New York’s recreational cannabis business will be taxed

In the British Royal Navy of the 1700s, a sailor guilty of a minor offense had to “run the gauntlet”. The culprit was forced to march around the deck while the other sailors beat him with ropes. Likewise, those lucky enough to obtain one of New York’s recreational cannabis licenses will be forced to fight a gauntlet of state and local taxes.

Up-to-date information on the New York recreational cannabis market

As of June 1, the New York State Cannabis Control Board has issued 162 recreational grow licenses. The first recreational retail licenses aren’t expected to appear until late 2022. According to Chris Alexander, executive director of the state’s Office of Cannabis Management, the final regulations are still being drafted. And while some dispensaries are likely to be licensed by the end of 2022, a mature market isn’t expected for another two to three years.

IRC Section 280E

With the signing of the 2022-2023 state budget into law, New York Governor Kathy Hochul also passed Senate Bill S8009, exempting state cannabis taxpayers from the onerous effects of Section 280E of the Internal Revenue Code, effective January 1, 2023.

Section 280E prohibits deductions and credits on federal tax returns for expenses related to the illegal sale of drugs, requiring retail cannabis businesses to add back such significant expenses as rent and salaries of sales staff. Like California, however, New York State now allows these and other standard business deductions on state returns.

The New York Department of Finance has not yet caught up with the state, and city cannabis taxpayers may still need to file their city tax returns pursuant to Section 280E. City income tax forms NYC-2 and NYC-202 still start with the opening number: “Net profit (or loss) from business … as reported for federal tax purposes,” which will include section 280E. However, New York State law states that “city taxable income … means and is the same as … New York taxable income,” suggesting that the city may need to opt out of section 280E.

State corporate franchise tax

New York State has a corporate franchise tax that requires businesses to pay the highest of three taxes. Business income tax ranges from 6.5% to 7.25% and $0 for qualified New York manufacturers. The business capital tax is 0.1875% of business capital allocable to New York and $0 for qualified New York manufacturers. The flat dollar minimum tax ranges from $25 to $200,000, but for qualified New York manufacturers it ranges from $19 to $3,740.

Possibility of tax planning

To minimize corporate franchise tax liability, simply elect to be treated as a qualified New York manufacturer that is “engaged in the production of goods by manufacturing … [or by] agriculture, horticulture, [etc.]”

In addition, either the adjusted basis of the business property for New York state tax purposes is at least $1 million, or all of the real and personal property of the manufacturer is located in New York. Many cannabis growing or manufacturing businesses must be able to meet these requirements.

New York City Corporate Tax

New York mirrors the state with a business tax that requires businesses to pay the highest of three taxes: The entire net income tax is 6.5% to 8.85% of income allocated to New York. For qualified manufacturing corporations in New York, the range is 4.425% to 8.85%. The general capital base tax is 0.15% of business and investment capital allocated to New York City, but not to exceed $10 million. And the flat minimum tax dollars range from $25 to $200,000 of gross receipts in New York.

A whole host of state taxes on cannabis

In addition to state and city corporate taxes, New York has a set of recently enacted taxes on adult cannabis use that will apply at the wholesale and retail level and take effect on April 1, 2022.

The tax on THC potency is imposed on a distributor when selling cannabis to a retailer. If the distributor is also a retailer — such as a micro business — the tax is charged at the time of the retail sale. This tax is based on the amount of THC in the cannabis product and depends on the form of the product, ranging from $0.005 per mg of THC on flower to $0.03 per mg for edibles.

Tests for THC levels can vary from lab to lab, and an experienced cannabis grower, producer, or distributor can save significant tax dollars by comparing results from different testing facilities. The state also instituted a 9% state adult-use excise tax payable by the cannabis retailer upon sale of product to a consumer.

A 4% local excise tax for adults has also been introduced. Funds are paid by the cannabis retailer to the state tax commissioner in trust for cities with a population of at least 1 million and counties, cities, towns and cities with a population of less than 1 million in which a retail dispensary is located.

Is there a sales tax on cannabis products?

Unlike California, which charges sales tax in addition to excise tax, New York cannabis businesses will not be responsible for collecting sales tax on cannabis products. However, sales tax will be collected on non-cannabis “accessories” such as pipes, rolling papers and other paraphernalia.

Medical cannabis has been legal in New York since 2014. Every sale of medical products includes a 7% excise tax, but no state sales tax.

New York imposes a general sales tax of 4.5% on all sales within the metropolitan area. This tax is in addition to all other government taxes. Since the state will now collect a 4% local excise tax on behalf of the city, many wonder if the city will reduce or eliminate its sales tax on cannabis.

A final word

The legal and tax environment for New York’s recreational cannabis business is being created as we speak. Business owners should pay close attention to any changes or adjustments, especially when it comes to New York taxes, which are still unclear in light of the state’s new cannabis tax guidelines. Careful tax planning is vital not only to avoid non-compliance penalties, but also to take advantage of the tax planning opportunities that cannabis accounting firms develop for their clients.

This article does not necessarily reflect the views of The Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Information about the author

Simon Menkes, CPA, supports AB FinWright’s clients and advisors through accounting and advisory services and by writing professional articles that are both accessible and informative.

Abraham Finberg MBA, CPA, managing partner at AB FinWright, has been a leader in the cannabis space since 2009, advising clients in all phases of business advisory and tax, from start-up through M&A and IPO.

Rachel Wright, MST, CPA, also managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multinational organizations, advising clients on everything from internal controls to the ultimate implications of mixed local, state, federal and international taxation laws.

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