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Gov. Kathy Hochul on Tuesday outlined her office’s recommendation for $233 billion in state spending in the 2025 fiscal year, including items that would repeal New York’s THC potency tax, and ramp up enforcement measures.
If state legislators pass the budget, it would mark a $6 billion increase over the 2024 fiscal year – which ends March 31 – while upending the potency-based tax system the MRTA set for the Empire State’s legal cannabis industry. But first, lawmakers need to take several steps before voting on the budget by March 31.
Let’s take a look at the cannabis-related items in the proposed budget, and the steps legislators must take before passing the budget into law.
Potency tax elimination
In her budget, Hochul proposes to amend the state cannabis industry’s tax structure by replacing potency-based tax rates with a 9% tax on the amount charged for the sale or transfer of adult-use cannabis products by a distributor to a cannabis retailer.
Additionally, under the proposal, retail sales by vertically integrated microbusinesses and medical cannabis Registered Organizations would be taxed at a rate of 9%, however would only apply to 75% of total sales. In other words, for every $100 these businesses earn in sales, $75 would be taxed at the 9% rate.
According to the governor’s memorandum in support, this bill would simplify tax computation and reporting for distributors. It would also adjust for the fact that microbusinesses and Registered Organizations pay tax on their retail sales based on the amount charged to the retail customer – rather than wholesale price on which other distributors’ taxes are based.
Many in the industry sought complete elimination of a supply side tax. Such elimination sparked concerns within the governor’s administration that legal and illicit cannabis would be indistinguishable at the point of distribution.
Likewise, given the significant current fiscal deficit and those in the coming fiscal years, complete elimination of such tax by the governor’s office is going to be challenging. Nevertheless, expect an industry-wide effort to further reduce this burden.
Illicit cannabis enforcement
The governor’s executive budget proposal on illicit cannabis would expand the Office of Cannabis Management’s authority to seal a building or premises of an illicit cannabis operator. If OCM determines that the business is an imminent threat to public health and safety, the agency could issue and execute a seal order with an immediate effective date, provided that a hearing is held within three days of a request for such a hearing.
This proposal would also increase the civil penalties for any person engaging in unlicensed activity who refuses to let OCM perform a regulatory inspection. If passed, penalties would increase from $4,000 to $20,000 for a first refusal and $8,000 to $40,000 for subsequent refusals.
The bill would also authorize localities to adopt their own laws to establish a process for the locality to execute closure orders, seize and destroy illicit cannabis, and establish their own civil penalties against the illicit operators.
Cities and towns that adopt a local law or ordinance must establish a local registry with all licensees in their municipality – mirroring OCM’s licensee registry. This bill would allow localities to receive penalty revenue from any legal actions they take related to unlicensed activity.
According to OCM, enforcement legislation against illicit cannabis, which legislators passed last session, has had significant technical and procedural difficulties. The new legislation is an attempt to fill the gaps of enforcement activity and assuage the concerns across the industry of the diversion of profits from the legal to the illicit industry.
What’s next?
Under New York’s Executive Budget process, the governor has up to 30 days to amend her budget proposal. Over the next several weeks, the State Assembly and Senate will conduct joint hearings on the proposal – by agency and issue area – and negotiations with the governor usually commence thereafter.
These hearings will begin Jan. 23 but cannabis industry stakeholders will likely be most interested in the public protection hearing on Jan. 25 and taxes on Feb. 14.
The 2007 Budget Reform Act mandates the use of conference committees as part of the legislative budget process. These committees work to facilitate agreement on a budget plan between the two houses.
The Assembly and Senate ultimately develop joint recommendations, amend the governor’s proposed bills to reflect their priorities, and pass the amended bills. This process results in a negotiated enacted budget that is due April 1, 2024.