The legal cannabis industry remains fluid and growing as we head into a new year. Two more states approved recreational laws on Election Day 2022, expanding the map where marijuana is legal. A month earlier, President Biden said he would issue pardons for people convicted of simple cannabis possession crimes. Momentum in America continues to build for the pro-pot movement. Could federal legalization be imminent?
For a look into legal cannabis in 2023, we recently spoke with David McManus, CPA, CGMA. He is partner at AAFCPAs Cannabis Practice, a full-service CPA and consulting firm that has advised Massachusetts cannabis companies since 2012, when the state approved medicinal pot. (Recreational sales became legal in Mass in 2018.)
Beverage Dynamics: What should we expect for legal cannabis in 2023?
David McManus: 2023 will be very similar to 2022. It will continue to be a challenging time for cannabis businesses. The impending recession won’t help anything, either. We’ll see a lot more clients and lenders dealing with the negative affects of increased interest rates, which are already high to begin with in this industry.
There’s a lot of competition in the legal cannabis industry, especially here in Massachusetts. I’ve been talking with my clients about how to get ahead of it. I liken it to microbreweries. There’s so many microbreweries now. So the way to stand out from all that competition is to have a great product.
BD: How should cannabis businesses prepare for 2023?
DM: You have to think, ‘How is your brand useful?’ If you have a good, useful product, then you will attract more people.
It’s also about being more efficient. These businesses face cash-flow issues. Especially with tax code 280E restricting tax write-offs at the federal level, and dealing with the sales tax at the state level. So how can you save money through automation? Particularly in plant cultivation, how can you cut down labor costs? Or internally, how can you automate accounting records? Can you do your finances more efficiently?
Then factor in how much more competition is still coming. There’s already a lot of competition in Massachusetts, and listening to the state’s Cannabis Commission, we hear about the staggering number of applicants that are still coming. So it’s also about right-sizing your business.
A dispensary in Western Mass just shut their doors. We might see more of that in 2023.
There’s a lot of potential issues with market oversaturation. For instance, in Mass, the western part of the state relies a lot on people crossing the border from neighboring states to purchase cannabis. But as recreational sales come online in New York, Connecticut and Vermont, businesses could feel the crunch.
BD: How can cannabis companies overcome these challenges?
DM: Branding is key. You have to have a good product. What is the intellectual property behind your brand? I tell clients, too, that you can further capitalize on branding if federal laws change and more people can access your product.
You have to protect your brand as more competition comes in and prices continue declining. Good branding makes you attractive to customers, and protects you from competition from the illicit market, as well.
BD: What will happen if federal legalization does occur?
DM: It changes a lot, nationally. There’s a lot of ‘ifs’ around this, but, for instance, what if interstate cannabis commerce becomes legal? Then states like California with an oversupply of product can transport it across state lines. What does that mean for clients on the east coast who cannot grow year-round? They have invested millions of dollars into grow operations — would those become obsolete? Are there other things you could do with your cultivation facilities? Could you grow other things?
BD: When do you see federal legalization occurring?
DM: I don’t see it happening in 2023. There will be some continued momentum from 2022, but I don’t see federal legalization happening this year. I think we’re still a few years out. But with more and more states voting in legalization, which is gaining more and more acceptance, it’s only a matter of time.
This interview was edited and condensed for publication.
Kyle Swartz is editor of Beverage Dynamics and our sister publication, Cannabis Regulator. Reach him at firstname.lastname@example.org. Read his recent piece, The Alcohol Brands Driving Meaningful Change in DEI.