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Could This Be a Game Changer? New York Introduces Tax on THC Potency in Addition to General Levies

Could This Be a Game Changer? New York Introduces Tax on THC Potency in Addition to General Levies

New York won’t have as high a general tax rate on cannabis products as other States (Washington is the most expensive), but it has come up with a completely novel tax factor – a levy applied according to THC potency - which could change the tax game entirely. One observer says it will be a "total pain"!

Don Cazentre

18 October 2022 at 10:30:00

New Yorkers can generally count on almost every type of state tax to be among the highest in the country. And many things the state does are often pretty complicated.

Take New York’s scheme for taxing recreational marijuana. The state’s proposed marijuana tax is above the average for the 15 or so states that have legalized it so far, many experts say, but it’s not the highest. (Washington state currently takes that honor.)

New York, like many states that have legalized marijuana, will combine retail (excise/sales) taxes with some sort of wholesale (production/distribution) tax. The retail marijuana tax will be 13% (that’s down from the 20% initially proposed by Gov. Andrew Cuomo).

But what really sets New York apart is a plan to tie the wholesale tax to the amount of the psychoactive compound THC in the product. Other states have based the wholesale tax on factors like weight or volume.

New York will be the first to tax THC levels in this way, making it hard to say exactly where it will rank in overall marijuana taxes when sales begin. It is likely to end up with higher overall tax than neighboring states.

And critics say that’s not the only problem.

“It’s just an unbelievably complicated way of doing it,” said Kaelan Castetter, of the Castetter Cannabis Group and partner in Empire Standard, a Binghamton area hemp/CBD processor. “I mean it’s great that we finally have marijuana legalization, but this THC-based tax is something that could create a lot of problems.”

Castetter is the co-author of a report called THC Tax? The Unintended Consequences of a Novel Tax Structure.” It argues there are too many questions, such as who pays the THC tax, when it is assessed, how the level of THC is measured in the first place and more.

And the report includes a concern that the tax will favor larger producers at the expense of smaller ones.

“Overall, the THC based tax proposal could spell disaster for a nascent industry in a state reeling from historic economic losses by adding a layer of unnecessary complexity and costs,” the report states.

On the other hand, the THC tax may be smart, according to Rob DiPisa, a cannabis law specialist for the Cole Schotz firm in New Jersey. That’s because THC levels are becoming more important as the cannabis industry moves more into concentrates (rather than flower) and edible products become more popular.

“It is an interesting approach,” DiPisa said. “Clearly New York is paying attention to the way that THC now drives the value and the growth in the industry. It may be the first, but I can see this becoming a trend in other states.”

After several years of trying, New York made the possession of small amounts of marijuana by those 21 and over legal on April 1. But the legal retail market to buy and sell weed isn’t likely to start here until next year, after the state writes the regulations and issues the licenses for it.

The THC-based wholesale tax is written into the law, but without specific regulations to look at it’s hard to see how it will work, Castetter and other experts say.

“This is the first time (marijuana) is taxed on the amount of THC in the product,” said Kim Stuck, who was one of the first cannnabis regulators in the country when she worked for the Denver city health department in Colorado. She now runs Allay,a consulting firm that provides advice and assistance to those in cannabis industry. “I can’t tell if it’s going to work or not. It sounds like a total pain.”

New York’s marijuana plan calls for a 13% tax on retail sales — with 9% going to the state and 4% to local governments where the sales take place. Washington state has the highest such tax, called an excise tax, at 37%. States like California and Oregon also have high retail taxes.

On the wholesale side, New York’s plan calls for marijuana to be taxed 0.005 cents (half a cent) per milligram for marijuana flower, 0.008 cents (8/10 of a cent) per milligram for concentrated cannabis and 3 cents per milligram for edible products.

Castetter said the specifics aren’t clear. “Will the tax be assessed when farmers sell to processors, or when processors sell to the distributors?” he asked.

There’s also the issue of when and where the THC levels will be tested, he said. And, he said, the testing can be imprecise.

“The results can range from plus-or-minus 12% to 35%,” he said. “That’s a pretty big window. And that means the state may be getting more or less tax revenue than its supposed to. We could be talking millions, or tens of millions, of dollars in incorrect taxes.”

The New York law also allows the ten existing medical marijuana vendors, most of which are large national companies, to retain “vertical monopolies” in growing, processing and retailing. Such monopolies would not be granted to newer, smaller vendors except for those with separate specific licenses.

“With a tax structure like this, that just builds in an advantage for the larger players in the market,” Castetter said.

Then, of course, there is the worry that New York’s overall marijuana tax, when it’s all added up, will be relatively high.

That’s especially important when it’s compared to neighboring states, said DiPisa of the Cole Schotz law firm.

“It’s not like people from New York are going to go to California (for marijuana) because the tax is lower,” he said. “But New Jersey is probably going to have a lower tax, and that would be a problem.”

And there’s the black market — the illegal drug trade that is likely to exist side-by-side with the authorized sale of marijuana. Critics of high taxes for legal marijuana point out taxes may keep buyers using the existing black market.

“California has had some issues with this,” said Heather Trela, a fellow at the Rockefeller Institute of Government in Albany and an expert in marijuana policy. “High marijuana fees and taxes leaves a strong, thriving black market. California has not done an effective job of dampening that, and is falling short of its revenue projections as a result.”

New York Gov. Andrew Cuomo and his aides have said they expect legal marijuana to create up to 60,000 jobs, generate $3.5 billion of economic activity provide more than $350 million in annual tax revenue once it is fully up and running.

Castetter, also a board member of the New York Cannabis Growers and Processors Association, has been a fan of New York’s approach to other cannabis issues. That includes the state’s Hemp Extracts law, approved last year, that gives New York what are likely the strictest standards in the country for the production and sale of hemp products.

“Don’t get me wrong — I like that we finally have legalization,” he said. “But now we have to get it right. And we need to fix the things that we can to make sure we have the best and strongest legal market we can.”


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