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Cannabis businesses in New York State will be subject to a 9% excise tax starting this month. The state’s switch from a potency tax to an excise tax will help some cannabis companies survive in a tough market, while smaller companies may take a hit.

The tax, which is intended to support the legal expansion of the cannabis market by “simplifying, rationalising and reducing” obligations, is uneven and would provide far smaller savings for micro-enterprises.

Potential investors and their advisors should be aware of the additional tax burden on these businesses. Owners of micro-businesses should consider contacting their state representatives to address these injustices.

Great advantages

One of the biggest advantages of the new excise tax is that it fluctuates with the price of cannabis. In recent years, the price of wholesale cannabis has dropped significantly, which has also led to a drop in retail prices.

In times of slowdown like the current one, companies can use this new tax to offer lower prices to their customers and thus stimulate traffic.

However, because the potency tax was based on the amount of THC in cannabis products, it remained artificially high. This put legal cannabis businesses at a competitive disadvantage compared to the illegal businesses surrounding them that pay no taxes at all.

A sample of Manhattan pharmacies suggests that the new excise tax will reduce pharmacies’ overall tax burden from about 23 percent to 18 percent.

Burden on micro-enterprises

For micro-enterprises, the excise duty burden will be significantly higher because the government sets their wholesale price at 75 percent of the retail selling price.

Microenterprises – defined as small cannabis businesses that grow up to 3,500 square feet indoors or 10,000 square feet outdoors and sell the product at retail – do not buy from a distributor. The excise tax burden negatively impacts them tax-wise because the cost of goods sold by most cannabis retail businesses is only 50% of the retail price or less, while the cost of flower is closer to 25% of the retail price due to oversupply in the market.

A comparison between the old potency tax and the new excise tax suggests that pharmacies will see a 73% tax saving on flower, while micro-enterprises will only receive 12%. The tax saving on concentrates and edibles for pharmacies is likely to be around 55%. Micro-enterprises will also receive a much smaller reduction on these products. Individuals looking to invest in a micro-enterprise will need to consider this additional tax cost.

Possibilities

In addition to lobbying for a change in the tax law, micro-enterprises may have another option. New York State law appears to allow the purchase of “up to 500 pounds of cannabis or the equivalent extract per calendar year from a duly licensed cultivator, micro-enterprise, cooperative or collective.”

This external purchasing from third parties could allow a micro-enterprise to pay the 9% excise tax on the wholesale price of these purchases, rather than on 75% of the retail selling price. Micro-enterprises should consult with their lawyers as a next step to consider this approach.

outlook

With the new excise tax, New York is no longer one of the few states that have adopted the complicated and burdensome potency tax. Now only Connecticut and Illinois remain.

Individuals considering entering the cannabis market as well as government policymakers should be aware of the additional burdens the new tax will place on small businesses.

Micro-business owners should urge their representatives to change the tax law. External purchase of a limited amount of cannabis from licensed third parties may be an additional transition option for these businesses.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Information about the author

Rachel Wright, managing partner at AB FinWright, specializes in cannabis accounting and taxation for federal and multinational companies.

Simon Menkes, CPA, supports AB FinWright clients and advisors through accounting and advisory services.

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