In the prior post in this series, we discussed U.S. federal and state taxation requirements for international cannabis companies. This post focuses on when a foreign company should or must register as doing business in a U.S. state, either by registering their foreign company directly in that state or by forming an affiliate or subsidiary company in that state.
Other than registration with the U.S. Internal Revenue Service (“IRS”) to fulfill U.S. tax obligations, there is no federal business registration in the U.S. because registration is done at the state level. The criteria for whether you need to register in a U.S. state depends on the laws of each state regarding when a business is considered to be “doing business” in that state. This determination is independent from whether you owe income tax or another tax based on your U.S. sales in a state.
For instance, in Washington, California, and New Jersey, only selling product through a broker or maintaining a bank account at a financial institution is not enough to require registration in those states. But doing anything more than maintaining a bank account, selling product through a broker, or doing other minimal business activities requires registration in those states:
|Washington (WA)||Yes||If leasing warehouse space, storing product, or repackaging product in WA|
|California (CA)||Yes||If leasing warehouse space, storing product, or repackaging product in CA|
|New Jersey (NJ)||Yes||If leasing warehouse space, storing product, or repackaging product in NJ|
Each international cannabis company will need to analyze each part of their U.S. operations to determine whether they need to register to do business in any states.
If, for example, you leased warehouse space and stored all of your west coast product in Washington and shipped it into California after the sale, then you would not need to register in California. The reverse would also be true if you stored all of your west coast product in California and shipped to Washington.
But if you would need to retool your CA and WA logistics to make this happen, that would probably cost you more in the long run (via shipping delays and other issues) than going ahead and registering in each state where you lease warehouse space or store product.
Often the criteria that a state’s taxation bureau applies regarding your income and sales tax obligations is different than the criteria that is applied by its department of commerce or secretary of state regarding whether the business needs to be registered.
The cost for initial state registration varies from USD $100-$300, and annual compliance with each state varies from a few hundred dollars to tends of thousands of dollars. The latter extreme expense can happen in Delaware, so be very careful when setting up a Delaware entity so you can ensure you minimize your annual franchise tax payment.
Generally, nonpayment of taxes is significantly more serious than nonregistration of a business entity due to high penalties that can and will be assessed against business owners (not just against the nonpaying businesses), but it is important to comply with both registration and taxation requirements.
Lastly, I need to flag the issue of U.S. immigration for non-U.S. citizens who are somehow involved or thinking about getting involved in a U.S. marijuana business, whether from their home country or while you are in the U.S. My colleague Akshat Divatia wrote a cautionary blog post discussing how involvement could cause foreign individuals to have significant problems with USCIS (U.S. Citizenship and Immigration Services) and USCBP (U.S. Customs and Border Protection). In that post, Akshat wrote:
Even a foreign national who has never consumed marijuana could be declared inadmissible under the INA [Immigration and Nationality Act] based on his or her involvement in a [U.S.] legal cannabis [marijuana] business, either as ‘a knowing aider, abettor, assister, conspirator, or colluder with others’ or ‘an illicit trafficker’ of a controlled substance.
In short, if you are a non-U.S. citizen and think you want to get involved in any way in a state-legal U.S marijuana business, and if you have any plans on entering the U.S., you should consult with an immigration attorney before you come to the U.S.