NY legalizes, but keeps marijuna ads non-tax-deductible

We don’t know the best way to tax cannabis, but New York State is advancing the process.

A surprising and useful feature of the New York bill is that it leaves in place “280E conformity.”  The federal government imposes a Selling Expense Tax on cannabis in Internal Revenue Code section 280E, which allows marijuana sellers to deduct only cost of goods sold on federal income tax returns.  

For New York state income tax returns, sellers follow 280E.  So on both federal and state income taxes, they can deduct only outlays to produce or buy the product.  Growers can deduct salaries for ag workers, but no one can deduct outlays for billboards, payments to celebrity endorsers, glitzy showrooms, and much more.  Too much more, maybe – not even minimum wage salaries or health benefits for retail workers.

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New York’s Radical THC Potency Tax on Marijuana Flower

We don’t know the best way to tax cannabis, but New York State is advancing the process.

With a THC potency excise tax, New York is starting a bold and radical experiment.  It’s the first jurisdiction in the world to tax cannabis flower or bud – smokeable plant matter – by THC content.  Canada taxes processed cannabis at 1 Canadian cent per milligram of THC, but taxes flower with a weight-based tax, at $1 per gram.  Canada doesn’t tax flower by THC. New York’s tax of 0.7 cent per milligram of THC of flower is revolutionary.  

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Implications of THC taxation of imported marijuana edibles

Along with some friends, I helped write this for Washington State:

“Concentrates that are infused or contained in other products for retail sale, such as those that go into edibles, sublinguals, tinctures, topicals, suppositories, and other processed cannabis products are additionally difficult to test accurately after being mixed with other ingredients.” Cannabis Potency Tax Feasibility Study: A Report for the Washington State Liquor & Cannabis Board, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3481584

I remember hearing that from stakeholders out there, and I still believe it, especially for more solid products like edibles.

Say we want, for a domestic tax scheme, a THC tax on concentrates, imposed before mixing or incorporation into a final product.  What do we do about imports?  Take an imported brownie, for instance.

Maybe the Narcotics treaties will prevent imports for a while, but maybe not forever.  Weight-based taxes plainly don’t make sense for brownies or similar imported processed products, which could be loaded with sugar instead of THC or other cannabinoids.  (And we can’t identify the raw plant matter that went into the processed import.)  I’m struggling to think of options beyond THC, sampled after incorporation into the final product, and ad valorem.  Ad valorem is especially unattractive there, with transfer pricing between foreign parent manufacturer and U.S. subsidiary distributor (a typical and unobjectionable business arrangement) a big problem – the foreign manufacturer would like to understate the price of the brownie to keep the ad valorem tax down.

So if we tax the imported brownie on the basis of THC sampled after incorporation into the final product, what about the domestic brownie?  Treat it like the imported brownie, measuring THC late in the process?  Or sample and tax the concentrate that goes into the domestic brownie, early in the process — leading to two similar edibles being sampled and taxed differently?