Like any business expanding into new territories, a cannabis business must keep careful track of the many state and local taxes, regulations, and market conditions it will be subject to. But, as is often the case, cannabis’ varying legality can add an extra layer of complexity. In this quarterly feature, we explore recent state-specific developments and what they could mean for your business.
Minnesota outlines taxation for newly legal adult-use cannabis
Minnesota has established an adult-use cannabis market and set laws concerning the taxation of sales of adult-use cannabis. The following is a summary of its key tax provisions.
- Imposes a 10% cannabis gross receipts tax on retail sales of taxable cannabis in Minnesota.
- Imposes a 10% cannabis use tax on a person receiving taxable cannabis for use or storage in Minnesota when not received from a taxable cannabis product retailer that paid the gross receipts tax listed above.
- Provides for a credit for taxes paid to another state on the taxable cannabis.
- Decouples from the federal disallowance of business expense deductions under IRC Section 280E.
- Prohibits localities from imposing a tax solely on the sale of taxable cannabis.
- Subjects the sale of taxable cannabis to the Minnesota sales tax.
- For purposes of property taxes, “real property used for raising, cultivating, processing, or storage of taxable cannabis products, cannabis flowers, and cannabis products for sale is classified as commercial and industrial property,” says the state Department of Revenue’s Cannabis Bill Legislative Bulletin.
- Establishes a licensing structure for entities engaged in the adult-use cannabis market.
For more details, see the full cannabis finance and policy bill, HF 100.
The cannabis gross receipts and sales/use tax provisions are effective July 1, 2023. The provisions related to decoupling from IRC Section 280E are effective for tax years beginning on or after Jan. 1, 2023. The property tax provisions are effective for assessment year 2024 and after.
- As with other states that have enacted adult-use cannabis laws, Minnesota’s new law will take time to implement. Taxpayers who are contemplating entering the Minnesota adult-use cannabis market are encouraged to consult with their tax advisors to determine the tax implications of the new law and to make sure they are in compliance with any tax collection and reporting obligations. Additionally, taxpayers should be aware of the disparities between federal and state cannabis-related tax laws. Even though cannabis has been legalized for Minnesota purposes, it remains an illegal controlled substance for federal purposes, and as such the restrictions on business expense deduction under IRC Section 280E still apply for federal tax purposes.
Tennessee imposes new tax, regulations on products containing hemp-derived cannabinoids
Tennessee recently signed into law SB0378, now Public Chapter 423, which imposes new regulations on the sale of products containing hemp-derived cannabinoids, including a new tax. A hemp-derived cannabinoid is defined as:
- “A cannabinoid other than delta-9 tetrahydrocannabinol, or an isomer derived from such cannabinoid, that is derived from hemp in a concentration of more than one-tenth of one percent (0.1%);” or
- “A hemp-derived product containing delta-9 tetrahydrocannabinol in a concentration of three-tenths of one percent (0.3%) or less on a dry weight basis.”
The sale of products containing hemp-derived cannabinoids is now limited to persons 21 years or older. The law also imposes a tax of 6% of the sale price of products containing hemp-derived cannabinoids sold at retail. This tax is in addition to the standard retail sales tax already imposed. The tax, however, does not apply to hemp-derived fiber, grain, or topical products, and to certain other substances.
The law also requires retailers and suppliers of products containing hemp-derived cannabinoids to obtain a license from the Tennessee Department of Agriculture authorizing the entity to engage in that business.
- Tennessee’s new law, which took effect July 1, 2023, is very limited in scope, applying to only a select type of cannabinoids. It is not to be confused with the legalization of recreational, adult-use cannabis seen in other states. Penalties may be imposed on entities that do not comply with the provisions of the law. Therefore, taxpayers who may be engaged in the supply or retail sale of products containing hemp-derived cannabinoids should be aware of any licensing or tax collection and reporting obligations they may have, and should consult with their tax advisors if needed to assist in navigating the new law’s requirements.
Vermont updates vaping product taxation – again
The Vermont Department of Taxes has again updated its Cannabis Tax Guide to clarify guidance on the taxation of vaping products. (See our Q3 2022 Cannabis SALT Shaker for our reporting of Vermont’s previous update.) This latest update clarifies that vaping devices and vaporizers sold at a cannabis establishment are subject to the cannabis excise tax, while those sold anywhere else are subject to the tobacco products tax. Similarly, vape liquids and oils containing cannabis are subject to the cannabis excise tax, while those containing tobacco are subject to the tobacco products tax. Additionally, all these products are subject to the sales and use tax in addition to the tobacco or cannabis excise taxes.
As the Tax Guide puts it simply: “Cannabis products are always subject to the cannabis excise tax but never subject to the tobacco products tax. Tobacco products are always subject to tobacco products tax but never subject to cannabis excise tax.”
Takeaways:Because this is a reversal of the previous guidance, which treated all vaping-related products as subject to the tobacco tax, it is imperative that cannabis retailers are aware of the change in policy and update their operating procedures to confirm the proper tax is being collected and remitted to the state.
Maryland builds out cannabis licensing regulations, imposes sales and use tax
Maryland recently issued emergency regulations relating to the state’s cannabis administration regulations, as well as enacted legislation imposing sales and use tax on the sale of adult-use cannabis. The emergency regulations focus primarily on expanding the licensing, reporting, and recordkeeping requirements surrounding adult-use cannabis sales within the state, and are effective July 1, 2023, to June 30, 2024.
Some items established by the emergency regulations included:
- Licensing fees ranging from $10,000-$50,000 per license.
- A timeline and conversion fee for existing license holders to convert their medical cannabis licenses to a dual-use license allowing them to sell both medical and adult-use cannabis.
- A prohibition on license transfers until July 1, 2028, except in limited cases.
- License holders can change the location of the licensed operation if approved, as long as the new location is in the same county as the existing licensed location.
- Expansion of the state’s license lottery system, allowing for the use of a lottery system should there be more applicants than available licenses.
The sales and use tax legislation imposes a 9% tax rate on any product containing cannabis. While most non-cannabis products sold at a dispensary will have a 6% tax rate, some products will have up to a 12% tax rate. Below is a sample of common products and the corresponding tax rate:
- Electronic smoking devices and tobacco pipes: 12%
- Vaping liquid that does not contain cannabis or cannabis products:
- Containers of 5mL or less: 60%
- Containers of more than 5mL: 12%
- Vaping liquid containing cannabis: 9%
- Vaping liquid containing cannabis prepackaged with an electronic smoking device, where each item in the package is separately stated on the receipt or record of sale:
- 9% applies to the vaping liquid containing cannabis, and
- 12% applies to the electronic smoking device
- Vaping liquid containing cannabis prepackaged with a reusable electronic smoking device, sold as a single item: 12%
- Vaping liquid containing cannabis prepackaged with a disposable electronic smoking device, sold as a single item: 9%
- Maryland has been releasing numerous changes to their adult-use cannabis regulations, many of which concern licensing. It is important for all current and prospective Maryland license holders to make sure they are staying up to date with these provisions, fees, and how taxes apply.
Tax credit opportunity: New York Manufacturer’s Real Property Tax Credit
While many tax incentives remain generally out of reach for cannabis businesses, we want to spotlight the New York manufacturer’s real property tax credit incentive. New York cannabis manufacturers and cultivators who qualify as a New York manufacturer are entitled to a tax credit equal to 20% of their eligible real property taxes paid during the tax year.
New York does not expressly prohibit those operating in the cannabis space from taking advantage of these credits, as long as all of the eligibility requirements are met.
A manufacturer is “a taxpayer or combined group that is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing during the tax year. … A combined group is considered a manufacturer only if the combined group is principally engaged in these qualifying activities.”
To be eligible for this credit, a qualified manufacturer must meet both a receipts test and a property test. The receipts test requires that at least 50% of the receipts be from manufacturing. The property test requires the manufacturer to have either all or at least $1 million (adjusted basis) of its manufacturing property as defined in Tax law section 210.12(b)(i)(A)located in New York. A taxpayer, including combined filers, is able to circumvent the receipts test as long as they employ at least 2,500 people within the state in manufacturing and the group has $100 million in manufacturing property located within the state.
It is important to note that for corporate filers, this credit is nonrefundable, but for pass-through entities, it is permitted to be refunded. Corporate filers that qualify as a manufacturer within the state of New York also benefit from reduced tax rates. While this credit is available for both corporate and pass-through entity filers, pass-through entities see the biggest benefit.
For full details, see the state Department of Taxation and Finance’s technical memorandum, plus amendments linked therein.
- The manufacturer’s real property tax credit can provide a significant benefit to qualifying taxpayers. Taxpayers should consult with their tax advisor to determine if they qualify for this and a variety of other credits and incentives available in New York.
Subject matter expertise
Managing Principal – Real Estate, Cannabis Industries
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.