This post was originally published on this site.
This guest column is from James B. Mann, an attorney specializing in cannabis tax and tax accounting issues. Mann has a J.D. from Harvard Law School and an MBA in accounting and finance from Columbia University. The views and opinions expressed in this article are those of the author, and do not necessarily reflect the views or positions of NY Cannabis Insider.
The Governor has recently released a proposal to repeal the THC potency tax and replace it with a 9% wholesale tax. While the industry supports the removal of the potency tax, the proposal does not go far enough to adequately support the New York cannabis industry.
The Governor’s office has contested the notion that its latest proposal would result in an approximate 30% tax on cannabis products. While the estimate of 30% may have been high, it is certainly not the 15% or so that the Governor’s office suggests. However, the difference comes down to semantics. From the State’s perspective, on product that costs $10 at wholesale, the state would collect $3.73, resulting in a tax rate of about 15%. The State argues that is the effective tax rate.
But the consumer experiences a 25% tax rate. On that same $10 wholesale price, the final retail price is $24.63. If there were no tax on the product, it would be $20 (as retailers have a 100% markup due to the draconian effects of Sec. 280E of the Internal Revenue Code). From the consumer’s perspective the extra $4.63 operates as an effective tax of nearly 25%.
While the State argues that its effective tax rate is only 15%, and industry contends that the tax’s impact is about 25%, in the end, the consumer only cares how much more the product costs after taxes are applied, not how much the government collects. It’s that disconnect that has allowed the government to continually state that the tax rates are low, when consumers and the industry contend the effective tax rate is far greater.
Operators in New York’s already struggling market are competing with thousands of illicit cannabis stores that sell products tax-free. Consumers are comparing the price of illicit cannabis versus the price of legal cannabis and NY-taxed cannabis will cost at least 25% more.
It’s worth noting, that with a 25% effective tax rate, New York will continue to have one of the highest tax rates for cannabis in the country. Below is a chart of current and proposed tax rates for various states (including some just starting their programs) all of which are 20% or less.
| State | Rate | Type |
|---|---|---|
| MD | 9% | Retail tax |
| NJ | 10-15% | Wholesale tax, retail tax, and optional local tax |
| CA | 15% | Retail tax |
| DE | 15% | Retail tax |
| OH | 15.75% | Retail tax (can be increased with optional local tax) |
| MI | 16% | Retail tax |
| NM | 16.87% | Retail tax (can be increased with optional local tax) |
| VT | 20% | Retail tax |
| RI | 20% | Retail tax |
Because these taxes are charged at the point of sale (except New Jersey), the statutory tax rate is equivalent to the effective tax rate. In New Jersey, the effective tax rate is between 10-15% depending on local taxes.
There is no denying that removing the THC potency tax and replacing it with a 9% wholesale tax gives much needed breathing room to struggling cultivators, but the cannabis market is driven by consumer demand. We know that cannabis has a price elasticity of roughly 10%, meaning that if legal cannabis is priced more than 10% over illicit market prices, sales drop off dramatically. When consumers can choose between a cannabis product in a legal dispensary and a product that is 25% cheaper from one of the thousands of illegal shops or from the person they’ve bought cannabis from for years, the data says they tend to choose the cheaper option.
There are also operational issues with a wholesale tax. For instance, a distributor that sells products to a retailer on 30-day terms may need to actually remit the wholesale tax to the State before receiving payment from the retailer. For businesses that are already suffering due to the slow rollout, this can cause tremendous stress. Furthermore, the structure of the proposed tax appears to give vertically integrated cannabis companies (the big guys) about a 2% price advantage over small cannabis businesses.
The Governor’s rationale for a wholesale tax is somewhat mystifying. New York’s Department of Taxation and Finance has gone on record stating that the wholesale tax is necessary due to the definition of “illicit cannabis” which enables both DTF and the Office of Cannabis Management to bring enforcement actions against illicit operators. Even accepting this strained interpretation, it should be pointed out that the Governor is in charge of the cannabis bureaucracy and the Legislature is in session, so fixing the problem is certainly feasible. Assuming however, that there is some immutable law of physics such that a workable scheme of enforcement cannot be created without a wholesale tax, then the wholesale tax should be set at 1% to minimize the impact on distributors and put New York on an equal footing with other states.
Removing the THC potency tax is a step in the right direction, since that tax results in prices approximately 40% higher than they would be without it, is destructive for the industry, and is a boon to both border states and illicit operators. Given the general train wreck of New York’s legal cannabis efforts to date, it seems especially crazy that the people in charge refuse to learn from other states and implement a single fair and efficient sales tax.