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.
The 280E Selling Expense Tax is overbroad, but it has some redeeming qualities, even for the marijuana community. First, it keeps the noise down – billboards and glitz can appeal to kids, and turn parents against legalization. Second, big companies spend much more heavily on advertising and marketing than poorly funded social equity licensees or Mom & Pop companies do. Big Marijuana hates the 280E Selling Expense Tax.
Early legalizing laws struck state conformity to 280E, thereby saying that sellers could deduct advertising, marketing, and everything on state returns. Those states bought the industry argument that 280E discriminates against marijuana. Well, so does any marijuana tax.
The New York marijuana legalization act keeps conformity, so those ads aren’t deductible on state income tax returns. New Jersey’s legalization act does the same, though a post-legalization bill would repeal conformity . The Selling Expense Tax is far from perfect, but at least those two states are not letting it get swept away willy-nilly. That’s a big change.