market and focus only on the things that we do well that solve problems for our consumers.

Glenn: From my perspective — I am not a big process person — I think the best way to do it is to say, “okay, we’ve got these products. We could look at technology, we could look at something else, but let’s just go scour what’s out there. And let’s get outside of our industry.” Look outside your own game, and see what you can use.

Discovering how to use these technologies in a gummy or chocolate as opposed to just drugs isn’t rocket science. My biggest avenue is looking outside and finding what you can apply as opposed to trying to reinvent everything.

Aaron: We’ve focused on the front end of innovation. Can you articulate on the back-end how that moves into product development, manufacturing and commercial launch?

Lisa: We have a new product pipeline with a Stage-Gate process where we will have a number of ideas and whittle them down on certain criteria.

Sometimes the ideas start with the technology and not the market. Glenn will find something and say, “Hey, this is going on, should we be thinking about this in cannabis?” It allows our each of our teams to come up with how they can make it work.

Then, as that product passes through the next stage-gate, we’re looking at the actual economics of the product, and how it fits relative to our other products all while we’re getting consumer input.

We get to that point in the process when we start trialing with consumers to help decide. And sometimes you get the best idea in the world, and then it’s not going to work so in some cases so you put it back in the pantry.

I never like to say that we don’t take an idea forward, even products that we may have taken off the market, we say “we freeze products, we don’t cut products!” because our goal is to have options. Our discipline is around a Stage-Gate process tied to our business goals and objectives. It’s also about playing around with concepts and seeing what materializes.

Glenn: There is this whole notion of a process, there’s a Stage-Gate, but before that, it’s a lot of playing around. What Lisa and I’ve recently worked on was making innovation a way of life so that every time you see something, you say something.

“We don’t think of innovation solely as the next flavor that’s going to be on the shelf.”We always gave people permission to play in the web.The reason brainstorming sessions don’t tend to work, is we expect people to become innovative in these next five hours.

So, if you think of innovation as a way of life, then it becomes what you do daily, and you look at things differently. I like to say when you’re driving home, go a different route, because you never know what you’re going to see. When you get out of that habitual mindset, you’ll think about your business differently, almost naturally. Innovation — this way of life — is one of our buzzwords.

Lisa: I think building that innovative culture is a responsibility, but also a challenge for a company like Coda. I mean, we’re not new. We’ve been around five, six years and we have some of the leading chocolate bars out there. We’re known for flavor systems.

Where our goal is to create a culture of innovation, you get these little pockets of creativity and innovation, and then it starts snowballing. You build on it, get people excited about it, and move it forward. That’s how everybody gets involved in innovation.

One of the goals of that pipeline process is to combine inspiration and discipline. But you don’t just want to be innovative in the next flavor. That isn’t doing enough for our consumers. We’ve educated them on the potential flavors could bring. But now we really want to be much more innovative across the board and see what kind of culture of innovation Coda can do.

We’re looking at the packaging, how we interact with retailers, how we use digital messaging to support our retailers and support our products. We don’t think of innovation solely as the next flavor that’s going to be on the shelf.

Aaron: From a supply chain perspective, how do you go about sourcing ingredients?

Lisa: We have some wonderful partners that have been with us at Coda. People that bring us chocolate from other parts of the earth.

We continue to keep building our ecosystem of partners. We look at different flavor houses and different food type researchers to be partners with us to broaden our ecosystem. It’s something that’s very much top of mind, even more so during COVID, because we’re feeling  very fragile about our supply chains.

Glenn: Yeah, I think Lisa, that’s one thing you and I bring, not only to Coda, but I think to the cannabis industry, is the whole CPG discipline of how we look at suppliers and procurement. We need to go out there find some smaller flavor labs with incredibly creative folks.

I think the whole notion of expanding the supplier and vendor base, is pretty unique in this industry and that’s one of the strengths we bring to Coda.

Lisa: Our goal is to really create an ecosystem of different suppliers. I just think that that’s something other industries — you talked about pharmaceuticals earlier — have done. Cannabis is just starting to get there, but that’s where you get exponential opportunities.

We’re really looking at cross-functional and interdisciplinary teams with outside partners. Cannabis is at the stage now where I think it’s looking for more sophisticated technologies and new ways of deploying. We’re also really interested, as Glenn said, in some of the younger, more entrepreneurial firms that want to possibly expand their reach into cannabis as well.

Aaron: Okay, great. So my next question is can you give me an example of a challenge that you run into frequently? And this can be either a cannabis challenge or a business challenge?

Lisa: I think one of the challenges that cannabis faces in general is educating consumers about our market. One of the opportunities we have is to bring people into the market. We’re at the same time developing products for people who are in the cannabis space and are active users and have varying degrees of understanding of how they’re using the category in their daily lives.

We’re also trying to create products and education to invite people into the cannabis market. That’s a different challenge than if you’ve had an Oreo cookie, and people kind of understand cookies. They understand Oreos, and then they understand organic Oreos and all the other permutations of two chocolate cookies with a vanilla thing in between. Our goal is to expand the ability for people to access cannabis in their lives.

That is a very unique business problem. And it does represent a bit of a screen, are you going to do some of your products for more sophisticated users and others for less sophisticated users?  Cannabis has consumers that have been taught essentially to think about milligrams; there’s one of the key components of choice. People will look at the product and flavor, and then they look at the milligrams and the price point.

That’s very unique to what we would find on CPG. You don’t necessarily look at dollars per milligram when you buy a cookie. So, if you’re trying to make a premium product with premium flavors, how do you say, “Well, yeah, there’s dollars per milligram, but this product has all these other technologies to create the warming or whatever.” “Innovation in products and new categories is critical to get the industry beyond common confections.”

So you kind of have a dual issue. You’re trying to get people educated on a new category and how they use it. But the education of the consumer in terms of the potential and the possibilities that they can access is going to be very important.

Aaron: What trends are you following in the industry?

Lisa: Beyond paying close attention to legalization progress across the country and monitoring how states are setting up their regulatory standards, we’re focused on which consumer demographics are incorporating cannabis into their wellness and self-care practices—and how Coda Signature products fit into their daily routines.

Glenn: For edibles, “fast acting” is probably beyond a trend and it will be interesting to see where this nets out. Consumers appear to be balking at the slightly higher price point for fast-acting gummies, but there may be a market for after-dinner dessert items. In other trends, use of minor cannabinoids and terpenes for specific benefits appears to be a solid consumer need, but this is going to require solid science to see if these products truly work. Innovation in products and new categories is critical to get the industry beyond common confections.

Aaron: Okay great! Lastly, what would you like to learn more about?

Lisa: We’re fascinated by the technological advances being made in the cannabis industry, and how those achievements may enrich the consumer experience moving forward. We’re also interested in the growing body of scientific research around how cannabis products can enhance people’s health and wellness.

Glenn: U.S. legalization and the constant changes in regulations require someone to distill the information and do a weekly report on changes.

Aaron: Thank you both! That concludes the interview!