California updates tax procedures, adds credits
As proposed earlier this year, California’s final approved 2022-23 budget includes several tax provisions for the cannabis industry, simplifying the tax structure and reducing taxes. These specifically include:
- Elimination of the cultivation tax by setting the rate at zero beginning July 1, 2022.
- Shifting the point of collection and remittance for excise tax from distributors to retailers on Jan. 1, 2023, and maintaining a 15% excise tax rate until July 1, 2025.
In addition, the final budget includes the following two income tax credits for tax years beginning on or after Jan. 1, 2023, until Jan. 1, 2028:
- A licensed commercial cannabis business can qualify for a credit equal to 25% of the total amount of their qualified expenditures in the taxable year, limited to a maximum credit of $250,000. The qualified expenditures include compensation for full-time employees; safety-related equipment, training, and services; and workplace development.
- Qualifying social equity cannabis licensees will be able to take an additional credit up to $10,000. In addition, if they apply and receive approval from the Department of Cannabis Control, until Dec. 31, 2025, social equity cannabis retailers may keep 20% of the excise taxes they collect to reinvest into their businesses.
- The California cannabis industry will feel some relief from these changes, such as the elimination of the cultivation tax and the change to excise tax collection; however, there is still work that needs to be done.
New Jersey allows small cannabis businesses to qualify for certain state or local economic incentives
Generally, cannabis businesses are prohibited from receiving state or local economic incentives. New Jersey S. 2945, signed into law this summer, allows the New Jersey Economic Development Authority (NJEDA) to provide financial incentives to small cannabis businesses that are prospective licensees or licensed to operate as a cannabis cultivator, manufacturer, wholesaler, distributor, retailer, or delivery service, as well as property owners, developers, and operators of projects that are to be used to benefit these licensees.
Permissible incentives are those awarded to provide financial or technical assistance and on-the-job training.
“Small business” is defined as any business that has its principal place of business in New Jersey, is independently owned/operated, and employs the equivalent of fewer than 250 full-time employees.
- S. 2945 is intended to be a step forward toward removing barriers facing potential startup small cannabis businesses by allowing them to receive some of the same economic state and local incentives awarded to non-cannabis businesses.
Massachusetts splits from 280E, adds host community agreement (HCA) restrictions
This summer, Massachusetts Gov. Charlie Baker signed An Act Relative to Equity in the Cannabis Industry. In addition to the Act’s social equity provisions – such as a new Cannabis Social Equity Trust Fund to provide grants and loans for “entrepreneurs from communities that have been disproportionately harmed by marijuana prohibition and enforcement” – it contains two positive cash flow impacts to Massachusetts cannabis businesses, through income tax and Host Community Agreement (HCA) provisions.
The Act adds Massachusetts to the growing list of U.S. states deciding not to conform with Internal Revenue Code (IRC) Section 280E. This Massachusetts income tax change is effective for tax years beginning on or after Jan. 1, 2022 (i.e., 2022 for most businesses) and allows cannabis businesses to deduct expenses for Massachusetts income tax purposes that are disallowed under Section 280E for U.S. federal income tax purposes. The impact for cannabis businesses is a decrease in Massachusetts income tax expense with a corresponding increase in cash flow.
Host community agreements, the agreements required under state law between cannabis businesses and their home municipalities, have previously been criticized as being exploited by some cities and towns, and consequently creating barriers to entry for small and minority-owned businesses. The Act outlines new restrictions on HCAs intended to provide better oversight and equity. These include:
- HCA fees are capped at 3% of the cannabis business’s sales.
- The Act bars HCA fees based on sales and places more emphasis on alignment with the cost of the cannabis business’s impact on the host community.
- HCA fees are barred after the cannabis business’s eighth year of operations.
- The first annual fee payment cannot be due prior to the first annual license renewal.
- The HCA cannot require additional obligations, such as charitable contributions by the cannabis business to the host community or other organizations.
- The Act provides a positive impact for Massachusetts cannabis businesses by increasing their cash flow — and at a good time, given that market factors are expected to continue to put pressure on their profits. Massachusetts cannabis businesses should discuss these changes with a tax advisor to understand how they may benefit their business.
Vermont lays out vaping product taxation in its cannabis tax guide
By updating its Cannabis Tax Guide, the Vermont Department of Taxes recently clarified that vaping devices, vaporizers, vape liquids, and oils used in vaping are considered tobacco products even when the products contain a substance other than tobacco, or no substance at all.
A cannabis retailer buying and selling vaping products must obtain a tobacco retail license and is subject to regulation and compliance checks by the Vermont Department of Liquor and Lottery.
Thus, vape products sold without cannabis are subject to the tobacco products tax and the sales/use tax. Vape liquids and oils that do contain cannabis are subject to the tobacco products tax, the sales/use tax, and the cannabis excise tax.
- It is imperative that cannabis retailers understand all taxes that apply to the sale of vaping products.
Food for thought
Michigan’s application of IRC Section 280E
In 2016, Michigan enacted the Medical Marihuana Facilities Licenses Act (MMFLA), authorizing “provisioning centers,” defined as a commercial entity licensed under MMFLA, to buy and sell medical marijuana.
Then, in 2018, Michigan enacted the Michigan Regulation and Taxation of Marihuana Act (MRTMA), authorizing the selling of recreational marijuana.
- “Marihuana establishments” is defined as a marijuana grower, safety compliance facility, processor, microbusiness, retailer, secure transporter, or “any other type of marihuana-related business licensed by the marijuana regulatory agency.”
- “Dual licensing” is permitted under the MRTMA. MRTMA allows a licensed retailer or microbusiness to be concurrently licensed as a provisioning center under MMFLA. In addition, both operations can be conducted out of the same physical location.
In addition, MRTMA allowed deductions from state taxes for the ordinary and necessary business expenses for “marihuana establishments,” effectively repealing Internal Revenue Code (IRC) Section 280E for Michigan state income tax purposes for marijuana businesses licensed under the MRTMA.
The MRTMA did not repeal the MMFLA. Therefore, Michigan has taken the position that a marijuana business not licensed under MRTMA, including a marijuana business regulated by the marijuana regulatory agency under MMFLA, does not qualify for deducting its ordinary and necessary business expenses, i.e., that it is governed by the limitations of Section 280E.
In Executive Reorganization Order 2019-02, the marijuana regulatory agency was granted all authority, power, duties, functions, and responsibilities of the medical marijuana licensing board under the MMFLA, which therefore abolished the medical marijuana licensing board. This provides an argument that provisioning centers should be entitled to ordinary and necessary business expenses against state taxes because provisioning centers are being licensed by the marijuana regulatory agency and therefore are marijuana establishments by definition.
- There may be a position to claim that provisioning centers meet the requirement of a marijuana establishment that can deduct ordinary and necessary business expenses for Michigan income tax purposes. This should be discussed with a tax advisor that understands the Michigan legislation framework discussed above.
Subject matter expertise
Managing Principal – Real Estate, Cannabis Industries
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