Cracking the Cannabis Cash Code: Essential Tax Tips & Strategies w/ Zach Gordon (Propellor Industries)

Episode Description

In this episode of Kaya Cast, we dive into the complexities of taxes and finances in the cannabis industry with Zach Gordon, VP of Accounting at Propeller Industries. Zach shares insights on the importance of understanding tax codes like 280e, maintaining proper cash reserves, and keeping up with ever-changing state regulations.

We also discuss the potential of blockchain technology for compliance and reporting, the challenges and opportunities in New York's cannabis market, and the importance of cultivating a fun and growth-oriented company culture. Join us for this informative and entertaining conversation that covers all aspects of navigating the financial side of the cannabis business!

Zachary Gordon is a Certified Public Accountant (CPA) with over fourteen years of professional experience in financial statement compilations, reviews, and audits, technology and financial framework implementations, and business advisory services. He has advised clients in various industries, including crypto, cannabis, real estate, healthcare, nonprofit, fintech, media, and consumer goods. Currently, he serves as VP-Accounting for a portfolio of Propeller clients.

Before joining Propeller, Zach held leadership positions in public accounting firms and startups, where he worked as a Controller, Auditor, and Director of Finance & Operations. He was also a founding member and managing partner of a cannabis-focused technology incubator and investment group based in New York.

Find out more about Propellor Industries at:

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Episode Transcript

Zach Gordon: Just know what you're gonna sell, how you're gonna sell it, who's gonna be doing what, and at the end of the day, how does this thing make money? Making sure that you can fundamentally answer those questions.

it sounds silly, but a lot of operators don't necessarily answer that at a specific level.

Tom Mulhern: Today on the show I have a conversation with Zach Gordon. Zach Gordon is the VP of Accounting at Propeller Industries based out of New York. Zach and I talk about, uh, everything from 280e at, which is the conversation I have with a lot of accountant, CPA professionals because 280e and those tax codes are so important.

In any business following the right tax legislation is important, but especially in cannabis where your license is on the line if you don't do it properly. And so we talk about 280e, we talk about 4 71. We also talk about company culture and, uh, really building a growth mindset into your day-to-day operations, which is gonna translate into a fun place to work.

You know, we kept going back to the theme of working in the funnest industry that's out there. And, uh, I really appreciated Zach's authenticity, his candor, and willing to be as he put it, a little corny and just say, You know what? This is a fun industry. This is a great place to be and we need to celebrate that and so I really hope you enjoy this conversation with Zach Gordon from Propeller Industries.

Tom Mulhern: zach Gordon is a CPA with over 15 years of professional experience across multiple industries and functions. He has extensive experience in financial statement, compilations reviews and audits, technology and financial framework implementations, deal and business structuring, due diligence, and business advisory services.

He has advised clients in the crypto, cannabis real estate, healthcare, nonprofit, FinTech media, and consumer good sector. Zach currently serves as the VP of accounting for a portfolio of Propeller clients. Propeller Industries is a fractional C F O and accounting partner to companies that have outgrown bookkeeping but aren't yet able to support a full-time finance.

A broad range of services ranging from c f O level strategic planning to day-to-day transaction processing through their team of full-time CFOs and accountants. The firm serves 300 plus clients across a diverse portfolio of industries, including e-commerce, technology, food and beverage, manufacturing, business services, and cannabis.

Well, Zach, Welcome to the Kaya Podcast. It's amazing to have you on here calling in all the way from New York.

Zach Gordon: right. Thank you so much for having me.

Tom Mulhern: Tell me a bit about your background in your bio. You know, you've worked in all these different industries, but tell me a bit about your background and how did you get involved in cannabis?

Zach Gordon: So I've had what you would call a bit of a non-traditional career in that star from public accounting, sort of the similar path that most in that industry go down. It got to the point where I could stick around or jump to the other side of the table and I made the jump. So wound up in private equity and, and learned a ton on that side.

And while I was there, I wound up uh, getting together with a few people and doing a little tech project on the side. And that project wound up scaling up and then, very long and interesting story short wound up in a WeWork and in the office next to mine was a retired Wall Street professional who's deploying capital into the space.

And basically we put our heads together and started to figure out what, how do we properly invest into this? And this was back in 2016 where there wasn't uh, as nearly a developed framework or even more specifically, network of opportunities as there is now.

So long story short, wound up founding the cannabis Committee for the New York State Society of CPAs.

I sit on the AICPA committee and have been in the space ever since.

Tom Mulhern: You've gone through all of this change in your career and now you're currently at Propeller industry. Could you kind of give us an overview of the services you guys provide, cuz it's pretty unique. I, I haven't heard of another company that, that does this, especially in the cannabis industry, but what sort of services do you guys provide to your clients?

Zach Gordon: We are fractional or outsource CFOs. But it, but it's not just that simple because at the end of the day, we do wanna represent that back office function. So we want to make sure that from a financial perspective and from an operational perspective, everything's covered.

And that means something very different for not only every industry, but every business. And if you think about just cannabis as an individual industry, you go up and down the vertical, the answers are very different, And they even, they vary on a state by state basis.

So understanding some of those nuances. And really helping to translate what is a very complex compliance and financial picture to something that makes sense to an operator is really our bread and butter and to nerd out. That's, I actually really enjoy doing that. It's, it's very difficult to get that narrative down and when we're able to do that and able to actually explain things in a way that makes sense, you know, we've done our jobs.

Tom Mulhern: How has the financial services industry in, in the cannabis industry evolved in recent years and how are you guys kind of adapting with those changes?

Zach Gordon: I think if you're, listening and, and you're interested in this industry as a whole, you know that taxes are a big, big deal. So making sure that not only are you dealing with the normal cashflow issues that can come up and making sure that, you know, you have the proper reserves in place, but it's taking that next jump to make sure that you're planning for those taxes to be due.

And it's not just the income tax, which is obvious a bigger issue than it would be in any other industry, but it's also making the reserves for payroll tax, ensuring that sales tax is properly handled. There's a lot of nuances here, above and beyond just a, a regular business in another industry. It's thinking about almost two different budgets or two different financial statements for all intents and purposes. So you have your actual operating budget, your cash flow, everything else, and then you have the net effect of 280e. And so looking at that before and after and and making sure that you're accounting for both sides of that, you know, potential.

Tom Mulhern: Well, What are some of the basics that most cannabis operators would need to know about 280e.

Zach Gordon: That if you think there's a workaround, there's not. The risk is way too high to think about some of these workarounds and some of these gimmicks that you can try to employ, they will be broken, they will be busted, and then you're in a much worse position than it instead, you know, just playing by the, the rules no matter how terrible they are right now.

And doing the best you can to ensure that your budgets are in place and. You're, you're safeguarding as best as possible. And I'll give you a great example, and I don't know why this is in vogue again, but several years ago there was a, a little workaround where you would set up a management company and everything would be in the name of that company, all the employees, all, all the contracts, everything else.

And then you would simply just be a, an outsourced service for the actual cannabis operating. And then you would theoretically avoid 280e that way. IRS, Everyone else said, no, no, that, that, that's not gonna fly. And for some reason, that's coming back around again. Slightly different branding this time, but it's the same basic structure.

And, you know, for the life of me, I, I, I just, I don't understand.

Tom Mulhern: If someone's setting something up, cuz I have, I've spoken to people that like, well this is our solution. What, what's kind of the implications of trying to get around the system like that?

Zach Gordon: You're, you're trying to avoid paying tax, which fundamentally I understand. However, There's significant risk in how you're doing it because there are tax court cases. There's not a ton of them. But there are ones that specifically state that you can't do this, that this, this type of structure is, is not acceptable.

So at the end of the day, it will get collapsed. And then not only will you have to pay the tax, but there's penalties, there's fines, and then there's potentially more severe repercussions that come with that. Not to mention no, your, your license could be at stake, and that's, that's a big deal. At the end of the day, that's the biggest asset you have.

Tom Mulhern: What about at the state level, like I'm, again, it's so different from state to state, but what are some of the things on a state tax level that retailers should be aware?

Zach Gordon: Oh man. Now we're getting to some interesting stuff. So there are currently two states officially and a, a couple more states coming that have decoupled from the internal revenue codes, specifically for cannabis and specifically 280e. So New York and California right now have said that they are decoupled, which means all those rules.

All those issues that we just talked about no longer apply, but that's only for the state level. If you're operating in either those states is huge potentially because you're able to actually take those deductions at the state level and you know, there, there's a material effect there.

Uh, New Jersey should be on the way. I believe Massachusetts should be on the way as well and a few other states as well will eventually make that jump, but that's a big deal.

one thing I was gonna highlight though is the necessity for proper documentation. What I mean by that is not only do you need to have your processes down, that's just, you know, the basics for getting your application done and going through the whole process of, of getting your license, but specifically for you, how you allocate cost of goods sold.

Because that's what really feeds into this whole issue around 280e. What can you deduct for tax purposes? What can't you? And coming up with a good definition for yourself of what costs of good sold are. Now if you're a dispensary, the general rule of thumb is it's inventory.

But where it gets more interesting is when you are a cultivator. When you are a manufacturer, it, it can get very interesting because now you're talking about potential personnel costs. So how is someone spending their time and. If only could think of a specific product or platform that could solve that particular issue.

Tom Mulhern: Well, you know, there is a solution for that. Your people management software from Kaya Push, that kind of can track some of that people management. I appreciate the shout out.

Zach Gordon: But that was just a nice natural transition. But joking aside, It, it is super important and not only that, you have that process documented and those allocation policies documented, but that you have the proof and that's where a platform, like a certain one, I can think of really does make the difference.

And I do recommend to, to anyone out there who has a license, who is operating. Make sure that you do have time sheets in place, that you do have these policies there and that you are tracking time. If you wanna make sure that you're covering yourself when you are doing those allocations, those time sheets are everything.

Tom Mulhern: guys' goal is to help people do what they love and that's, that's like our vision at Kaya Push. And most cannabis business owners don't love accounting. Like they don't know the numbers. They love the business, they love the plant. So what are some of those like big mistakes that you see a lot of cannabis operators run into?

Like whether it's misconceptions that they've heard from, you know, their cousin Jeff, who was like, oh yeah, you don't need to worry about 280e or whatever it is. Like, what are some of those common things that you run into?

Zach Gordon: One of the biggest misconceptions or biggest areas of concern all goes back to taxes and not having enough in reserve to make sure that you can make those regular tax payments, because there's areas where you get some flexibility. The government is not in that group. They need their taxes paid when they need their taxes paid. And that's where we wanna make sure that there is this larger than normal cash reserve set up so that that's not a concern.

So we wanna make sure that from a tax planning perspective, we are uh, more conservative than less. So we wanna make sure if it looks like, you know, maybe you're gonna owe, 450,000 in taxes. we're gonna bump it up another 20% just to make sure that we're covered here.

And you know what, end of the day, if it's still in the reserve at the end of the year, great. Then we'll, we'll, adjust move. But those are a couple of areas where they are a really big deal.

And then the other one, and again, this is an area where people management is a really big deal. Still gotta be in compliance with D O L, Department of Labor.

You still have to be in compliance with sales tax, et cetera, et cetera. So all these areas of running a traditional business still matter.

Tom Mulhern: Thinking of a dispensary as just a, it is a traditional business and I've, I've heard you talk about growth mindset and building that into employees and company culture and whether that's, you know, any of the industries that you guys work with. But I'm, I'm sure you probably see that a lot in cannabis as well.

So maybe speak to that a little bit. Your kind of, your, your vision behind building a growth mindset into company culture. Because when I've spoke with you before, I, that was one of the things that really I took away was our conversation about that.

Zach Gordon: it's one of those really intangible things that you just, while, while you can put a budget towards those sort of things and community building and really developing that, that brand, which is a very lofty goal and can be again, a little intangible, it really makes a difference. And this is one of those rare industries where, The crazier you get, the more fun it is.

And end of the day, this industry is a lot of fun. You know, even if you're just uh, doing taxes or debits and credits, if you're just doing financials or if you're growing the plant, or if you're selling the plant through dispensary, should be having fun with it. You know, there's all sorts of fun you can have with merch.

All sorts of fun you can have with developing that unique culture.

Zach Gordon: you're based out of New York, so let's talk a little bit about New York.

Tom Mulhern: What's kind of your outlook for the cannabis market in New York? Being, you know, local and, and seeing what's happening on the ground.

Zach Gordon: So this, this is where it gets to be a little more difficult of a conversation. So again, you would think it's New York. There's all this financial firepower. There's, there's a large population. There's, depending on which economic survey you, you believe there's somewhere between a 3, 4 to 5 billion market today pre legalization and it should be some manner of x percent of that porting over and then over time that, that growing and growing.

So theoretically you can map it that way. However, there is a a lot of work to be done on the legislative framework. There's a lot of work to be done on making sure that everyone has access to proper banking. That there's an understandable framework, not only again from the compliance and and regulatory perspective, but just from an a business and operational perspective.

I know that New York made some very large promises as far as funding, as far as getting mentors set up, as far as getting that experience in place so that a lot of first time business owners would have that. And there's a, a lot of work to be done there. That's where I think a lot of us have tried to donate our time and do want to help in invest in one form or another to make sure that things are set the right way.

But I think long term it, it, it's hard not to see it being a success. But in the short term, in the next few years, it's gonna be a lot of work to, to get it there.

Tom Mulhern: So Zach, what advice would you have for someone who's interested in opening a cannabis business in New York?

Zach Gordon: First, good luck. Secondly, real estate location is, is key. So make sure you have a good location, because that's gonna be everything. It's just like any other retail operation on that front. Again, not to go full accounting nerd on this thing, but make sure you know how you're going to run your business.

So get your QuickBook set up. Make sure that you have your Kaya Push set up, you know, in place, of course. But just know what you're gonna sell, how you're gonna sell it, who's gonna be doing what, and at the end of the day, how does this thing make money? Making sure that you can fundamentally answer those questions.

it sounds silly, but a lot of operators don't necessarily answer that at a specific level. How does this thing become successful? Asking yourself, what do you consider to be a success unit? We talked about culture a little bit. How are you going to define that? Because there's a whole lot of ways to approach, there's all sorts of different target demographics.

Inventory makes a big difference on how you target different demographics. cuz you can't sell everything. You know, there's just frankly not enough inventory and there's not enough cash, honestly, to, to sell everything. So, you know, what do you want your story to be ultimately?

Tom Mulhern: That's really good advice. so important to, from the beginning, think about what, what, what type of a story do you wanna tell with your brand, with, you know, your employees, every, every, every part of it.

Zach Gordon: making sure that you uh, You understand what your story's gonna be, and then hey, we can build a financial model off of that. We can make sure your, your taxes are handled the right way, but before we can even get that far, you need to be able to tell your own story.

Tom Mulhern: You kind of hinted at the fact that you're kind of a tech nerd. I am as well. And you work in crypto and blockchain, so is there any sort of crossover for the crypto blockchain industry with legal cannabis? And I'm gonna put that caveat of legal cannabis because I know there's lots with the illegal market, but can you see a future where crypto and blockchain and these technologies that can create, you know, a sense of security can be used in legal cannabis?

Zach Gordon: Well, you just hit on an awesome point and security is a very interesting part there. So the crypto side, I'm sure many groups will continue to try to figure that part out and I would certainly put a pin in that. But from utilizing blockchain technology, there are some very interesting areas there where if I were a state authority, I'd be paying very close attention to how to set up a proper blockchain network and to utilize it for things like compliance, to ensure that reporting is done in a timely manner.

A blockchain is an instantly auditable and publicly viewable ledger. All you need to do is manage the end points, if you're the state, you got one, you are, you are one of the end points. And then just making sure that on the other side you can properly identify them.

And that becomes a very, very interesting tool.

Tom Mulhern: We use cash for so much of what we do in cannabis and there's no way to track the cash. There's no way to track, you know, where that came from, where it's going. Where the blockchain, you really can track every single step of that transaction.

Zach Gordon: I, I've told this story in the past, but I'll give it one more. very early on in my, my cannabis career, I had a group where they were very successful and they bought a bank branch for the vault itself. And you walk in and there's tens of millions of dollars in cash stacked from floor to ceiling.

You know, they want you to get comfortable with just the sheer volume of cash that's in there. That's not the easiest thing in the world to do. And, and just think about logically how easy it'd be for someone to just, you know, whoop right off the top.

So, moving away from that, and I know things like the Safe Banking Act should theoretically help on that front and legislation like that, it, you know, it's a small step in that direction, but there's gonna be some better answers I think, in hopefully the near term. Those are the little things that, that I look forward to.

Tom Mulhern: Now we'll keep our future hats on. So what are you gonna see as the future of the cannabis industry and what are you and Propeller Industries kind of doing to position yourself as a leader in the industry as as it moves forward towards the future.

Zach Gordon: So in the future, I, I think there will be uh, quite a bit of M&A as we are dealing with a lot of very inexperienced or relatively inexperienced business owners and operators and. They, they will need help, especially as this begins to scale up. And it's just the natural cycle to, to these things.

So after that sort of moratorium period is up, especially New York and New Jersey, you're gonna see some, some changes here. And of course, federal and state, laws as they, they come into play will certainly be interesting to watch on top of that.

From our side, honestly, we wanna help, you know, as corny as that sounds.

I like to think I have a pretty vested interest in making sure that, this industry continues to grow. It's, it's been a long time in, and I, I would like to believe that, you know, as a profession, CPAs have made a, a small and positive impact and that we will continue to do so.

Tom Mulhern: This is the last question I always ask people, but what is, and you worked with so many different dispensaries and businesses and, and all different sectors. So what's one tip you would have for a dispensary owner to grow their business?

Zach Gordon: We talked about it before. It's, it's your brand. It's know your story and developing a positive culture, really, it rubs off on people good or bad. If, you are telling your story the right way, not only what you present to the public but in-house. And also that, that does feed through to, to us as well. So we wanna develop those proper work in relationships and end of the day, we wanna make sure the numbers are right. So, little less stress, a little more positive feelings in, in the uh, in the dispensary, and that things are always moving in the right direction.

Tom Mulhern: Well, and those brand stories are so important. Like I know you could probably think of a handful of brands that are really true to the story that they're telling. And then you, when you get the chance to talk to them, you're like, oh, this is like in, in, inbred, in everything they do. And that's why they are successful the way they are.

Zach Gordon: It really makes a difference. And, it's not something you can necessarily manufacture. And of course you can bring in the right strategists, you can bring in the right consultants, the, you know, the right professionals to craft and distribute the story. But it, you know, especially in this industry, it, it's your story.

And again, it all comes back to having fun.

Tom Mulhern: So how can people connect with you and Propeller? Like maybe there are some businesses that are now growing to that size that they're. We need help. We're, we're, we're too big for our bookkeeper, but we're not quite at that level that we're ready to, you know, bring on a CFO and do all of that. How can people reach out to you, connect with you, and find out more about what you guys are doing?

Zach Gordon: Our website propeller I can always be reached at uh, On social at Zach Gordon cpa. I don't know if I could get a, a nerdier handle than that, but I, I think I found it. If there's technical questions, we have hotline set up through the New York State Society CPAs and through the AI CPA as well.

However you wanna reach out Feel free to, we're certainly not gonna charge, I'm not worried about a billable hour to go through something if there's a real concern. So, uh, end of the day, we really do wanna help.

Tom Mulhern: Zach, it's been. Fantastic to be able to talk to you and, you know, hear your insights. And as a fellow corny person as well, I'll, I'll own it too. Like, I really believe in those, like, those thing, those mantras almost of like, you know, having that growth mindset and telling the story and, and it's, it really does make a difference.

So I, I appreciate you just putting 'em out there and yeah, it, this has been a lot of fun.

Zach Gordon: No, I'm, I'm so glad to be here and uh, glad we could uh, be corny together.

Tom Mulhern: Again, going back to that brand story, what are you telling? What story are you telling with your business, with your cannabis business? What type of a story are you telling in the local community? What do people know about that dispensary that is down the street? Is it one that's reaching out into the community?

Is it one that's reflecting community values, or is it one that. There to sell weed, we have to do better than that. We have to tell a story through our businesses, whether we're cultivators, whether we're ancillary businesses like Kaya Push that are just there to help people do what they love. And, and that's the crazy thing about Kaya Push is that our goal is to help a million retailers do what they love.

And that really is our end goal. . And Zach's encouragement of telling that brand story and being authentic to who you are, your company's gonna grow. Your company's gonna thrive. It's gonna succeed. And so again, I want to thank Zach Gordon from Propeller Industries for his time, for his insights, and uh, for his, you know, on the ground knowledge of New York and the industry that's happening there in New Jersey.

And, you know, he works in states all across the United States. So reach out to Zach, we'll have all of his links in the bio.

And I also wanna thank you for listening to the Kaya Cast podcast. It's been cool to see all the people that are really learning and growing and, and how these conversations that I'm having in my basement are transforming businesses. Be sure to subscribe, be sure to check out, some of our past interviews, especially if there's, specific accounting questions you have.

We've talked to Cultivate Consulting, we've talked to, you know, different bookkeepers. We've talked to our dear friend, at NACAT Pros, Naomi Granger. And, you know, there's so many people working in this industry to to, to make it a better place to work, a better place to have a business.

And so tune in every week to the Kaya Cast podcast for more interviews like this.

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