A High Tax State – New York’s Potency Tax on Adult-Use Cannabis

Seyfarth Shaw LLP

Adult-use cannabis legalization was passed in New York State when Governor Andrew Cuomo signed the Marijuana Regulation & Taxation Act (the “MRTA”) into law on March 31, 2021, after the Governor had previously attempted to include the legalization of adult-use cannabis in his last three budget proposals. The MRTA is expected to create significant economic opportunities for New Yorkers and the State, which should help the State generate some much needed tax revenue  to address the budget shortfalls resulting from the Covid-19 pandemic. The Governor’s office estimates that legalization could create 30,000 to 60,000 new jobs and the tax collections from the adult-use cannabis program could reach $350 million annually.

In order to raise the projected revenue while furthering the stated policy goals of helping those from disproportionately impacted communities and community reinvestment, New York took a novel approach to taxation of cannabis. The Act implements a new cannabis tax structure imposing a tax per milligram of tetrahydrocannabinol, better known as THC, the active chemical found in cannabis, with a tiered rate structure depending on final product type. Section 493(a) of the MRTA provides that adult-use cannabis products sold by a distributor to a retailer will be taxed at the following rates based upon the amount of total THC, as reflected on the product labels:

(1) cannabis flower at five-tenths of one cent (0.5) per milligram;

(2) concentrated cannabis at eight-tenths of one cent (0.8) per milligram; and

(3) cannabis edible product at three cents (3.0) per milligram.

In addition to the unique tax imposed by product type, Subsections (b) and (c) of Section 493 further impose a retail tax of nine (9%) percent upon the sale of adult-use cannabis products, as well as an additional four (4%) percent going to the local cities, counties, towns, or villages.

Of the 18 states that have legalized recreational marijuana to date, Illinois is the only other state to incorporate a potency based tax structure, imposing a 25% tax rate for cannabis products with THC concentration above 35%, and only 10% for products that fall below the threshold. While this hybrid product-specific taxation model has yet to be widely tested across the patchwork of individual state cannabis markets and frameworks, there are similarities to the taxation of the alcohol industry. However, taking such an unprecedented and granular approach to cannabis taxation could further delay the much-anticipated start date for legal sales, already unlikely to occur for close to two years, by adding an administrative hurdle requiring product-specific testing and potency labeling by regulators.

There is much still unknown about the timing, specific regulations, and licensing requirements to be promulgated by the newly created Office of Cannabis Management (OCM), governed by a Cannabis Control Board, which will oversee and implement the law, and whether there may be administrative complications arising from the taxation model. In the event logistical or other administrative difficulties complicate the rollout, it should be noted that the MRTA provides that the Board, no later than January 1, 2023, will be required to make recommendations to lawmakers regarding “the appropriate level of taxation of adult-use cannabis” and could potentially address any concerns with the taxation model.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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