Why I work with unlicensed cannabis businesses

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This guest column is from Paula Collins, EA, Esq., a tax attorney dedicated to the cannabis industry and a co-founder of the NY Consortium of Cannabis Accountants. She can be contacted at paula@paulacollinslaw.com. The views and opinions expressed in this article are those of the author, and do not necessarily reflect the views or positions of NY Cannabis Insider.

I’ll never forget the day I decided to work with unlicensed cannabis clients. It was in March of 2022, almost a full year after then-Governor Andrew Cuomo signed the law that created a regulated marijuana industry in New York.

Prior to that fateful day, I had been entrenched in the “no, I’ll never work with an unlicensed business” mindset. This bright-line encampment is common among many cannabis industry ancillary professionals, including attorneys, accountants, security providers, construction companies, software providers, banking, and more. The unlicensed business owner is treated like a leper in the majority of the regulated marijuana industry groups and conferences.

My white-light experience happened while I was on a video call with a prospect. The gentleman I was speaking with was part of a group of legacy business owners who had been recommended to me by a “handler” of sorts. Each business was separately owned. The businesses were each uniquely operated according to the guidelines set by individual owners. Their connecting activity, and what brought them together as a conglomerate (my term, not theirs), seemed to be centered on a shared marketing internet platform. At times, the members also shared wholesale suppliers.

The men and women in this conglomerate had each spent years, some of them decades, running the streets and managing formidable enterprises that put many small businesses to shame in terms of gross profits and job creation. Many of the business owners had substantial academic credentials, including doctoral-level studies. Some had successful careers in financial services industries. Several had successful music careers, and were earning royalties from recordings. Others were graduates of the proverbial school of hard knocks, but had talents in coding, in graphic design, or in the genetics of marijuana cultivation.

The handler contacted me to explore licensing opportunities for the members of the conglomerate. Specifically, they needed help getting their tax filings in order in anticipation of applying for a New York cannabis license. Eventually, they hoped that the entire group would get licensed. They wanted my help to start the process of getting the businesses in the conglomerate ready to submit applications when they came available.

Notice that the organization and its handler reached out to me. They genuinely and sincerely wanted to get the businesses into compliance in the State of New York. I emphasize this as a rebuttal to those who say that the unlicensed business owners have no interest in getting licensed, and as soon as they make their money, they will exit the market.

The client I was speaking with when I had my big “aha!” moment had a delivery business that consistently brought him mid-six-figure profits and employed about 40 people. Leaning heavily on my accounting training from DopeCFO, as well as being schooled in the Rules of Professional Responsibility by the New York Board of Law Examiners, I was determined that all conversations and substantive work with clients would be limited to discussions leading up to licensure, and the work thereafter as a licensed business.

I would not work with a business owner unless they were willing to sign an affidavit in which they were to explicitly commit to working towards licensure. If ever they disavowed themselves of the goal of getting licensed, I would immediately sever ties with them.

I think back to that mindset now. How “bougie” that must have seemed. How arrogant of me to think that the men and women who had literally saved this plant for our society were merely engaged in a prolonged adolescent crisis, as opposed to the real adults who were there to teach them about running a grown-up (licensed) business.

After we talked for a while, I said to the prospective client, “The state regulators are saying that they won’t penalize you for having a legacy business, but they are suggesting that you should suspend operations while waiting for the license applications to open up.”

He spluttered and stammered. The client said that he knew that the state would like for him to cease operations. He thought about it a lot, but ultimately determined that he could not. He worried about the risk every day, but he simply felt continuing his business was the best of all of his options.

I asked, “Even if it means that they will penalize you moving forward? In other words, they say they won’t penalize you for past legacy activity, but while they get the regulated market up and running, they want you to stop. You might not get a license if you get caught from this point on.”

He calmly stated his truth. “I have been a weed dealer all my life. I’ve made money as a musician, and I still have steady royalties coming in. But basically, I sell weed. I’m good at it. If I get caught, well, I’ve been caught before and I’m still here. Where else am I going to earn this much money? In fact, where else am I going to earn ANY money after Covid? And it’s not just me – I have other people who rely on my income. I can’t let them down. I support three households with my income from selling weed.”

“Three households?” I asked.

“Yes. I support my grandmother. I support the household where my daughter lives. And I support myself. And, Ms. Paula, I don’t know what my 40 employees would do if I closed up ‘til I got a license. They also support their households. And some of them support their grandmothers and babies’ houses, too. If I close up shop, or if my business dwindles down to nothing while I sell CBD, that’s a lot of people that’s gonna lose their jobs all at once.”

At that precise moment, I realized that if the state was saying that they were willing to work with legacy operators, they could not delay the roll out of the licensing a single day more. If they hoped to build any type of relationship with the existing marijuana business owners, they needed to understand a basic truth: for many people, selling weed was not an “investment”; it was the hard-scrabble reality of how they paid the bills for themselves and the people they loved.

The overwhelming majority of my unlicensed clients are of a mindset that, for lack of a better term, I call the “creative class.” The overwhelming majority are musicians or visual artists, or both.

My clients think outside-the-box. They are survivors. They can problem solve on the fly. They work efficiently and tirelessly.

My unlicensed clients are not “dealers” or “thugs” or “potheads.” Contrary to what politicians say, these are not mere “opportunists” who care nothing for the community around them. In some cases, my clients are people who are actively managing their cash-based marijuana businesses (and paying employees from the community well above minimum wage) while simultaneously schmoozing with lawmakers and advocates to advance the regulated industry. Is this inconsistent? No – the individuals I meet are passionate about the plant and want to advance marijuana businesses of any variety.

Most of the people I meet in the unlicensed cannabis world are men and women who have the same concerns I have: making enough money to support themselves and their families, saving for retirement, and helping as many people around them as possible.

Consistently, my clients express the desire to do what it takes to comply with the application requirements, and to step into the light of day as business owners. I’ve got one guy who calls me, like clockwork, once a week and says, in his heavy West Indies accent, “Surely there is some kind of a license you can get for me! All these people up here in my shop – there’s got to be a way I can pay my taxes and move on with my business to make it grow.”

I don’t wish ill on the regulated industry. In fact, I have licensed clients whom I also admire. And I have clients who have made the leap from unlicensed to licensed.

Now about my professional peer group: I have professional colleagues who get downright giddy over the rules and regs. The licensing frameworks in most states are the complex product of legislative and regulatory committees. The text is not designed for the layperson; the codes and references are in legalese known only to the privileged few.

Every new social equity program, drafted by lawmakers to build a state-based industry, is prefaced with weeks of webinars and meetups. Consultants circle like sharks, eager to offer a business plan in exchange for an agreement to sign a contract somewhere along the path to scoring millions in multi-generational wealth (while also generating a retainer fee for themselves). Pro bono legal services provide outreach. Politicians grandstand about the new era of marijuana reform. The messaging is usually along the lines of telling people that the time is now to set up your very own state-licensed shop and to build multi-generational wealth.

Sadly, for every social equity program, or that matter, for every license program, someone gets left out. They don’t land in the right ZIP code; they can’t prove certain charges; they are too much or too little; not enough this, or not enough that.

It’s confusing and it is disheartening.

It is estimated that 85-90% of the weed that is sold in this country is unlicensed.

Let that sink in: 85-90% of all marijuana that is sold, even in mature markets, is through the grey market.

Let’s wake up! It is short-sighted to ignore the unlicensed market. Their sales run circles around the sales generated in the licensed dispensaries.

Put another way: why are we spending enormous time, energy, and financial resources on micromanaging 5-10% of the market?

Wouldn’t we be better off finding a way to work with (and tax!) the remaining 85-90% of the market?