In a few short years, marijuana has gone from being widely regarded as an illicit drug to being legalized for medical purposes in 23 states and for recreational purposes in four states – with others expected to follow suit in short order. New York State jumped on the bandwagon last year with the enactment of the Compassionate Care Act (the Act), a highly-regulated medical marijuana program. In fact, the Department of Health is currently accepting applications from would-be “registered organizations” (ROs) aspiring to be among the five ROs to receive the department’s blessing to cultivate and dispense medical marijuana from up to four locations around the state.
So why would sophisticated tax bloggers like us care? As tax nerds, we see tax issues everywhere! Indeed, the potential for states to grow tax revenue from marijuana sales has been a selling point on much of the state-level marijuana legislation from the outset. The potential is great: Colorado collected over $50 million in tax revenues and related fees in its first year. New York State, never one to forego a new tax, adds a new Article 20-B to the Tax Law under the Compassionate Care Act. Article 20-B imposes a 7% excise tax on every sale of medical marijuana by an RO to a “certified patient” or “designated caregiver” – both defined terms under the Act. That’s a pretty high tax rate…
The excise tax will be imposed on each RO’s gross receipts from sales of medical marijuana to a certified patient or designated caregiver. It is imposed on and payable by the RO and cannot be added to the retail customer’s receipt. And since the Department of Health will be setting the retail price, the ROs cannot pass the tax on to customers – even indirectly. That’s a buzz-killer.
Another relevant tax consideration is income tax. Indeed, the tax treatment of income derived from marijuana sales is a particularly heady issue. On the one hand, all sales of medical marijuana, be they medical or recreational, constitute federal crimes, and reporting income from such sales on one’s federal income tax return could be rather incriminating. Of course, not reporting the income presents a host of other potential problems. But for now, the federal government appears to be deferring to the states to “address marijuana activity through enforcement of their own narcotics laws.”
Another more imminent income tax issue lies in a provision of the Internal Revenue Code whereby no deductions or credits may be claimed for federal income tax purposes. This is because marijuana—medical or not—is still classified as Schedule I under the federal Controlled Substances Act. But in calculating taxable income, the ROs—and similar entities in other states—may adjust gross receipts with respect to cost of goods sold. Since federal AGI is typically the starting point for state and local-level income tax computations, this limitation can have also have state and local income tax implications, unless the state acts to ensure a different result. And there is no indication that New York State will deviate from the standard rule, at least not right away. Of course, much of this is still being rolled out, and once the Department of Health has selected the ROs from the applicant pool, I expect that the Tax Department will begin issuing guidance on these and other tax issues.
