In the British Royal Navy of the 1700s, a sailor guilty of a minor offense was required to “show his hand”. The guilty party was made to march around the deck while the other sailors beat him with tied ropes. Similarly, those lucky enough to obtain one of New York’s recreational cannabis licenses will be forced to contend with a variety 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 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 will probably be licensed by the end of 2022, a mature market isn’t expected for another two to three years.
IRC Section 280E
In signing into law the 2022-2023 state budget, New York Governor Kathy Hochul also approved Senate Bill S8009, exempting state cannabis taxpayers from the burdensome effects of Section 280E of the Internal Revenue Code, effective January 1, 2023.
Section 280E disallows deductions and credits on federal returns for expenses related to the illegal sale of the drug, requiring retail cannabis businesses to add significant expenses such as rent and salaries 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 the city’s 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 begin with the initial number: “Net profit (or loss) from business … as reported for federal tax purposes,” which will include Section 280E. However, New York state law says, “taxable income of the city … shall mean and is the same as … taxable income of New York,” which suggests the city may have to withdraw by Section 280E.
Franchise tax on state corporations
New York State has a corporate franchise tax that requires a business 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 allocable business capital in New York, and $0 for qualified New York producers. The minimum flat dollar tax ranges from $25 to $200,000, but for qualified New York manufacturers, it ranges from $19 to $3,740.
The possibility of tax planning
To minimize the corporation’s franchise tax liability, simply elect to be treated as a qualified New York manufacturer, which is one “engaged in the production of goods by producing … [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 must be able to meet these requirements.
New York Business Corporation Tax
New York City mirrors the state with a business tax that requires a business to pay the highest of three taxes: All net income tax is 6.5% to 8.85% of New York City’s allocable income. For qualified New York manufacturing corporations, the range is 4.425% to 8.85%. The total capital base tax is 0.15% of business and investment capital allocated to New York City, not to exceed $10 million. And the minimum flat dollar tax ranges from $25 to $200,000 of New York City’s gross receipts.
A whole host of state cannabis taxes
In addition to state and city corporate taxes, New York has a series of recently enacted adult-use cannabis taxes that will apply 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 micro-business – 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, ranging from $0.005 per mg of THC in flower to $0.03 per mg for edibles.
Tests for THC levels can vary with different labs, and a savvy cannabis grower, manufacturer, or distributor may be able to save significant tax dollars by comparing results from different testing facilities. The state has also enacted a 9% adult-use state excise tax that is paid by the cannabis seller after selling a product to a consumer.
A local excise tax of 4% for adults has also been approved. Funds are paid by the cannabis seller to the state tax commissioner in trust for cities with a population of at least 1 million and counties, towns, villages and cities with a population of less than 1 million in which a retail distributor is located.
Is there sales tax on cannabis products?
Unlike California, which levies sales tax on top of excise duty, 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 papers and other paraphernalia.
Medical cannabis has been legal in New York since 2014. Every medical sale includes a 7% excise tax, but no state sales tax.
New York City imposes a flat sales tax of 4.5% on all sales within the metropolitan area. This tax is in addition to all other state taxes. While the state will already collect a 4% local excise tax on behalf of the city, many wonder if the city will lower or eliminate the sales tax on cannabis.
One last word
The legal and tax landscape for recreational cannabis businesses in New York is shaping up 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 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 are developing for their clients.
This article does not necessarily reflect the opinion 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 through writing professional articles that are accessible and informative.
Abraham Finberg MBA, CPA, a managing partner at AB FinWright, has been a leader in the cannabis space since 2009, advising clients at all stages of business and tax advisory, from inception to M&A and IPO.
Rachel Wright, MST, CPA, also a managing partner at AB FinWright, specializing in cannabis accounting and taxation for multi-state and multinational entities, advising clients on everything from internal controls to the ultimate implications of mixed local, state, federal and tax statutes international. .
We’d love to hear your clever and original thinking: Write for Us