Articles & Alerts

Cannabis Industry Update: Impacts of the 2025 New York State Budget Bill

May 8, 2024

The recently passed 2025 New York State budget bill included items that were high on the agenda for the State’s legal cannabis industry, specifically enforcement and taxes. However, not all the reforms sought were incorporated into the finalized budget. The following is a summary of the items that did and did not make the cut, and the significance of these items to New York’s cannabis industry.

Repeal of Cannabis Potency-Based Tax & Other Tax Actions

Until the 2025 budget was passed, New York was one of a small handful of states that imposed a tax based on the potency of the cannabis product. This tax regime was largely seen as problematic because compliance for business owners was overly burdensome both from a calculation and expense-related perspective, thereby discouraging customers from purchasing products in the legal market. The overall effective tax rate was estimated to average 35% depending on product type and potency. A flat tax on the wholesale level was called for to alleviate these concerns. What now replaces the potency tax as of June 1, 2024, is a new flat 9% tax on the wholesale price to be collected by the cannabis distributor.

The new 9% flat tax for microbusiness license holders and for registered organizations (vertically integrated businesses) is calculated on a base amount of the retail sale of cannabis products, which is 75% of the sale price. Accordingly, if the retail sale price is $100, the wholesale tax of 9% is imposed on a base amount of $75 resulting in a tax due of $6.75.

Note, New York’s retail tax remains unchanged at 13%, the collections of which is divided 9% to the State and 4% to the municipality.

In addition, another change to the tax system implemented with the 2025 state budget is a decrease in the medical cannabis tax rate from 7% of the retail price to 3.15%.

Tax Background

The competitive advantage enjoyed by the New York State illicit cannabis market over the legal market is already an existential issue to many of the fledgling New York cannabis businesses, due primarily to the sheer number of illicit stores and to the ability of non-compliant sellers to offer products at a fraction of the legal retail price. Other competition comes from neighboring states, such as New Jersey and Massachusetts, which have tax rates that are considerably lower than New York’s.

Another issue with the potency-based tax system was that fluctuations in the market price of cannabis were not considered in the structure. Specifically, if the price of cannabis dropped, a potency-based tax fails to adjust with the market shifts.

Consequently, the longstanding call from State cannabis operators and lobbyists for a repeal of the potency-based wholesale level tax was answered with the 9% flat tax on the wholesale price of cannabis products.

What Was Left Out

Cannabis farmers were left out of the final version of the budget despite expectations that support on their behalf was to be included within the broader plan to bolster the state legal cannabis industry. Earlier proposals included a fund dedicated to farmers to help compensate them for losses that they sustained, and to help ensure that farmers could continue financing their business operations. The state created an expectation for existing hemp farmers that if they raise the first cannabis crops that there would be a market to sell those products to within a reasonable timeframe. The announcement of the first cannabis conditional cultivator licenses issued was made April 14, 2022, and existing hemp farmers were given the first state cultivation licenses. These farmers invested heavily into cultivation to meet the projected supply needed to stock the first licensed store shelves upon opening, but by October of 2022, as the first cannabis harvest approached, not a single adult use cannabis retailer was in existence due to substantial delays in the state licensing program that ensued. The first retailer opened its doors in December 2023. In the interim, many farmers lost sizeable sums, have gone out of business, or are not able to finance the next crop. The first versions of the budget contained plans for grants, loans and tax credits that would be made available to the impacted farmers, yet nothing related to this was ultimately enacted.

Action to End Proliferation of Illicit Cannabis Operations

Increased scrutiny by New York State on the implementation of the adult use cannabis program, and the continued proliferation of the illicit market lead to an intensified political involvement in the program. While not tax related, it is worth noting that the budget included substantial changes to enforcement against stores selling cannabis without a license. Previously, legal enforcement was limited to the Office of Cannabis Management and the Department of Finance and Taxation, neither of which had adequate resources needed to target the thousands of illicit stores in the state. Local municipalities were similarly not given the authority to act against these shops. However, the budget now authorizes localities to padlock illicit storefronts, collect civil fines from such illicit businesses, and inspect, enforce and shut down illicit shops in an effort to protect the legal marketplace. Further, counties and cities are able to adopt and enforce their own ordinances regarding unlicensed cannabis businesses. New York City will be marshalling the power of the City Sheriff’s Office to aid in this effort. Finally, New York City landlords will face fines of $50,000 for failing to initiate eviction proceedings on tenants engaged in the sale of unlicensed cannabis, and outside of the City these fines will be equal to five times the rent.

In summary, while significant strides have been taken in the 2025 New York State budget, particularly in repealing the problematic Cannabis Potency-Based Tax and implementing other enforcement changes, there remains a need for further action. Notably absent from the budget was funding to assist cannabis farmers, a gap that underscores the challenges faced by some early industry entrants. For more information or to discuss the impact of the new budget regulations on your cannabis business, contact your Anchin Relationship Partner, or Elana Tamas, Anchin’s Cannabis Tax Leader.