Tax points and the New York Marijuana Regulation and Taxation Act

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New York has legalized adult marijuana use for cultivation, processing, and sale in New York. The Marihuana Regulation and Taxation Act (S.854-A / A.1248) (MRTA) was signed into law by the governor on March 31, 2021.

The MRTA establishes the Cannabis Management Bureau within the Alcohol and Beverage Control Department to set standards, license, inspect, and enforce laws pertaining to marijuana businesses. The tax revenue will be used for community investment funds for reinvestment, education and mental health initiatives.

The MRTA also changes the medical marijuana rules and provides for the continuation of the 7% excise duty for registered organizations offering marijuana to a certified patient that is payable by the registered organization and is not added as a separate item on a sales slip . Invoice or receipt to the customer.

A new Article 20-C of the Adult Marijuana Tax Act has been added. A tax payable by a distributor to an adult retailer is levied based on the THC content in the product as follows: (1) Cannabis flower at a rate of five tenths of a cents per milligram of the amount of total THC, such as indicated on the product label; (2) concentrated cannabis at an amount equal to eight tenths of a cent per milligram of the total amount of THC as stated on the product label; and (3) edible cannabis product at a rate of three cents per milligram of the amount of total THC as indicated on the product label.

In addition, there is a 9% tax on retail sales of adult marijuana. Municipalities have the option to impose an additional 4% tax on retail sales, so the maximum state and local sales tax rate is 13%. . The MRTA amends Section 1115 of the Taxes Act, adding a new paragraph 3-b that exempts adult marijuana from normally imposed state and local sales taxes.

Of course, every marijuana business is subject to general corporate, income, and excise taxes from New York State and local authorities. Depending on how the company is organized, corporation tax is levied if the company is incorporated as a corporation. Some corporations may be eligible to run a federal and New York election to be treated as an S corporation that provides transit tax treatment (note: New York City does not recognize S elections for its corporate income tax). Income tax is payable if the business is incorporated as a partnership, limited liability company, or sole proprietorship, and 4% unincorporated corporate tax (UBT) is payable if the business is in New York City if the income is the threshold for the payment of this tax (a credit eliminates the UBT if the net income is less than $ 100,000). Additionally, if you rent a NYC location south of 96th Street, you will also incur a 3.9% commercial rental tax if the annual rent for the premises exceeds $ 500,000.

In general, both state and city tax laws enact the Internal Revenue Code (IRC) for definitions and as a starting point for calculating their corporate taxes with specific changes for New York purposes. However, federal tax law poses significant problems for those in the marijuana business. As noted below, the IRC prohibits deductions and credits for conducting any trade or business in any Schedule I controlled substance that also applies to New York state and city corporate and income taxes.

Marijuana is still illegal under federal law and is classified as a controlled substance under Appendix I under the Federal Regulated Substances Act. Income from a marijuana business must be reported for federal tax purposes as income from illegal activities, which is subject to federal income tax under IRC Section 61. While companies are generally able to deduct normal and necessary business expenses, marijuana companies are prohibited from deducting business expenses incurred in the sale of marijuana. IRC Section 280E prohibits any deduction or crediting of amounts paid or accrued in the pursuit of any trade or business in any substance controlled by Schedule I. Section 280E applies to all marijuana businesses, including those operating in states that have legalized recreational marijuana use.

The IRS has issued guidelines that provide that IRC Section 280E does not prohibit a company in the marijuana industry from reducing its gross income by the cost of goods sold in order to determine gross income. Therefore, a company that sells marijuana can reduce its gross income by the cost of acquiring or manufacturing the marijuana it sells, but cannot deduct its advertising, selling, or other business expenses. As a result of IRC Section 280E, marijuana companies pay federal income tax on gross profit, while most companies pay federal income tax on net income.