NJ Publishes Guidance on Cannabis Sales & Use Tax and Social Equity Excise Fee

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The New Jersey Division of Taxation recently provided guidance[1] on registration and licensing requirements, Social Equity Excise Fees, and the Sales & Use tax applicable to companies operating in the cannabis industry.[2]

The following provides important takeaways from the Division’s publication.

Registration & Licensing

To operate a cannabis business in New Jersey a company must first register with the New Jersey Division of Revenue and Enterprise Services (DORES) 15 business days before conducting business.

The cannabis business must then apply for a license with the New Jersey Cannabis Regulatory Commission (CRC). Both medical and recreational cannabis businesses must be licensed by the CRC.

Limitations

Of note, an entity that is licensed to participate in the cannabis industry is not eligible for State or local economic incentives. For example, a cannabis business cannot be an Urban Enterprise Zone (UEZ) business or receive any of the benefits that come with that program.

Additionally, a licensed cannabis cultivator may not operate – or be located – on land that is valued, assessed, or taxed for agricultural or horticultural use.

Excise Fee

Once a cannabis business has begun operations, there are several state taxes and fees of which the business must be aware.

A cannabis cultivator (a “Class 1 licensee”) must generally charge a Social Equity Excise Fee (SEEF) on the sale or other transfer of recreational cannabis to other cannabis establishments. The SEEF is imposed at the rate of 1/3 of 1% of the statewide average retail price of an ounce of usable cannabis for consumer purchase, as determined by the CRC. For tax year 2022, the SEEF is $1.10 per ounce.

The SEEF must be reported and remitted monthly on Form SF-100.

However, a sale by one cannabis cultivator to another Class 1 licensee is not subject to the SEEF. Likewise, the SEEF may not apply to the transfer of product by a Class 1 licensee to a licensed medical cannabis alternative treatment center.

The SEEF is not imposed on retail consumers.

Retail Sales & Exemptions

As of July 1, 2022, retail sales of medical cannabis are no longer subject to Sales and Use Tax.[3]

By contrast, retail sales of recreational cannabis and cannabis products are subject to the state’s Sales and Use Tax.[4] This tax must be reported and remitted to the Division of Taxation by filing Form ST-50C on a quarterly basis. The current sales tax rate is 6.625%.

However, certain purchases by a licensed cannabis establishment are exempt from Sales and Use tax. The exemptions include the following:

  • Purchases for Resale – Purchases of tangible personal property for resale in its current form or for incorporation into other property held for sale by the business; the cannabis establishment must provide the seller with a Resale Certificate on Form ST-3.
  • Purchases of Production Equipment – Purchases of machinery, apparatus, or equipment used directly and primarily in the production of cannabis (including parts with a useful life of more than one year) may be exempt from the sales tax; the cannabis establishment must provide the seller with an Exempt Use Certificate on Form ST-4.

The exemption does not apply to the purchase of supplies or tools that are simple, hand-held, manually operated instruments used in connection with the machinery, apparatus, or equipment.

  • Purchases of Wrapping Supplies – Purchases of materials used to contain, protect, wrap, and deliver cannabis to customers – including, for example, wrapping paper, wrapping twine, bags, cartons, tape, rope, labels, nonreturnable containers, and all other wrapping supplies when such use is incidental to the delivery of recreational cannabis – if the licensed cannabis establishment provides the seller with an Exempt Use Certificate on Form ST-4.
  • Farming Enterprises[5] Purchasing Tangible Personal Property and Services – Purchases of farm equipment or production services used for tilling, planting, maintaining, or harvesting recreational cannabis; a qualifying, licensed cannabis establishment must provide the seller with a Farmer’s Exemption Certificate on Form ST-7.

Purchases of property such as seeds, plants, liners, fertilizer, lime, pesticides, and drip irrigation may also be exempt from sales and use tax when used directly at the farming enterprise for the purpose of producing and selling recreational cannabis.

Exempt Organizations

Because cannabis remains a Schedule 1 controlled substance under Federal law, a company that is engaged in a cannabis business cannot qualify as a nonprofit organization described in Section 501(c)(3) of the Federal Internal Revenue Code. Thus, it cannot claim an exemption from sales and use tax by presenting an Exempt Organization certificate on Form ST-5.

Instead, a cannabis business is treated as a for-profit business for the purpose of paying sales and use tax on taxable purchases. Notwithstanding this status, the cannabis business may qualify for any of exemptions from sales and use tax described above.

Stay Tuned

The foregoing is based upon the current state of the law in New Jersey. We expect there will be changes over time as the business community’s and the Division’s experience with cannabis evolves.

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[1] Publication ANJ-30.

[2] The guidance focuses on three major pieces of cannabis legislation: New Jersey’s Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization (CREAMM) Act (2021), which allows for the legal sale and use of recreational cannabis and cannabis products for anyone 21 years and older; New Jersey’s Compassionate Use Medical Marijuana Act (2010), which allows for the legal sale and use of medical cannabis products for resident patients 18 years and older; and the Jake Honig Compassionate Use Medical Cannabis Act (2019), which expanded access to medical cannabis for patients.

[3] The tax was phased out under a schedule that began July 1, 2020.

[4] In addition, there may also be a local cannabis transfer tax imposed by municipalities. A municipality in New Jersey may charge a Local Cannabis Transfer Tax of up to 2% on sales of recreational cannabis, or cannabis items by a cannabis establishment in that municipality. In addition, a municipality may charge a User Tax. A municipal User Tax differs from the State Use Tax (N.J.S.A. 54:32B-1 et seq.)

[5] A “farming enterprise” is a facility used to raise agricultural or horticultural commodities for sale.

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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