{"id":5057,"date":"2022-03-24T11:30:00","date_gmt":"2022-03-24T11:30:00","guid":{"rendered":"http:\/\/CAIiECgWnkG8i6AJVYuVigrofFwqGQgEKhAIACoHCAowvqX_CjDFtfgCMPHkpAY"},"modified":"2022-03-24T11:30:00","modified_gmt":"2022-03-24T11:30:00","slug":"getting-into-the-weeds-of-nys-cannabis-taxes-syracuse-com","status":"publish","type":"post","link":"https:\/\/thcinct.com\/?p=5057","title":{"rendered":"Getting into the weeds of NY\u2019s cannabis taxes &#8211; syracuse.com"},"content":{"rendered":"<p class=\"article__paragraph article__paragraph--left\" id=\"CPSJFUNITREHRNMYD2DNFBPEOI\"><i>NOTE: A version of this story first appeared in <\/i><a href=\"https:\/\/www.newyorkupstate.com\/cannabis-insider\/\"><i>New York Cannabis Insider<\/i><\/a><i>, a new publication covering the state\u2019s marijuana marketplace. NYCI is hosting a half-day virtual event on March 31 about financing your cannabusiness, sourcing and securing capital, changing your community\u2019s perception to marijuana, and working with and respecting Native American cannabis operations. Tickets <\/i><a href=\"https:\/\/www.advancemediany.com\/ny-cannabis-insider-live\/\"><i>are available here<\/i><\/a><i>.<\/i><\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"TLSEXYVV5BCWVE4BDSMLUOSI2M\">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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"W5R6ZKOQ2BDJDGOGBMR26VXT5U\">The first is a potency tax on businesses based on THC content, the second is an IRS code known as <a href=\"https:\/\/www.jdsupra.com\/legalnews\/section-280e-and-the-taxation-of-5068426\/\">Section 280E<\/a>, which prevents cannabis businesses from writing off certain expenses.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"LI76QHQEBJDKTO45GFNNRQ7PIA\">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.<\/p>\n<h2 class=\"article-heading\">New York\u2019s marijuana potency tax<\/h2>\n<p class=\"article__paragraph article__paragraph--left\" id=\"6MJAHAX7MVDRTG6SNLXHROSYCM\">New York\u2019s 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"2QW7NXE5CFFVHMQ36R2ZBTPJOU\">New York\u2019s <a href=\"https:\/\/cannabis.ny.gov\/marihuana-regulation-and-taxation-act-mrta\">Marijuana Regulation and Taxation Act<\/a> taxes distributors:<\/p>\n<ul class=\"article__unordered-list\">\n<li><span>Half a cent per milligram of the amount of total THC for flower<\/span><\/li>\n<li><span>Eight-tenths of one cent per milligram for concentrates<\/span><\/li>\n<li><span>Three cents per milligram for edibles.<\/span><\/li>\n<\/ul>\n<p class=\"article__paragraph article__paragraph--left\" id=\"DOOAKAT4FZEB5ALIV6RF5KQVA4\">That\u2019s in addition to a 9% sales tax and possible further municipal taxes.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"C77D3J2HHNGY3GD6225S6CXNYM\">\u201cI think that the THC potency tax has all negatives \u2014 I think it has no redeeming qualities,\u201d said tax attorney <a href=\"https:\/\/www.barclaydamon.com\/profiles\/Jason-W-Klimek\">Jason Klimek<\/a>, co-leader of the Cannabis Team at law firm <a href=\"https:\/\/www.barclaydamon.com\/Professionals\">Barclay Damon<\/a>.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"KCWAHRYDKZDJPINUTBQ3WATHQM\">Klimek, who is also a member of the <a href=\"https:\/\/nysba.org\/committees\/committee-on-cannabis-law\/\">New York State Bar Association Committee on Cannabis Law<\/a>, told NY Cannabis Insider that a major problem with the potency tax is that it could drive New York\u2019s weed prices higher than those in other states.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"V2WXDHDZVNB4JG2GPED5ZL46ZU\">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% \u2013 or possibly 55% for edibles \u2013 compared to Massachusetts\u2019 maximum 20% rate, which is tied to sales.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"SRAMVCGN75CUHG5ISXK6JNZQTY\">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 \u201cat a competitive disadvantage.\u201d<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"EWUFB7HG2NGZDK3ILR4KUPYCVE\">Regulators may also struggle with people trying to game the system, Klimek said.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"FGDBPHOEMZF6XCOFNHFGHFWUUU\">For example, the buds at the <a href=\"https:\/\/www.orangephotonics.com\/testing-for-truth-part-2-is-the-tip-of-a-single-bud-more-potent-than-the-bottom\/\">top of a cannabis plant<\/a> 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 \u2013 where the THC content is lower \u2013 while still selling a high THC product.<\/p>\n<figure class=\"article__image\">\n<div class=\"article__image-wrapper\"><img decoding=\"async\" src=\"https:\/\/thcinct.com\/wp-content\/uploads\/2022\/03\/getting-into-the-weeds-of-nys-cannabis-taxes-syracuse-com.jpg\" loading=\"lazy\" alt=\"Marijuana\" class=\"article__image-content\" height=\"600\" width=\"300\"><figcaption class=\"article__image-caption\">\n<p class=\"article__mm-image-caption-text\">This Jan. 26, 2013 photo taken at a grow house in Denver shows a marijuana plant ready to be harvested. (AP Photo\/Ed Andrieski)<span class=\"article__mm-image-credit\">AP<\/span><\/p>\n<\/figcaption><\/div>\n<\/figure>\n<p class=\"article__paragraph article__paragraph--left\" id=\"EOF3PJ5KIZGNTDRRLRUR5UK6S4\">Aside from the possibility of inaccurate reporting, the government\u2019s laser-focus on THC could create a false impression to customers that the molecule is the only important metric to a user\u2019s experience, said <a href=\"https:\/\/www.google.com\/url?sa=t&amp;rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=&amp;cad=rja&amp;uact=8&amp;ved=2ahUKEwish4mf99r2AhXSneAKHafODlkQFnoECAYQAQ&amp;url=https%3A%2F%2Fwww.linkedin.com%2Fin%2Fsally-parker-nichols-707438a3&amp;usg=AOvVaw1bqFlnTtoYhGGyWPzq1vVv\">Sally Nichols<\/a>, president of THC CBD for <a href=\"https:\/\/getbloomfarms.com\/our-story\/\">Bloom Farms<\/a>, a California-based company that sells hemp in 37 states including New York and cannabis in California.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"ZVIMH3IYUFGQDDXHHFZ7EF4WVY\">\u201cOut 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,\u201d said Nichols, who pointed out that cannabinoids like CBD and terpenes are important parts of user experience.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"SR4GJITLE5HODIPLJ6MFUFHZBE\">She added that she can\u2019t think of another consumer agricultural product that\u2019s 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"DTXHFAXPFBCSNDKLKEMI2I24B4\">\u201cIf you\u2019re only going to look at THC and you\u2019re going to tax based on THC content, you\u2019re going to create an environment where only THC is valued,\u201d she said.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"VBXAOCLM4FF6RFTYYFP3F7ZCLA\">The tax could also put a squeeze on local cultivators, said Kaelan Castetter, founder of business consulting firm <a href=\"https:\/\/www.castettercannabis.com\/\">Castetter Cannabis Group<\/a> and co-founder of the <a href=\"https:\/\/www.nycgpa.org\/\">New York Cannabis Growers and Processors Association<\/a>. That\u2019s 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"7O7JO36SEZBAVG7SDZ3NIQ5STY\">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\u2019t tied to sales prices, cultivators will pay the same tax rates even as the price for which they\u2019re able to sell their goods falls.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"RXRSRCC5IZH55FCBYODHNHLXVQ\">\u201cReally, you\u2019re setting up cultivators to be in a position down the line where they\u2019re not able to eke out a profit, and the ones that will are the biggest ones,\u201d Castetter said.<\/p>\n<figure class=\"article__image\">\n<div class=\"article__image-wrapper\"><img decoding=\"async\" src=\"https:\/\/thcinct.com\/wp-content\/uploads\/2022\/03\/getting-into-the-weeds-of-nys-cannabis-taxes-syracuse-com-1.jpg\" loading=\"lazy\" alt=\"Kaelan Castetter, vice president of the New York Cannabis Growers and Processors Association addresses members of the media.\" class=\"article__image-content\" height=\"600\" width=\"300\"><figcaption class=\"article__image-caption\">\n<p class=\"article__mm-image-caption-text\">Kaelan Castetter, vice president of the New York Cannabis Growers and Processors Association addresses members of the media.<\/p>\n<\/figcaption><\/div>\n<\/figure>\n<p class=\"article__paragraph article__paragraph--left\" id=\"OLWYCPPIFZBV7GI4AI5NGFQWFQ\">However, not everyone thinks the potency tax is an altogether bad idea.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"XNBQVIMYGVH7RDNBZEI3VUHHAM\">Lauren Rudick, co-founder of law firm <a href=\"http:\/\/www.hillerpc.com\/\">Hiller, PC\u2019s<\/a> 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"QWJ23LR5IRA75DD3MBSBXQMJLQ\">\u201cI see this as a tremendous opportunity for people to become educated on the endocannabinoid system,\u201d Rudick said. \u201cI think it\u2019s going to spur some really unique product development.\u201d<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"OGTZ44GZ3VCJJKXBLI6KZ4FNZA\">Taxing based on THC potency also makes a lot of sense from the state government\u2019s perspective, said <a href=\"https:\/\/taxfoundation.org\/staff\/ulrik-boesen\/\">Ulrik Boesen<\/a>, director of excise tax policy at <a href=\"https:\/\/taxfoundation.org\/\">The Tax Foundation<\/a>, an independent tax policy nonprofit.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"N7CVKEB4XZHABO6B7XGDP4VULM\">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\u2019s in the state\u2019s best interest to avoid pinning tax revenues to sales, as prices will likely start out high, but fall as the market matures.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"HOI3KSRZF5AIFBNVFEBCKPKKIU\">\u201cIt\u2019s really hard for states to forecast revenue if it\u2019s based on the price of a volatile commodity. It\u2019s much easier for them to forecast volume,\u201d Boesen said. \u201cIf you do price-based tax in a state, the revenues are going to go down, too, and it\u2019s an issue, because most states are earmarking this revenue for specific purposes.\u201d<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"I6JJKJRMUVHX5JPZC2ILXDT4CU\">Patrick Oglesby, founder of the tax policy nonprofit <a href=\"https:\/\/newrevenue.org\/the-center-for-new-revenue\/\">Center for New Revenue<\/a>, said he thinks it\u2019s important for states to experiment with different cannabis-taxing methods.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"J2R4A2OODRH3THA3J7EIRBQ7KI\">Federal legalization will probably happen eventually, he said, so states can serve as laboratories that find the costs and benefits of different approaches.<\/p>\n<h2 class=\"article-heading\">How does 280E affect a businesses\u2019 bottom line?<\/h2>\n<p class=\"article__paragraph article__paragraph--left\" id=\"PRYPTRYHXJFNTJ2HHQ3TOG5MLI\">Oglesby also believes many small cannabis businesses might want to rethink their position on Section 280E.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"V2WSM25FPJDWFHMAGQDI2LTE4I\">That <a href=\"https:\/\/www.jdsupra.com\/legalnews\/section-280e-and-the-taxation-of-5068426\/\">part of the tax code<\/a> prohibits those engaged in the business of trafficking certain controlled substances \u2013 including cannabis \u2013 from writing off many business expenses on their taxes.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"NZT4XX3CVBFGNFKFQKSHI6E66Y\">The section is largely reviled in the cannabis industry, and New York lawmakers are <a href=\"https:\/\/www.nysenate.gov\/legislation\/bills\/2021\/S7518\">considering<\/a> legislation that would enable cannabis businesses to write off some of the same expenses as other legal industries on their state taxes.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"MS5J52MFMZAGTAFHSHCQTLNLXM\">Castetter said that while the state legislation won\u2019t amount to huge savings for marijuana businesses here \u2013 since their federal tax bills are higher \u2013 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"AQ3A5MY5SRDHFCWZF7E6WNBRJI\">However, Oglesby thinks getting rid of 280E puts smaller businesses at a further competitive disadvantage with large multistate cannabis corporations.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"YMXXW7X2LRCQRBX62DOABR5LDA\">Businesses in the industry are already allowed to deduct \u201ccost of goods sold\u201d 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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"I22RKFVDEZE3VCYS7JYRIBO3Q4\">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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"NCMDOTHJHJA27JIDLYFEZ6ZYGI\">\u201cIt turns out that small businesses in general have a lot less of these selling expenses than big businesses do,\u201d Oglesby said.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"UICEQNMVFRE7TOCB6OJU276J6Q\">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.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"3TJ7BTZALZEJTBGT2EUK6B7GWQ\">The state\u2019s registered operators \u201care definitely in a better position on 280E, and vertically integrated operators in general,\u201d Castetter said.<\/p>\n<p class=\"article__paragraph article__paragraph--left\" id=\"HVTJMYRUOZAQJLLFAM6BPWI5JE\">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.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>NOTE: A version of this story first appeared in New York Cannabis Insider, a new publication covering the state\u2019s marijuana marketplace. NYCI is hosting a half-day virtual event on March 31 about financing your cannabusiness, sourcing and securing capital, changing your community\u2019s 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&#8230; <\/p>\n","protected":false},"author":1,"featured_media":5058,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"","fifu_image_alt":"","footnotes":""},"categories":[2],"tags":[],"class_list":["post-5057","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured"],"jetpack_featured_media_url":"https:\/\/thcinct.com\/wp-content\/uploads\/2022\/03\/getting-into-the-weeds-of-nys-cannabis-taxes-syracuse-com.jpg","_links":{"self":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts\/5057","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5057"}],"version-history":[{"count":0,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts\/5057\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/media\/5058"}],"wp:attachment":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5057"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5057"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5057"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}