In the British Royal Navy of the 1700s, a sailor guilty of a minor offense was required to “run the gauntlet.” The guilty party was forced to march around the deck while the other sailors struck him with knotted ropes. Similarly, those fortunate enough to obtain one of New York’s recreational cannabis licenses will be forced to contend with a gauntlet of state and local taxes.
An Update on New York’s Recreational Cannabis Market
As of June 1, New York state’s Cannabis Control Board has issued 162 recreational cultivation licenses. The first recreational retail licenses aren’t expected to appear until the end of 2022. According to Chris Alexander, executive director of the state’s Office of Cannabis Management, final regulations are still being crafted. And while some dispensaries will probably be licensed by end of 2022, a mature market isn’t expected for another two to three years.
IRC Section 280E
By signing the 2022-2023 state budget into law, New York Gov. Kathy Hochul also enacted Senate Bill S8009, freeing state cannabis taxpayers from the onerous effects of Internal Revenue Code Section 280E, starting on Jan. 1, 2023.
Section 280E disallows deductions and credits on federal returns for expenditures connected with the illegal sale of drugs, requiring retail cannabis businesses to add back such significant expenses as rent and wages for sales staff. Like California, however, New York state now allows these and other standard business deductions on state returns.
New York City’s Department of Finance hasn’t yet caught up with the state, and city cannabis taxpayers may still have to file their city tax returns conforming to Section 280E. City income tax forms NYC-2 and NYC-202 still begin with the starting number: “Net profit (or loss) from business … as reported for federal tax purposes,” which would include Section 280E. However, New York state law says, “city taxable income ... shall mean and be the same as ... New York taxable income,” which suggests the city may need to back off from Section 280E.
State Corporate Franchise Tax
New York state has a corporate franchise tax that requires a business to pay the highest of three taxes. The 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 allocated to New York, and $0 for qualified New York manufacturers. The fixed dollar minimum tax ranges from $25 to $200,000, but for qualified New York manufacturers, it ranges from $19 to $3,740.
Tax Planning Opportunity
To minimize corporation franchise tax liability, simply elect to be treated as a qualified New York manufacturer, which is one “engaged in the production of goods by manufacturing ... [or by] agriculture, horticulture, [etc.]”
Additionally, either the adjusted basis of the business property for New York state tax purposes is at least $1 million, or all of the manufacturer’s real and personal property, is located in New York. Many cannabis cultivation or manufacturing businesses should be able to meet these requirements.
New York City Business Corporation Tax
New York City mirrors the state with a business tax that requires a business to pay the highest of three taxes: Entire net income tax is 6.5% to 8 .85% of income allocated to New York City. For qualified New York manufacturing corporations, the range is 4.425% to 8.85%. Total capital base tax is 0.15% of business and investment capital allocated to New York City not to exceed $10 million. And fixed dollar minimum tax ranges from $25 to $200,000 of New York City gross receipts.
A Whole Host of State Cannabis Taxes
In addition to state and city corporation taxes, New York has a range of recently enacted adult-use cannabis taxes, which will be applied at the wholesale and retail levels and are effective as of April 1, 2022.
The THC potency tax is imposed on a distributor when they sell cannabis to a retailer. If the distributor is also the retailer—such as a microbusiness—the tax accrues 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, varying from $0.005 per mg of THC on flower to $0.03 per mg on edibles.
Tests of THC levels can vary with different labs, and a savvy cannabis cultivator, manufacturer, or distributor may be able to save significant tax dollars by comparing the results from different testing facilities. The state also has enacted a 9% state adult-use excise tax payable by the cannabis retailer upon sale of a product to a consumer.
A 4% local adult-use excise tax has also been enacted. Funds are payable by the cannabis retailer to the state tax commissioner in trust for cities with a population of at least 1 million and counties, towns, villages, and cities with populations of less than 1 million in which a retail dispensary is located.
Is There Sales Tax on Cannabis Products?
Unlike California, which charges sales tax on top of 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 “adjunct products” such as pipes, rolling papers, and other paraphernalia.
Medical cannabis has been legal in New York since 2014. Each medical sale incurs 7% excise tax but no state sales tax.
New York City imposes a general sales tax of 4.5% on all sales within the metropolis. This tax is in addition to all other state taxes. As the state will already be collecting a 4% local excise tax on behalf of the city, many wonder whether the city will reduce or remove its sales tax from cannabis.
A Final Word
The legal and tax landscape for recreational cannabis businesses in New York is being created as we speak. Business owners should pay close attention to any changes or adjustments, especially when it comes to New York City taxes, which have yet to be clarified in light of the state’s new cannabis taxing guidelines. Careful tax planning is vital, not only to avoid non-compliance penalties, but also to take advantage of tax planning opportunities that cannabis accounting firms are developing for their clients.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Simon Menkes, CPA, supports AB FinWright’s clients and advisers through accounting and advisory services, and through writing professional articles that are both approachable and informative.
Abraham Finberg MBA, CPA, a managing partner at AB FinWright, has been a leader in the cannabis sphere since 2009, counseling clients in all phases of business advisory and tax, from start-up through M&A and IPO.
Rachel Wright, MST, CPA, also a managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multi-national entities, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal, and international statutes of taxation.
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