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12/14/2022
Cannabis SALT Shaker: State and local developments in tax and more (Q4 2022)
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.
In this issue:
- Market updates: New York, Illinois
- Plus: A post-election roundup of new state markets
- Food for thought: CBD taxation
Market updates
Review of November 2022 ballot measures: Two states add adult-use cannabis
Recreational marijuana use has increasingly gained bipartisan support, as social pressure and the benefits of tax revenue generated from its use have increased. This year’s November elections included five states voting on legalizing recreational-use cannabis – Arkansas, Maryland, Missouri, North Dakota, and South Dakota – four of which are GOP-led. Arkansas, North Dakota, and South Dakota did not pass their measures, but Maryland and Missouri did, bringing the total to 21 states that have legalized recreational-use marijuana, plus Washington, D.C. (Learn more about legalization in Maryland and Missouri.)
Also, while Colorado did not vote on any cannabis measures this election cycle, they did pass Proposition 122, decriminalizing the personal use, possession, growth, and transportation of certain psychedelic plants and fungi.
Takeaway:
- While not all ballot measures to legalize recreational marijuana passed in this election cycle, the momentum is moving forward. Only time will tell how voters and elected officials will feel in the future, or if a federal change will circumvent this altogether, especially with President Biden’s recent actions toward decriminalization and the fears of state budget deficits if the country falls into a recession.
N.Y. approves first round of dispensary licenses
Over a year after the Marihuana Regulation and Taxation Act was signed into law, New York issued its first 36 cannabis dispensary licenses in November. The state has faced a long road to get to this point, including a judicial block on issuing various licenses earlier in November. While many are celebrating this push forward for the Empire State’s cannabis industry, others, including the New York Medical Cannabis Industry Association, have concerns remaining over New York’s developing regulatory guidance. Currently, New York has numerous draft regulations open for public comment, which are expected to be finalized alongside the license rollout as we go into 2023.
While the rollout has been slow, of the 900 applicants, several of those that were able to receive licenses in this first round expressed optimism to news outlets about the future of the cannabis industry in the state. Among those who received the new Conditional Adult-Use Retail Dispensary (CAURD) licenses, eight went to nonprofit groups, with the remaining 28 issued to qualifying individuals, the state reported.
Currently, the requirements to obtain a CAURD license include having had at least 10% control and ownership of a profitable business; applicants must also have themselves had a cannabis-related conviction or have an eligible family member who had a cannabis-related conviction. Nonprofit license eligibility includes having a history of working with justice-involved individuals and communities, among other requirements.
Takeaway:
- New York is blending their legalization movement with social reform by targeting people and communities heavily targeted by cannabis-related offenses as those among the first eligible for a CAURD license.
Some Illinois retailers to see new municipal and/or county occupation tax rates, effective Jan. 1
Illinois statutes permit counties and municipalities to impose a Municipal or County Cannabis Retailers’ Occupation Tax on retail sales of cannabis (excluding medical cannabis). This tax is in addition to any state and local sales taxes that are imposed on the sale. The maximum tax rates that jurisdictions may impose are:
- Municipalities – 3%
- Counties – 3% in municipalities
- Counties – 3.75% in unincorporated areas
Illinois cannabis dispensaries should be aware that some Municipal or County Cannabis Retailers’ Occupation Tax rates will be changing effective Jan. 1, 2023. The rate changes are at the municipal and/or county levels, and not every jurisdiction is affected. Updated combined state and local retailers’ occupation tax rates for January 2023 can be viewed through the MyTax Illinois Tax Rate Finder.
Takeaway:
- Illinois cannabis dispensaries should verify the combined Municipal and County Cannabis Retailers’ Occupation Tax rates that apply to them and make any needed updates to their point-of-sale systems and software so that they are in place by Jan. 1, 2023, when the new rates become effective.
Food for Thought
Be aware of sales and excise tax complexities of selling CBD
State and local sales and excise tax classifications have never been considered straightforward. Compound this with the murky legal framework of marijuana, and the sales of THC and CBD are one of the most complex areas of state and local taxation.
Federally, marijuana is a Schedule I substance under the Controlled Substances Act, making it illegal to consume, grow, and dispense in any form. However, cannabidiol, a chemical derivative of cannabis commonly known as CBD, is an unregulated and federally generally legal substance to sell. This has led to a rise in popularity in CBD, even in the states with the strictest cannabis possession laws.
In most states, CBD products are not specifically defined and do not meet the definition of traditional THC marijuana. This allows CBD-infused product to be classified as a vitamin, health supplement, or general consumer good. Classifying CBD-infused products as general or health products allows them to escape the additional sales and excise taxes assessed on THC-infused products.
In contrast, a few states include CBD in their taxing provisions for marijuana, subjecting CBD to additional sales and excise taxes. For example, Minnesota has made it very clear that any products sold with CBD are now considered taxable as marijuana, even if the product would be nontaxable without the CBD being present.
Takeaways
- State and local sales and excise taxes are complex and vary by state. Retailers selling CBD products should be aware of the marijuana provision for every state they make sales into to determine if the products they sell are subject to additional sales and excise taxes.
Subject matter expertise
Ira Weinstein
Managing Principal – Real Estate, Cannabis Industries
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