Bill to severely cut NYC Cannabis dispensary taxes still awaiting governor’s signature
To great fanfare, New York State recently allowed cannabis operators to deduct business expenses on their state taxes.
The move will likely save Empire State cannabis companies – already operating at a disadvantage due to marijuana’s Schedule I classification – tens to hundreds of thousands of dollars annually.
However, when Albany lawmakers altered the state tax code last year to allow these deductions, the changes didn’t apply to New York City’s cannabis businesses, said Elana Tamas, the cannabis group tax leader at Anchin, an accounting and advisory firm.
“New York State doesn’t speak for New York City – they’re separate,” Tamas said.
Changing New York City’s municipal taxes requires separate legislation, and a bill passed by both houses of the state’s legislature would change New York City’s municipal taxes to allow these deductions (which could amount to a six-figure sum).
But as of mid-October, Gov. Kathy Hochul hasn’t yet signed the bill.
Charles King, the CEO of Housing Works Cannabis Co. – the first adult-use cannabis store to open in the state – said he has reached out to city officials and legislators about the issue.
King said he has also had conversations with Gov. Hochul’s staffers, which have led him to believe the governor intends to sign the bill before it sunsets at the end of 2023.
“It actually took us realizing the tax implications, going to City Hall … to get this [legislation] moved,” King said.
However, Hochul’s office did not respond to NY Cannabis Insider’s emails asking about the bill’s fate.
Tax disparities for cannabis operators
This disparity between state and city taxes revolves around the IRS code known as Section 280E. This federal tax policy prohibits businesses that traffic controlled substances on the Drug Enforcement Administration’s Schedule I or II lists – including cannabis – from writing off many business expenses on their taxes.
Section 280E is well known across the legal cannabis industry nationwide because it forbids state-licensed weed companies from writing off most business expenses. Under the policy, companies are allowed to write off items under the “cost of goods sold” category, which includes spending on items necessary to manufacture a product.
Under 280E, growers and processors may write off things like salaries of cultivation employees and rent paid for growing or processing facilities, said Tamas from Anchin.
But since retailers resell products – rather than produce them – they generally cannot write off line items like rent or most of their employee salaries, since these costs are not related to manufacturing a product.
Instead, weed businesses must eat the same costs that other businesses can deduct, which can amount to a staggering expenditure.
“The numbers are huge,” Tamas said.
Ironically, because the federal government categorizes marijuana as an illegal substance, one of the few items dispensaries are able to deduct from their taxes is money spent on their inventory: marijuana.
If the DEA reschedules cannabis to Schedule III – as the U.S. Department of Health and Human Services recommended – it would immediately make 280E moot for cannabis companies, Tamas said. But for now the tax regime applies to all legal plant-touching cannabis companies’ federal taxes.
These rules also applied to state taxes before Gov. Hochul’s 2023 budget decoupled the state tax regime from 280E. However, the changes didn’t apply to New York City’s tax system, and it won’t unless lawmakers pass specific legislation to decouple the city’s municipal tax structure from 280E.
The proposed law awaiting the governor’s signature applies retroactively to costs incurred since 2022 and would be a major windfall for Housing Works Cannabis Co., King said. Based on Housing Works Cannabis’ $12 million in sales in its first six months operating, King said the dispensary paid $350,000 extra in city taxes, which would be wiped clean via tax credits.
“I think every licensed cannabis retailer in New York City is going to benefit from this,” King said, adding that there are currently only four legal dispensaries operating in the city, but this number will likely grow exponentially over time – and two more have already been greenlit to open in coming days: Terp Bros in Queens and CONBUD in the Bronx.
Paul Yau, CEO of Union Square Travel Agency – another licensed New York City dispensary – said that even though federal taxes make up the lion’s share of the store’s tax burden, decoupling city taxes from 280E would have a meaningful impact on the business.
“It’s especially material in the context of Union Square being 51% owned by The Doe Fund,” said Yau.
If the store can keep a greater share of its revenue, it can contribute more to programs run by the Doe Fund, a nonprofit that provides housing, career training, and supportive services to homeless and formerly incarcerated men, Yau said.
Yau declined to specify Union Square’s revenue, and how much money the store will save in taxes if Hochul signs the bill into law, but he said the change would be significant to the shop’s bottom line
“On the corporate level, it’s 7.25% of revenue that we have to pay the city tax,” Yau said. “That is a significant amount of money, especially when it could be going to The Doe Fund.”
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