Getting into the weeds of NY’s cannabis taxes –

NOTE: A version of this story first appeared in New York Cannabis Insider, a new publication covering the state’s marijuana marketplace. NYCI is hosting a half-day virtual event on March 31 about financing your cannabusiness, sourcing and securing capital, changing your community’s perception to marijuana, and working with and respecting Native American cannabis operations. Tickets are available here.

As New York works to get its legal adult-use cannabis industry off the ground, advocates and businesspeople in the space are concerned with two controversial tax issues.

The first is a potency tax on businesses based on THC content, the second is an IRS code known as Section 280E, which prevents cannabis businesses from writing off certain expenses.

Many in the industry think both measures are misguided, but tax experts interviewed by NY Cannabis Insider warn about the possible repercussions of repealing these policies.

New York’s marijuana potency tax

New York’s potency tax structure for the cannabis industry is a departure from earlier legal cannabis states like Massachusetts, but in line with Connecticut, which also plans to tax marijuana partially based on THC content.

New York’s Marijuana Regulation and Taxation Act taxes distributors:

  • Half a cent per milligram of the amount of total THC for flower
  • Eight-tenths of one cent per milligram for concentrates
  • Three cents per milligram for edibles.

That’s in addition to a 9% sales tax and possible further municipal taxes.

“I think that the THC potency tax has all negatives — I think it has no redeeming qualities,” said tax attorney Jason Klimek, co-leader of the Cannabis Team at law firm Barclay Damon.

Klimek, who is also a member of the New York State Bar Association Committee on Cannabis Law, told NY Cannabis Insider that a major problem with the potency tax is that it could drive New York’s weed prices higher than those in other states.

He reasoned that since New York will have a sales tax in addition to the potency tax, the overall tax rate for flower cannabis could reach 30% – or possibly 55% for edibles – compared to Massachusetts’ maximum 20% rate, which is tied to sales.

That could mean average retail prices of $70 per eighth of flower in New York, Klimek said, which is more expensive than legal weed in Massachusetts and about double the price that can be found on the illicit market, putting state licensed businesses “at a competitive disadvantage.”

Regulators may also struggle with people trying to game the system, Klimek said.

For example, the buds at the top of a cannabis plant often contain more THC than those at the bottom. This could tempt some businesses to seek a lower tax rate by testing samples from the bottom – where the THC content is lower – while still selling a high THC product.


This Jan. 26, 2013 photo taken at a grow house in Denver shows a marijuana plant ready to be harvested. (AP Photo/Ed Andrieski)AP

Aside from the possibility of inaccurate reporting, the government’s laser-focus on THC could create a false impression to customers that the molecule is the only important metric to a user’s experience, said Sally Nichols, president of THC CBD for Bloom Farms, a California-based company that sells hemp in 37 states including New York and cannabis in California.

“Out of the gate, we will be educating New Yorkers that THC is the driver of their experience, and we all know that is not entirely true,” said Nichols, who pointed out that cannabinoids like CBD and terpenes are important parts of user experience.

She added that she can’t think of another consumer agricultural product that’s taxed based solely on a single molecule, and that innovation around cannabinoids like THCV, THCA, relabeled Delta-9 THC and others could complicate the tax structure.

“If you’re only going to look at THC and you’re going to tax based on THC content, you’re going to create an environment where only THC is valued,” she said.

The tax could also put a squeeze on local cultivators, said Kaelan Castetter, founder of business consulting firm Castetter Cannabis Group and co-founder of the New York Cannabis Growers and Processors Association. That’s because the potency tax will be imposed on distributors who will seek out lower prices to offset the burden, and large multistate operators are in a better financial position to offer lower prices than smaller cultivators only working in New York, Castetter said.

This problem could become more pronounced as the market matures, he added. Legal cannabis markets typically begin with high prices that recede as supply increases. Since the THC tax isn’t tied to sales prices, cultivators will pay the same tax rates even as the price for which they’re able to sell their goods falls.

“Really, you’re setting up cultivators to be in a position down the line where they’re not able to eke out a profit, and the ones that will are the biggest ones,” Castetter said.

Kaelan Castetter, vice president of the New York Cannabis Growers and Processors Association addresses members of the media.

Kaelan Castetter, vice president of the New York Cannabis Growers and Processors Association addresses members of the media.

However, not everyone thinks the potency tax is an altogether bad idea.

Lauren Rudick, co-founder of law firm Hiller, PC’s cannabis law practice, told NY Cannabis Insider that the tax could encourage innovation by incentivizing growers and sellers to offer products that are lower in THC but create a better user experience by balancing other cannabinoids and terpenes. It also presents an opportunity for the industry to better educate customers who may think THC levels are solely responsible for the experience a product induces.

“I see this as a tremendous opportunity for people to become educated on the endocannabinoid system,” Rudick said. “I think it’s going to spur some really unique product development.”

Taxing based on THC potency also makes a lot of sense from the state government’s perspective, said Ulrik Boesen, director of excise tax policy at The Tax Foundation, an independent tax policy nonprofit.

Since THC is one of the few commonalities between flower, concentrates and edibles, it seems logical to tax based on the molecule, Boesen said. Additionally, it’s in the state’s best interest to avoid pinning tax revenues to sales, as prices will likely start out high, but fall as the market matures.

“It’s really hard for states to forecast revenue if it’s based on the price of a volatile commodity. It’s much easier for them to forecast volume,” Boesen said. “If you do price-based tax in a state, the revenues are going to go down, too, and it’s an issue, because most states are earmarking this revenue for specific purposes.”

Patrick Oglesby, founder of the tax policy nonprofit Center for New Revenue, said he thinks it’s important for states to experiment with different cannabis-taxing methods.

Federal legalization will probably happen eventually, he said, so states can serve as laboratories that find the costs and benefits of different approaches.

How does 280E affect a businesses’ bottom line?

Oglesby also believes many small cannabis businesses might want to rethink their position on Section 280E.

That part of the tax code prohibits those engaged in the business of trafficking certain controlled substances – including cannabis – from writing off many business expenses on their taxes.

The section is largely reviled in the cannabis industry, and New York lawmakers are considering legislation that would enable cannabis businesses to write off some of the same expenses as other legal industries on their state taxes.

Castetter said that while the state legislation won’t amount to huge savings for marijuana businesses here – since their federal tax bills are higher – it does send the message that the state supports cannabis entrepreneurs. And like many in the industry, Castetter ultimately wants 280E repealed on a federal level.

However, Oglesby thinks getting rid of 280E puts smaller businesses at a further competitive disadvantage with large multistate cannabis corporations.

Businesses in the industry are already allowed to deduct “cost of goods sold” from their federal taxes despite 280E, Oglesby said. This means a cultivator can deduct things like the cost of fertilizer, greenhouses, and other expenses related to growing marijuana.

However, 280E prevents businesses from deducting costs related to things like advertising and a large number of retail employee salaries, which are costs more heavily incurred by larger companies, he said.

“It turns out that small businesses in general have a lot less of these selling expenses than big businesses do,” Oglesby said.

Castetter said he understands that reasoning, but said large cannabis companies are also adept at separating their business into subsidiaries to lessen their overall tax burden.

The state’s registered operators “are definitely in a better position on 280E, and vertically integrated operators in general,” Castetter said.

He added that it can be difficult for cultivators to document costs of goods sold, and may still be unable to write off certain costs.

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