In the year In the British Royal Navy in the 1700s, a sailor guilty of a minor misdemeanor was required to “run the gauntlet.” As the criminal was forced to march around the ship, the other sailors beat him with a hanging rope. Likewise, those lucky enough to get one of New York’s recreational cannabis licenses will be forced to contend with state and local taxes.
An update on the New York recreational cannabis market
As of June 1, the New York State Cannabis Regulatory Board has licensed 162 recreational farms. The first recreational retail licenses aren’t expected to appear until late 2022. Chris Alexander, executive director of the state’s Office of Cannabis Management, said final rules are still being drafted. And while some dispensaries will probably be licensed as late as 2022, a mature market isn’t expected for another two to three years.
IRC Section 280E
Signing into law the 2022-2023 state budget, New York Governor Kathy Hochul approved Senate Bill S8009, exempting state cannabis taxpayers from the onerous consequences of Internal Revenue Code Section 280E effective January 1, 2023.
Section 280E does not allow deductions and credits on federal returns for expenses related to the sale of illegal drugs, requiring retail cannabis businesses to recoup 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 contacted the state, and city cannabis taxpayers must still file their city tax returns in compliance with 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 includes Section 280E. However, New York State law states, “the taxable income of the City … means and shall be the taxable income of … New York,” 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 a business to pay the highest of three taxes. Business income tax is 6.5% to 7.25%, and $0 for qualified New York manufacturers. The business capital tax is 0.1875% of allocable business capital for New York, and $0 for qualified New York manufacturers. The minimum dollar minimum tax ranges from $25 to $200,000, while for qualified New York manufacturers it ranges from $19 to $3,740.
Tax planning opportunity
To reduce a corporation’s franchise tax liability, simply elect to be treated as a qualified New York manufacturer, which is “engaged in the manufacture of manufactured goods . . . [or by] Agriculture, Horticulture, [etc.]”
In addition, for New York State tax purposes, the adjusted business asset base must be at least $1 million or all of the manufacturer’s real and personal property 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 in its business tax, which requires businesses to pay the highest of three taxes: the gross net income tax for New York City ranges from 6.5% to 8.85% of gross income. For qualified New York manufacturing corporations, the range is 4.425% to 8.85%. The total capital base tax shall not exceed 0.15% of $10 million of business and investment capital allocated to New York City. And the fixed dollar minimum tax ranges from $25 to $200,000 of New York City gross receipts.
A comprehensive list of government cannabis taxes
In addition to state and city corporation taxes, New York has recently enacted a range of adult-use cannabis taxes, which apply at the wholesale and retail level and will take effect on April 1, 2022.
When cannabis is sold to retail, the THC potency tax is imposed on the distributor. If the distributor is also a retailer – such as a micro business – the tax is added at the time of the retail sale. This tax is based on the amount of THC in the cannabis product and the form of the product, ranging from $0.005 per mg of THC for flower to $0.03 per mg for edibles.
Tests for THC levels can vary from lab to lab, and a savvy cannabis grower, producer or distributor can save significant tax dollars by comparing results from different testing facilities. The state has enacted a 9% adult-use excise tax that must be paid by cannabis retailers when they sell a product to a consumer.
A 4% domestic adult consumption excise tax is also levied. Funds by cannabis retailers to the trust of the state tax commissioner for cities and counties with a population of at least 1 million, villages, hamlets and cities with a population of less than 1 million where there is a retail outlet.
Is there a sales tax on cannabis products?
Unlike California, which charges sales tax on top of excise tax, New York cannabis businesses are not responsible for collecting sales tax on cannabis products. However, sales tax is collected on non-cannabis “related products” such as pipes, wrappers and other items.
Medical cannabis has been legal in New York since 2014. Every medical sale incurs a 7% excise tax but no state sales tax.
New York City levies a general sales tax of 4.5% on all sales within the metropolis. This tax is in addition to all government taxes. Since the state is collecting a 4% local excise tax on the city’s behalf, many believe the city will eliminate or eliminate its sales tax on cannabis.
We’re talking about the legal and tax landscape for recreational cannabis businesses in New York. Business owners should keep an eye out for any unclear changes or adjustments to the state’s new cannabis tax guidelines, especially when it comes to New York City taxes. Careful tax planning is essential, not only to avoid non-compliance penalties, but also to take advantage of the growing tax planning opportunities that cannabis accounting firms offer their clients.
This article does not necessarily reflect the views of the Office of National Affairs, Bloomberg Law and Bloomberg Tax, publisher or its owners.
Simon Menks, CPA; AB FinWright supports clients and advisors with accounting and advisory services, as well as writing professional articles that are both presentable and informative.
Abraham Feinberg MBA, CPA; Managing Partner at AB FinWright has been a leader in the cannabis sphere since 2009, advising clients at all levels of business advisory and tax, from start-ups 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 bottom-line hybrid local, state, federal and international tax laws. .
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