Token of Trust

Compliance: Handle In-House or Outsource?

Cost Effectiveness Analysis on the options for Vape Retailers and Wholesalers
By Michael Adrian

Over the past few years, regulations and requirements have increased across the United States for businesses in the vape industry. While the legal landscape will look different for each unique business operation, it’s important to explore the costs of becoming and remaining compliant and identify the most cost effective route to get there.

Please note that this analysis was performed using a typical vape wholesaler, but retailers can use this as a model regardless. The definition of a typical vape wholesaler, the cost variables, and other assumptions used to calculate the costs of each potential solution are explained at the end of this article.

There are two major costs related to vape compliance that I’m going to explore. The first category is licensing and registration; the second category is operational compliance.

Getting Started With Licensing and Registration

Welcome to the first step. Licensing and registration for vape retailers and wholesalers can be a complex maze to navigate alone — requirements vary across jurisdictions and they change frequently. The process can quickly get overwhelming with registering with the ATF at the Federal Level, being appropriately registered and licensed in each state, and also having the appropriate registration and licensing in county and municipal jurisdictions that require it.

Within the registration process for each state, there are typically registration fees. For all 50 states, the total cost of these fees is about $15,000. Because the cost is consistent whether you’re doing it yourself, hiring someone internally, or outsourcing, this is excluded from the cost comparison. Fair warning - don’t be surprised when each state requires a filing fee.

On average, becoming licensed and registered takes business owners 4-6 hours per state in the U.S. By comparison, a legal partner that specializes in the vape industry is usually able to complete licensing and registration in 2 hours per state on average and cost between $500 and $700 per hour. After interviewing a number of merchants and firms, these ranges held true and mostly differed due to familiarity and specialization with the task.

*Risks Considered:
The numbers in the table above have to be adjusted in consideration of the risks and additional costs involved with each option. They could include the following:

Do It Yourself
• Mistakes and errors on paperwork, causing delays and duplicative work;
• Opportunity cost of time spent;
• Extra spending on licensing and registration costs for retry applications; and
• Extra costs and time spent due to changes occurring that you aren’t aware of.

Hire Someone Internally
• Time spent finding, onboarding, and retaining a qualified candidate;
• Additional costs of employment, like full salary and more;
• Time lost by owner and staff person communicating internally when questions arise;
• Mistakes and errors on paperwork, causing delays and duplicative work;
• Extra spending on licensing and registration costs for retry applications; and
• Extra costs and time spent due to changes occurring that you and they aren’t aware of.

Outsource It
• Partner doesn’t deliver on contracted services; and
• Time spent completing the partner’s customer onboarding process.

Operational Compliance So, you’ve successfully filed the right paperwork and you’re all licensed and registered as you need to be. Now what? It’s time to keep up with monthly reporting and tax payments. For this analysis, the three components of operational compliance we are going to focus on are Sales Taxes, Excise Taxes, and PACT Act Reporting. In analyzing our customers’ anecdotes and our own operational data at Token of Trust, we were able to find that producing these reports in the appropriate format for each jurisdiction and submitting them successfully takes business owners, their internal staff person, or an accounting firm about 1-4 hours per month per state.

*Risks Considered:
The numbers in the table above have to be adjusted in consideration of the risks and additional costs involved with each option. They could include the following:

Do It Yourself
• Major penalties for errors, late submissions, or missed submissions;
• Opportunity cost of time spent; and
• Extra costs and time spent due to changes occurring that you aren’t aware of.

Hire Someone Internally
• Major penalties for errors, late submissions, or missed submissions;
• Time spent finding, onboarding, and retaining a qualified candidate;
• Additional costs of employment beyond salary;
• Time lost by owner and staff person communicating internally when questions arise;
• Mistakes and errors on paperwork, causing delays and duplicative work; and
• Extra costs and time spent due to changes occurring that you aren’t aware of.

Hire An Accounting Firm
• Partner doesn’t deliver on contracted services;
• Time spent completing the partner’s customer onboarding proces; and
• Finding a specialized accounting firm can be difficult.

Outsource To Software Partner
• Partner doesn’t deliver on contracted services; and
• Time spent completing the partner’s customer onboarding process.

The most cost-effective solution is outsourcing it to an industry expert.

Ultimately, the choice is yours! What is best for your business? Use this as a guide for how to compare and contrast your options for your business specifically.

Need some help? Reach out to Token of Trust at 1-833-738-0038 - our specialists would be happy to help you evaluate which option is best for you!

Our Assumptions:
1. The business owner(s) is/are keen to become and remain compliant with all regulations and requirements across the country;
2. The business has been properly established as a legal entity in their primary location per the regulations of that location;
3. The business owner(s) has/have not started the process of becoming compliant yet, or has/have only just begun;
4. The business owner(s) has/have equated the value of their time to be worth $200/hour;
5. The business makes sales and, subsequently, ships vape products to other businesses in every state regularly;
6. The business offers 100 or more SKUs;
7. The business rotates out old products and adds new products routinely;
8. Business Owners still spend 75% of the time it would have taken them to complete each process themselves with an internal staff person considering the hiring, onboarding, and assistance required to hire them;
9. The extra costs on licensing and registration for retry applications is $10,000;
10. While the cost of a late excise tax submission in California is 500% of the taxes owed, I have used $150,000 as the cost of “major penalties for errors, late submissions, or missed submissions;”
11. The average hourly rate of an Accounting Firm is $175;
12. The average annual cost of outsourcing the operational compliance component is $45,000; and
13. Per Glassdoor.com’s data on salaries for an in-house Accountant, Compliance Manager, or Operations Manager, the average salary in the United States for someone in that kind of role is about $72,000.

Even if these parameters don’t perfectly match your business currently, this evaluation process could still prove useful as you consider your options now as well as when you grow to more closely align with them.

Token of Trust
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1.833.738.0038

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