New York Bill Would Allow Marijuana Industry to Deduct Business Expenses On State Taxes
A New York Senate bill introduced on Friday would allow licensed cannabis companies to deduct certain business expenses on their state tax returns, a move the bill’s sponsor says “will create a more equitable taxation system and allow more local, small businesses to participate in the cannabis market.”
The proposal represents not only a change to existing state law but also a break from federal tax policy, which through IRS Code Section 280E prohibits cannabis businesses from claiming deductions available to most other companies on their federal tax returns. Industry advocates have complained the federal and state rules treat cannabis businesses unfairly, impacting retailers and small businesses the hardest.
Because cannabis businesses can’t write off inventory or other operating expenses, 280E currently means that some cannabis businesses pay effective tax rates of up to 80 percent, according to industry groups and accounting firms.
I am excited to introduce this new legislation to create a more equitable taxation system. Senate Bill S.7518 will amend the state tax law to allow cannabis enterprises licensed by New York State to deduct ordinary and necessary business expenses. https://t.co/sGg5QQHx26 pic.twitter.com/Em5uiqO6PG
— Senator Jeremy Cooney (@SenatorCooney) December 10, 2021
The New York legislation, S.7518, would decouple the state tax code from the federal policy, amending state law to state that “the provisions of 280E…shall not apply for the purposes of this chapter to the carrying on of any trade or business that is commercial cannabis activity by a licensee.”
“This bill will provide tax equity to the emerging cannabis industry by allowing licensed cannabis businesses to make ordinary and necessary deductions on their New York state taxes,” says a memo from bill sponsor Sen. Jeremy Cooney (D). “Additionally, it ensures the adult-use cannabis market will not be dominated solely by large multi-state operators who can afford to pay the higher effective tax rate.”
In New York, the effective tax rate on cannabis businesses “would be approximately double what any other business has to pay,” the sponsor memo says. “If this goes unchanged, people will be unable or unwilling to leave the legacy market for a licensed business.”
“New York cannot realize the goals set in the MRTA for social and economic equity if the cost of doing business prevents the equity candidates from actually participating.”
Cooney wrote on Twitter that New York’s new cannabis legalization law “was crafted with a focus on equity at all stages,” adding that the state “must ensure that this focus includes licensing and taxation of these new businesses.”
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The senator has introduced two other proposed reforms to the new cannabis system this year. In July, he sponsored a bill to create a temporary licensing category to allow farmers to begin cultivating and selling cannabis ahead of the formal rollout of the adult-use program. That measure has been referred to the Senate Rules Committee.
Last month, Cooney filed separate legislation to amend the state’s cannabis law so transgender and nonbinary people can qualify as social equity applicants. The proposal is meant to resolve what its justification section calls an “unintended consequence” of the current law, which currently gives priority to women-owned businesses as well as other marginalized groups but does not include transgender or nonbinary people—a situation that would force some applicants to choose “between their gender identity and receiving priority for a license,” the bill says.
New York lawmakers have been proactive in seeking to improve the state’s adult-use marijuana law since the reform was approved earlier this year and as regulators continue to develop rules for the program.
In addition to proposals introduced by Cooney, Sen. Michelle Hinchey (D) last month filed a bill that would prioritize hemp-based packaging aimed at improving sustainability. The legislation would require the state’s Cannabis Control Board to “develop strategic plans detailing the primary use of industrial hemp for packaging and labeling requirements to be used prior to the retail sale of any cannabis or cannabis product to a cannabis consumer.” It would also establish a “Sustainable Cannabis Packaging Incubator Program” to provide financial incentives for businesses to create “compostable and biodegradable cannabis packaging materials.” Participants in the program would need to make packaging that contains at least 30 percent hemp.
Currently, adults 21 and older in New York can possess up to three ounces of cannabis or 24 grams of concentrates, although there aren’t any legal shops open for business yet. Adults can also smoke marijuana in public anywhere tobacco can be smoked.
The first licensed recreational marijuana retailers in the state may actually be located on Indian territory, with one tribe having officially opened applications to prospective licensees in October.
Because the implementation process has been drawn out, however, one GOP senator wants to give local jurisdictions another year to decide whether they will opt out of allowing marijuana businesses to operate in their area—a proposal that advocates say is unnecessary and would create undue complications for the industry.
Gov. Kathy Hochul (D), who replaced Andrew Cuomo after he resigned amid a sexual harassment scandal, has repeatedly emphasized her interest in efficiently implementing the legalization law.
At a recent event, she touted the fact that she had quickly made regulatory appointments that had been delayed under her predecessor. “I believe there’s thousands and thousands of jobs” that could be created in the new industry, the governor said.
Meanwhile, New York’s Cannabis Control Board (CCB) held its first meeting in October, a key step toward implementing the state’s adult-use marijuana program.
Members of the board, who were appointed by the governor and legislative leaders, announced that medical marijuana dispensaries will be allowed to sell flower cannabis products to qualified patients. The $50 registration fee for patients and caregivers was also permanently waived.
Last month, regulators also approved rules for the state’s cannabinoid hemp program, notably clarifying that flower from the crop can be sold but delta-8 THC products are currently prohibited from being marketed.
Adding pressure to get the market up and running is the fact that regulators in neighboring New Jersey recently released rules for its adult-use marijuana program, which is being implemented after voters approved a legalization referendum last year.
The state comptroller recently projected that New York stands to eventually generate $245 million in annual marijuana revenue, which they say will help offset losses from declining tobacco sales.
For the first year of cannabis sales, the state is expected to see just $20 million in tax and fee collections. That will be part of an estimated $26.7 billion in new revenues that New York is expected to generate in fiscal year 2021-2022 under a budget that the legislature passed in April.
The state Department of Labor separately announced in new guidance that New York employers are no longer allowed to drug test most workers for marijuana.
Meanwhile, a New York lawmaker introduced a bill in June that would require the state to establish an institute to research the therapeutic potential of psychedelics.
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Photo courtesy of Philip Steffan