New York state cannabis businesses are now subject to a 9% excise tax, effective this month. The state’s transition to an excise tax from a potency tax will aid some cannabis businesses in surviving a tough market, while smaller businesses may be disproportionately affected.
The new tax system, which aims to streamline and reduce obligations, will not provide significant savings for microbusinesses. Potential investors and their advisers should be aware of this additional tax burden. Owners of microbusinesses are advised to contact their state representatives to address these inequities.
Big Benefits
One notable advantage of the new excise tax is that it will fluctuate with the price of cannabis. Over recent years, there has been a significant drop in wholesale cannabis prices, leading to reduced retail pricing. During a depressed market, as is currently being experienced, businesses can leverage the new tax to offer lower prices to consumers, thereby boosting customer traffic.
The previous potency tax, which was based on THC content in cannabis products, remained artificially high, putting legal cannabis businesses at a competitive disadvantage compared to illegal operations that pay no taxes. A survey of Manhattan dispensaries suggests that the new excise tax will reduce the total tax burden on dispensaries from approximately 23% to 18%.
Burden for Microbusinesses
For microbusinesses, the excise tax burden will be higher because the government approximates their wholesale cost as 75% of their retail selling price. Microbusinesses, which are defined as small cannabis businesses that cultivate up to 3,500 square feet indoors or 10,000 square feet outdoors and sell the product at retail, do not purchase from a distributor. The cost of goods sold for most retail cannabis enterprises is only 50% of retail or less, with the cost of flower closer to 25% due to market glut.
A comparison between the old potency tax and the new excise tax indicates that dispensaries will see a 73% tax savings on flower, while microbusinesses will only see 12%. Tax savings on concentrates and edibles are projected to be around 55% for dispensaries. Microbusinesses, however, will see a much lower reduction on these products. Potential investors in microbusinesses must take this additional tax cost into account.
Possible Options
In addition to lobbying for tax law changes, microbusinesses may have another option. New York State law permits the purchase of up to 500 pounds of cannabis, or the extract equivalent, per calendar year from a licensed cultivator, microbusiness, cooperative, or collective. This outside purchase from third parties may enable a microbusiness to pay the 9% excise tax on the wholesale price instead of on 75% of the retail sales price. Microbusiness owners should consult their attorneys to explore this option fully.
Outlook
The new excise tax removes New York from the short list of states that had implemented the complex and burdensome potency tax, leaving only Connecticut and Illinois. Individuals considering entering the cannabis market, as well as policymakers, should be mindful of the excess burdens that microbusinesses will face under the new tax. Microbusiness owners should advocate for tax law changes and consider the external purchase option as an interim solution.
The owners of microbusinesses should press their representatives for a change in tax law. The outside purchase of a limited amount of cannabis from licensed third parties may be an additional, interim option for these businesses.
For further details, you can view the full article on Bloomberg Tax.