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 walk around the deck while other sailors hit him with ropes. Likewise, those lucky enough to obtain a New York recreational cannabis license will be forced to fight a gauntlet of state and local taxes.
An update on New York’s recreational cannabis market
As of June 1, the New York State Cannabis Control Board has issued 162 recreational cultivation licenses. The first recreational retail licenses are not 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 finalized. And while some dispensaries will likely be licensed by the end of 2022, a mature market isn’t expected for another two to three years.
IRC Section 280E
After signing the 2022-2023 state budget into law, New York Governor Cathy Hochul also enacted Senate Bill S8009, exempting state cannabis taxpayers from the severe effects of Internal Revenue Code Section 280E, effective January 1, 2023.
Section 280E disallows deductions and credits on federal returns for expenses related to the illegal sale of drugs, requiring retail cannabis businesses to recoup significant expenses such as rent and wages for sales staff. Like California, however, New York State now allows these and other standard business deductions on state returns.
The New York City Department of Finance has not yet caught up with the state, and city taxpayers may still need to file their city tax returns pursuant to Section 280E. The city’s income tax forms NYC-2 and NYC-202 still begin with the initial number: “Net profit (or loss) from business … as reported for federal tax purposes,” which would include Section 280E. However, New York State law states, “taxable income of the City . . . shall have the same meaning and . . . as New York taxable income,” suggesting that the City must opt out of Section 280E.
State corporate franchise tax
New York State has a corporate franchise tax that is the highest of the three taxes a business must pay. 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 allocable business capital in 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 opportunities
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.]”
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 manufacturer’s real and personal property is located in New York. Most 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 in which businesses must pay the highest of the three taxes: the entire net income tax is 6.5% to 8.85% of income allocated to New York City. For qualified New York construction corporations, the range is 4.425% to 8.85%. The gross capital base tax is 0.15% of business and investment capital not exceeding $10 million in New York City. And certain dollar minimum taxes range from $25 to $200,000 in 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 apply at the wholesale and retail levels and take effect on April 1, 2022.
The THC potency tax is levied on the distributor when they sell cannabis to a retailer. If the distributor is also a retailer – such as a microbusiness – the tax is collected at the time of 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 milligram of THC in flowers to $0.03 per milligram in edibles.
Tests for THC levels can vary from lab to lab, and a knowledgeable cannabis grower, manufacturer, or distributor may be able to save significant tax dollars by comparing results from different testing facilities. The state also imposed a 9% state adult-use excise tax paid by cannabis retailers on sales of the product to consumers.
A 4 percent local adult use excise duty has also been imposed. Cities and counties with a population of at least 1 million, cities, towns, and cities with a population of less than 1 million where a cannabis retailer believes a retail dispensary is located are eligible to pay the state tax commissioner.
Is there a 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 “ancillary products” such as pipes, rolling paper, and other goods.
Medical cannabis has been legal in New York since 2014. Each medical sale is subject to a 7% excise tax but no state sales tax.
New York City imposes a general sales tax of 4.5% on all sales within the city. This tax is in addition to all other state taxes. Since the state already collects 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 landscape for recreational cannabis businesses in New York is shaping up as we speak. Business owners should pay 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 tax guidelines. Careful tax planning is essential, not only to avoid non-compliance penalties, but also to take advantage of the tax planning opportunities that cannabis accounting firms are developing for their clients.
This article does not reflect the views of The Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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 Feinberg MBA, CPA, A managing partner at AB FinWright, has been a leader in the cannabis sector since 2009, consulting clients at all stages of business advice and taxation from start-up through M&A and IPO.
Rachel Wright, MST, CPA, Also a managing partner at AB FineWright, he specializes in accounting and taxation for multi-state and multinational organizations, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal and international tax laws. .
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