Steven North: I-502 and Taxes

Steven H. North, an accountant in Spokane, got in touch with me after problems arose at local stores over taxes.

The BiotrackTHC software that many cannabis businesses in Washington use added in a federal tax on the excise taxes that stores pay to the state. The change was made about two weeks ago as a service to customers, the company said.

Biotrack also makes the state software that tracks inventory at growers, processors and stores.

A lot of controversy surrounds that tax and whether it’s legal or not. BiotrackTHC Chief Operating Officer Patrick Vo told me that although the company added the change for customers, the company isn’t responsible for tracking taxes – and that taxes are ultimately their customer’s responsibility.

North contacted me to explain that the tax on excise tax, from his research, doesn’t seem to actually exist.

I asked him to do a post for us explaining what he’s learned.

I’ve also called some federal sources about the tax but haven’t heard much back yet. I’ll let you know what I learn when I do.


Here’s what North said:

By Steven North
North Accounting Services, Inc.

(Steven North)
(Steven North)

Confusion arose concerning taxes following Biotrack’s updated software to include the markup for Washington’s Liquor Control Board’s 25 percent excise tax.

This Excise Tax is levied to your inventory. When you sell to the next level, this “tax” is part of your Cost of Goods Sold (COGS).

According to several recent United States Tax Court decisions, the Court and the IRS Commissioner affirmed that, as an illegal activity, you may still deduct your COGS from the Gross Revenue.

The Internal Revenue Service has set guidelines for determining your inventory COGS.

Department of Revenue (DOR) and the Excise Tax: The DOR’s I-502 Memo says “Amount Subject to B&O Tax … may include,” It does not say “will include.”

Following the DOR instructions, a retailer would be paying an additional sales tax.

There are still a lot of conflicting laws in Washington. These additional taxes will essentially equate to a State income tax.

It was already decided 81 years ago. We do not have an income tax in Washington.

Depending on the services and products you sell, some of your normal expenses may still be tax deductible.

The marijuana businesses and drug dealers (per westlaw.com) that ultimately lost in the United States Tax Court had poor or nonexistent records and bookkeeping.

This is an emerging market.

Up to date records and information are essential for taxes and reporting to the State to stay in compliance.

Marijuana will develop into a multibillion dollar industry overnight.

Dealing with Federal and State compliance is difficult at best.

Avoid cyber-attacks and hackers looking to break in to this business.

Keep your financial records simple, well defined, logical, and local – not in a “Cloud.”

I am not an attorney. This information does not constitute formal written advice.

Steven H. North, North Accounting Services, Inc., steven@northaccounting.org, www.northaccounting.org, (509) 995-3926.