From the Black-Market to the Gray-Market: Accounting's Role in the Budding Cannabis Industry

Abstract

We examine accounting’s role in the development of the cannabis industry within the U.S., where formal accounting has historically been strongly discouraged. Employing an inductive approach, we conduct in-depth interviews to examine the current landscape of the cannabis industry and the ways in which accounting is used within the industry. Unique to the development of the cannabis industry is that, prior to state legalization, cannabis operations existed within a black-market, with no formal guiding rules or regulations, opposition to formal accounting records, and long-standing operational norms that were challenged once state regulation passed. Regulation, therefore, was the impetus for the dissolution of the black-market and the prerequisite for the development of an innovative industry within the gray-market. Our findings suggest that current cannabis participants face a unique set of challenges not experienced by other developing industries in modern times, including federal illegality of the primary product, limited access to and higher cost of peripheral services, punitive tax provisions that severely limit deductions of ordinary and necessary business expenses, and operations restricted to cash transactions. This set of obstacles, in addition to pervasive negative stigma, has created a path toward industry development that is not supported by theory. Therefore, we re-theorize industry evolution to recognize the unique nature of the cannabis industry, which will provide insight to other semi-legal, stigmatized industries. We also provide evidence of the use of accounting toward normalizing the dirty work associated with the cannabis industry and discover the development of new forms of accounting in response to the unique needs of industry participants.