Articles & Alerts

The Office of Cannabis Management (OCM) announced that the general application window for New York adult-use cannabis licenses opened on October 4, 2023. This much-anticipated development ends a waiting period of more than two and a half years since the Cannabis Law’s passage in March of 2021, marking a significant milestone for New York-based investors and entrepreneurs.

NY Cannabis License Applications

Key Licensing Details

• Application Start Date: October 4, 2023
• Available Licenses: Adult-Use Cultivator, Adult-Use Processor, Adult-Use Distributor, Microbusiness and Adult-Use Retail Dispensary
• Expedited Application Window: Retail dispensary and microbusiness applicants with proof of control over the proposed licensed premises have until November 3, 2023 to apply.
• Final Deadline: December 4, 2023

Provisional Licenses

Before the October 4th general licensing window opened, the Office of Cannabis Management (OCM) began the process of awarding provisional licenses for cultivation, manufacture/distribution, and retail. These were strategically designed to provide select groups, such as existing hemp growers and justice-involved entrepreneurs, a head start in the burgeoning cannabis market. By April 2022, the Cannabis Control Board (CCB) had begun awarding these licenses, which currently total 270 cultivators and 40 processors and distributors.

In August 2022, the Conditional Adult-Use Retail Dispensary (CAURD) applications were made available, aiming to empower those impacted by past cannabis prohibitions. While the awarding of these licenses was anticipated to provide a substantial economic advantage, it did the opposite for most. Despite the promising start, only 23 retail stores are currently operational largely due to unforeseen delays and a recent legal injunction. This has placed many licensees in a challenging position, grappling with financial strains and the decision of whether to reapply with priority amidst a landscape of uncertainties.

The limited number of retailers has impacted the other provisional licensees tremendously. The relative abundance of supply side businesses to those on the demand side of the market has left cultivators and manufacturer/distributors with large amounts of inventory, and little to no opportunity for sales. The financial challenges experienced by early licensees emphasizes the need to adequately assess the risk in entering a nascent legal market in New York State.

Social and Economic Equity (SEE) Applicants

SEE entrepreneurs, representing those from communities most affected by cannabis prohibition, will be given a 50% reduction on application fees, and license review priority. Guidance has been issued by OCM that aims to allocate half of the available licenses to SEE applicants. Priority is also given to re-applying CAURD licensees described above.

NY Cannabis-Related Taxes

Income Tax Perspective

Federal: Due to the tax code provision known as 280E, cannabis businesses cannot deduct their regular business expenses unless they are included in costs of goods sold (COGs), which for cannabis businesses is calculated according to guidance that differs from that provided to non-cannabis businesses. The inability to apply business deductions against business income leads to a substantially higher effective tax rate on income generated for cannabis businesses.

280E may become inapplicable in the future if cannabis is rescheduled from a Schedule I Controlled Substance to a Schedule III substance, in accordance with the recommendation made by the Department of Health & Human Services (HHS) to the Drug Enforcement Administration (DEA). Without a clear timeline for this change, or its actual implementation, forecasting cash flow based on the inapplicability of 280E may lead to substantially inaccurate financial projections, and severely underestimating the necessary cash required for business continuity.

New York State: New York State tax law was changed to indicate that the state does not conform to the Federal disallowance of business deductions in line with 280E. For cannabis businesses, the impact of New York not conforming to 280E is significant, as the state income tax would otherwise be applied to income without any ability to offset or reduce it using business deductions.

New York City: At present, unlike the State, New York City follows the Federal calculation. New York Senate Bill 7508 has been passed by both legislative houses which would preclude New York City cannabis businesses, like those in New York State, from being subject to 280E. However, procedurally, the Governor must request that the bill be sent to her from the Senate in order to move it forward, and she has chosen not to at present. With the bill left unsigned by the governor, and its expiration set to occur on December 31st of this year, it would appear that this inaction may be viewed as a quiet form of issuing a pocket veto, leaving legislators unable to move it forward. Accordingly, for now there is uncertainty around whether business deductions can apply against New York City tax for purposes of financial projections. If the City ends up continuing to follow the Federal 280E rule, it is likely to see businesses with a higher New York City tax liability than New York State tax liability.

Tax Rates in New York State and City

Tax rates imposed by the state and the city vary depending on the corporate tax status of a business, and then again depending on income level. Dividends, or profits generated by corporations, which are distributed to shareholders, are taxed twice – once on the corporation’s net income and then again at the shareholders’ level. Alternatively, businesses operating as partnerships are only subject to income tax at the partner level. The tax rates for state and city businesses generally range as follows:

• NY Corporate Tax Rate: 6.5% – 7.25%
• Metropolitan Transportation Business Surcharge: 30%
• NY Individual Tax Rate: 4% – 10.9%
• NYC Business Corp Tax Rate: 6.5% – 8.85%
• NYC Unincorporated Business Tax Rate: 4%
• NYC Individual Income Tax Rate: 3.078% – 3.876%

THC Potency Tax: Products are taxed based on their total THC content. Retailers pay this tax, but it’s remitted by the distributors and ultimately passed on to consumers. Rates are:

• Edibles: $0.03 per mg of total THC
• Concentrates: $0.008 per mg of total THC
• Cannabis Flower: $0.005 per mg total THC

Cannabis Sales Tax: In replacement of a standard retail sales tax, an excise tax is imposed on all cannabis retail sales at a combined 13% rate (9% state and 4% local). This tax is paid by consumers and remitted by retailers.

Navigating New York’s Cannabis Regulations

New York’s cannabis regulations are intricate and complex and were designed to promote fair competition. When entering into the market in any capacity (i.e., investor, lender, services provider, consultant, or brand) it is vital to research how the regulations may apply to you. Frameworks have been put in place on both horizontal and vertical ownership in the NY market. Beneficial owners are generally unable to hold interests in both the supply and demand side of the market (vertical), and there are limits on the number of businesses that licensees and their owners can hold interests in and operate (horizontal). Further, laws regarding many business arrangements create imputed ownership status when renumeration is paid in excess of certain thresholds. Various restrictions are in place on retailer-supply side agreements, such as product placement, exclusivity agreements, and brand promotions, that are entered into to pay for advantages regarding consumer purchases. It is also important to note that practices commonplace in other states might be at odds with NY’s stipulations thus making compliance paramount to sidestep potential pitfalls.

About Anchin

With a century-old foundation in New York City, we are delighted to offer our services to the cannabis industry right here in our home state. The dynamic business landscape of New York State and City, known for its challenges and opportunities, is where we’ve honed our skills. We understand the intricacies and resolve that it takes to succeed in New York, and we look forward to helping you navigate this distinct terrain.

To learn more about the application window and to discuss any tax planning strategies, please reach out to Elana Tamas – Cannabis Tax Leader, Alan Goldenberg – Tax Principal and Leader of State & Local Tax and Tax Controversy, or your Anchin Relationship Partner.