Hartford Business Journal

HARTFORDBUSINESS.COM | FEBRUARY 6, 2022 25 FOCUS: ACCOUNTING EXPERT'S CORNER PROJECTED TAX REVENUE FROM ADULT-USE CANNABIS SALES IN CT TAX TYPE FY 22 FY 23 FY 24 FY 25 FY 26 6.35% sales tax $2.1M $12.5M $23.8M $36.8M $37.7M State cannabis tax $1.0M $7.9M $9.6M $17.0M $17.5M Municipal cannabis tax $1.0M $5.9M $11.2M $17.4M $18.2M TOTAL $4.1M $26.3M $44.6M $71.2M $73.4M Source: Office of Fiscal Analysis Cannabis companies under 'magnifying glass' as state hires industry auditors By Andrew Larson alarson@hartfordbusiness.com A s the state Department of Revenue Services works to ensure compliance and reduce the tax gap – the difference between taxes owed and the amount that is paid on time – Commis- sioner Mark Boughton said in an interview with the Hartford Business Journal that his agency has hired five cannabis auditors. The new DRS examiners will not only enforce the state's tax laws, but help cannabis companies ensure they're collecting the correct amount and remitting it properly and on time — generally the month after the end of the month to which the tax applies, said Robert Lickwar, a partner in national accounting firm UHY LLP's Farmington office. The pay-as-you-go model is meant to help companies avoid situations where they owe a larger-than-expected amount at the end of the tax year. "They're hiring people number one for enforcement, but also number two, to get people through the process," Lickwar said. The state projects $4.1 million in tax revenue from cannabis sales in fiscal 2022, with that number expected to grow to $73.4 million by fiscal 2026, according to an Office of Fiscal Analysis report. By design, the state's cannabis tax scheme is cumbersome. There are three taxes on retail sales: • The state's usual 6.35% sales tax; • A 3% sales tax dedicated to the city or town where the sale occurs; • And a tax based on THC content that will cost about 10% to 15% of the sale price, according to the Department of Revenue Services. The total tax on retail sales is about 20%, the same as in Massachusetts, where recreational pot legally hit the market in 2018. "Just to deal with that administra- tive burden of calculating out those Claiming the Employee Retention Credit: How to qualify and avoid scams By Brenden Healy B usinesses can still claim the Employee Retention Credit (ERC) if they had to tempo- rarily or permanently close opera- tions due to COVID-19. The ERC program generally allows for a three-year window for businesses to claim the credit. Therefore, businesses can claim the 2020 credit until April 15, 2024, and 2021 expenses by April 15, 2025. ERC basics To encourage companies and organizations to keep their employees on payroll, the ERC was enacted by the Coronavirus Aid, Relief and Economic Security (CARES) Act and signed into law in March 2020. In 2021, the Consolidated Appro- priations Act, 2021 (CAA) and the American Rescue Plan Act (ARPA) amended and extended the credit. The ARPA amendment allows small employers that received a Paycheck Protection Program (PPP) loan to also claim the ERC. For 2021, an employer can receive a 70% credit for the first $10,000 of qualified wages paid (i.e. $7,000) per employee in each qualifying quarter of 2021. This could be a 2021 maximum of $21,000 per employee. This is an increase from 50% (or $5,000) per employee for all 2020. The credit generally applies to wages paid or incurred from March 13, 2020, through September 30, 2021. Additionally, the cost of employ- er-paid health benefits can be included as part of employees' qualified wages. How to qualify In order to be eligible for the ERC, employers must have: • Experienced a full or partial cessa- tion of operations as a result of government-mandated restrictions on commerce, travel or group gatherings during 2020, or the first three quarters of 2021, due to COVID-19; or • Experienced a considerable drop in gross receipts in 2020, or the first three quarters of 2021; or • Been considered a recovery start-up business during the third or fourth quarter of 2021. Avoiding ERC scams The IRS is cautioning employers to be vigilant of third parties that may be encouraging them to claim the ERC when they are not eligible. Some third-party providers, often referred to as "ERC mills," are guaranteeing businesses a refund without fully understanding the employer's circumstances. These providers may use various means of communication, such as emails, letters, voicemails and even television advertising, to reach out to businesses. When businesses respond, these "ERC mills" may make false claims for write-offs related to the credit, which does not align with the taxpayer's eligibility and calculation of the credit. These third parties may also neglect to inform businesses that wage deductions reported on the companies' federal income tax returns must be adjusted to account for the credit amount. Thus, the ERC is taxable to the business, unlike PPP loan forgiveness. Businesses should cautiously approach advertised schemes or direct solicitations that promise excessive tax savings. Incorrectly claiming the ERC may result in the credit being repaid along with penal- ties and interest charges. Brenden Healy is a tax partner in the Hartford office of accounting and consulting firm Whittlesey. Brenden Healy An employee at cannabis grower CTPharma's Rocky Hill plant rolls joints for recreational sale. HBJ PHOTO | STEVE LASCHEVER taxes for the consumer and then finding a way to incorporate that automatically into your point-of-sale system was certainly a challenge for retailers," said Sarah Westby, co-chair of Hartford-based law firm Shipman & Goodwin's cannabis industry practice. Many companies are working with attorneys and accountants to ensure compliance. "You have to treat your tax compli- ance like you treat your operational regulatory compliance, which is, you need to dot your I's and cross your T's because the industry is under a magnifying glass, espe- cially as new states come online," said Jeremy Shaw, a partner with national cannabis law firm Vicente Sederberg.

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