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Governor Proposes Legalizing Adult-Use Cannabis in New York State; THC Potency Tax

Feb 2, 2021

On January 19, Governor Andrew Cuomo released his Executive Budget Proposal for 2021-2022. For the third consecutive year, the budget includes a proposal to legalize adult-use cannabis in New York State.

The Cannabis Regulation and Taxation Act (“CRTA”) would establish the Office of Cannabis Management, governed by the Governor’s appointed Cannabis Control Board, to oversee the adult-use, medical, and CBD hemp industries.

The CRTA establishes a two-tier tax structure for adult-use cannabis: one based on THC content to be applied at the wholesale level, and the second a 10.25% surcharge tax on sales from the retailer to the consumer. The Governor has said that the THC potency tax is intended to “more accurately capture both the true market value and potential public health risk associated with the final cannabis product.” The THC potency tax would be applied as follows:

  • Cannabis flower/pre-roll/shake products are taxed at a rate of 0.7 cent per milligram of THC content.
  • Cannabis concentrates/oil products are taxed at a rate of 1 cent per milligram of THC content.
  • Cannabis infused/edible products are taxed at a rate of 4 cents per milligram of THC content.

Additionally, the CRTA subjects all adult-use cannabis sales to regular state and local taxes. Most New York State counties have a combined state and local tax rate of 8%, so the majority of consumers would pay 18.25% tax on adult-use cannabis purchases. This is a reduction in tax from the Governor’s previous proposals, which proposed a 20% state-wide tax.

Of the THC-based tax, retail surcharge, and any license fees, the first $10 million in the 2023 fiscal year, $20 million in the 2024 fiscal year, $30 million in the 2025 fiscal year, $40 million in the 2026 fiscal year, and $50 million annually thereafter are directed for social equity purposes, with the remainder directed to the newly established New York State Cannabis Revenue Fund.

According to the Governor’s office, ultimately, adult-use legalization is projected to raise about $350 million in annual tax revenue, with $100 million being allocated to a social equity fund. The remaining $250 million would go to help fill the state’s historic $15 billion budget deficit and boost an economy that has suffered amid the coronavirus pandemic.

Prior proposals from the Governor to legalize adult-use cannabis have stalled over disagreements with lawmakers, chief among them the need for a social equity program. The current proposal mandates the Office of Cannabis Management to establish a social equity plan that “actively promotes racial, ethnic, and gender diversity in the adult-use cannabis industry” and will “correct past harms by investing in areas that have disproportionally been impacted by the war on drugs.”

Although encouraged by the inclusion of a social equity program, activists criticize that the proposal does not go far enough and “devotes only a fraction of the funding that is needed in these program areas.” It is expected that this proposal will act as a starting point for further negotiation with legislators, who re-introduced a competing cannabis legislation proposal in early January, sponsored by Senator Liz Krueger.

The push to legalize adult-use cannabis in New York has gained momentum as a way to boost the economy amid the COVID-19 pandemic.  Bolstered by that fact that neighboring New Jersey approved a legislation referendum last November, many are viewing legalization as an inevitability in 2021.

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Brett Cornell

Brett Cornell is a Tax Senior Manager and a member of the Financial Services Group with tax and accounting experience specializing tax consulting and compliance services for the financial services industry including asset management and fund clients.

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