The Cannabis Special Interest Section was formed to bring education and information to Arizona CPAs to better serve clients while protecting the public in this burgeoning cannabis and hemp industry.
Research shows that in 2021, Americans purchased $24.6 billion worth of cannabis products, a 34% increase over 2020.1 This year the U.S. legal cannabis market is expected to grow by a rate of 18% to $29.2 billion. Analysts forecast that the following states will experience high growth in cannabis sales in the coming year: Arizona (20%), Florida (38%), Pennsylvania (57%), Illinois (58%), and New Jersey (74%).
For Arizona, the addition of adult-use sales gave the state’s overall cannabis market a 31% boost over 2020. Arizona’s licensed adult-use stores and medical dispensaries sold a total of $1.35 billion in cannabis products in 2021, $320 million more than the state’s medical-only dispensaries sold in 2020.2
Medical Marijuana Program
According to reports filed by the Arizona Department of Health Services (ADHS), Arizona medical marijuana stores sold 147,942 pounds of product in 2021 compared to 211,557 pounds of product in 2020 and 165,722 pounds sold in 2019. According to the Arizona Department of Revenue’s (ADOR) Office of Economic Research, medical marijuana retail sales for 2021 were $758.5 million with total sales tax collected of $63.5 million.
As of February 2022, there were 268,309 medical marijuana active cardholders of which 244,523 are qualifying patients. The number of qualifying patients decreased by 19% from February 2021.
Adult Use
In April 2021, the ADHS awarded 13 new adult-use cannabis retail licenses across eight rural counties. In December 2021, in a transaction facilitated by Highway 33 Capital Advisory, the license was sold, establishing a benchmark for these rural cannabis retail licenses.3
According to ADOR’s Office of Economic Research and Analysis, total adult-use marijuana sales reported, and transaction privilege tax (TPT) and excise taxes collected in 2021 were $594,449,941, $50,069,473 and $104,137,763, respectively.
Job Growth
According to the Leafly Job Report 20224, the legal cannabis industry added 107,059 new jobs in the U.S. in 2021 compared to 77,300 and 32,700 jobs in 2020 and 2019, respectively. Arizona ranked eighth (23,333 jobs) out of the top ten states by cannabis-related jobs as of January 2022. Arizona added approximately 2,600 jobs in 2021.
Social Equity Program
In December 2021, regulators in Arizona began taking applications for social equity cannabis retail licenses despite ongoing lawsuits seeking to stop multistate marijuana operators from getting the permits. The deadline for would-be applicants to submit the required paperwork was December 14.5
Arizona marijuana regulators received more than 1,500 applications from cannabis entrepreneurs hoping to win one of the 26 highly coveted social equity permits that were up for grabs via lottery in spring 2022. The lottery took place on April 8, 2022.
280E Updates
In 2021, over 200 pages of internal documents were released by the Internal Revenue Service (IRS). According to the Marijuana Business Daily, “IRS audits of marijuana businesses have generated far more in unpaid taxes, or revenue, per hour for the agency than audits of mainstream industries.” These documents, which are a must-read for all CPAs, include a participant guide, IRS reference guide, training presentations and audit project documents.
Testing/Product Recalls
In June 2021, ADHS issued a voluntary cannabis product recall related to a lab’s testing of possible product contamination. According to azcannabisbisnews.com, the lab indicated that the voluntary recall was not the result of any wrongdoing by the products, dispensaries, or brands, but rather an audit-based testing discrepancy between the lab and ADHS.
In December 2021, the Medical Marijuana Testing Advisory Council issued its findings and recommendations.6
In February 2022, Arizona regulators sent notices of intent to revoke the licenses of two marijuana testing laboratories for allegedly using procedures that could inflate product potency results. The two labs disputed the findings but have settled or plan to settle with regulators, the Arizona Republic reported.7
M&A Activity
Merger and acquisition activity was on the rise in 2021, with almost 3.5 times as many transactions through
Dec. 17, 2021 (306 transactions), as during the same period in 2020 (86 transactions). Public companies were buyers in 86% of the deals. That included 209 in the U.S. totaling $10.1 billion in value8 Arizona has certainly had its fair share of transaction activity in 2021.
Banking Update
According to the Whitney Economics U.S. Cannabis Business Conditions Survey, the lack of access to banking and financial services is one of the main key issues hindering the cannabis market growth.
The Secure and Fair Enforcement, or SAFE, Banking Act says federal banking regulators cannot penalize depository institutions for providing banking services to cannabis-related businesses. Championed by Rep. Ed Perlmutter, D-Colo., the House of Representatives has passed the measure six times, most recently in February 2022, before seeing it stall out in the Senate the previous five times.9
Hemp Update
In January 2021, the USDA published its final regulations, which became effective on March 22, 2021, for the production of industrial hemp in the U.S. In February 2022, the U.S. Department of Agriculture issued the National Hemp Report. In 2021, the U.S. planted and harvested 54,152 and 33,480 acres, respectively, of industrial hemp. Colorado planted the most outdoor hemp last year, 10,100 acres, compared to Arizona’s 790 acres, but Colorado only harvested about a third of that, 3,100 acres. Montana harvested the most hemp last year, 4,500 acres.10
Most recently, the U.S. Department of Agriculture approved hemp production programs for Alaska, Arizona and Montana. Arizona’s newly approved hemp production plan allows producers to grow and sell new products, such as hemp baby greens commercially.11
Looking Forward
Despite the multitude of challenges, Arizona continues to be a state to watch in 2022. As the industry matures and evolves, the economic impact is expected to materialize on both a local and national level.
1 https://www.leafly.com/news/industry/cannabis-jobs-report
2 Ibid
3 mjbizdaily.com 12-14-2021
4 https://leafly-cms-production.imgix.net/wp-content/uploads/2021/02/13180206/Leafly-JobsReport-2021-v14.pdf
5 mjbizdaily.com 12/2/2021
6 https://azdhs.gov/documents/licensing/medical-marijuana/testing-advisory-council/2021-medical-marijuana-testing-advisory-council-report.pdf?v=202110075
7 https://mjbizdaily.com/arizona-cracking-down-on-two-marijuana-testing-labs/
8 https://mjbizdaily.com/marijuana-mergers-acquisitions-sizzled-in-2021-and-poised-for-a-hot-2022/
9 https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/cannabis-company-valuations-rise-as-us-reform-efforts-accelerate-62416542
10 https://hempindustrydaily.com/behind-the-numbers-what-usdas-1st-hemp-survey-shows-about-the-industry/
11 https://hempindustrydaily.com/usda-approves-hemp-production-plans-for-alaska-arizona-and-montana/
Josephine Giordano, CPA, ABV, CFE, CFF, CBA, ASA, CDBV, CIRA, CICA, CTP, CCCE is the National Cannabis Practice Leader and a Director in the Financial Forensics and Business Valuation Group of BeachFleischman PLLC, Chairperson of the ASCPA’s Cannabis Special Interest Section and author of ASCPA’s electronic newsletter’s Bud Brief. Ms. Giordano has extensive experience as a financial professional, with a diversified background in audit, banking, tax, business valuation, fraud investigation and forensic accounting, bankruptcy, restructuring and turnaround, expert witness, court appointments, and other litigation support services. She can be reached at jgiordano@beachfleischman.com or 602-792-5981.
