June 6, 2023
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The New York Senate has approved a bill that would provide tax relief to New York City marijuana businesses that are currently blocked from making federal deductions under an Internal Revenue Service (IRS) code known as 280E.
While Gov. Kathy Hochul (D) signed a budget bill last year that included provisions allow state-level cannabis business tax deductions—a partial remedy to the ongoing federal issue—New York City has its own tax laws that weren’t affected by that change.
Now the Senate has passed legislation from Sen. Luis R. Sepúlveda (D) to fill that policy gap, voting 43-18 on Monday to send the local reform fix to the Assembly for consideration.
“This bill would allow a deduction for business expenses, incurred by taxpayers authorized by the Cannabis Law to engage in the sale, distribution, or production of adult-use cannabis products or medical cannabis, for purposes of the unincorporated business tax (UBT), the general corporation tax (GCT), and the corporate tax of 2015, commonly referred to as the business corporation tax (BCT),” a summary says.
A section of the city’s tax code would be amended to add sections allowing the deductions “in an amount equal to any federal deduction disallowed by section 280E of the internal revenue code.”
“This modification to income is appropriate because, while the expenses of cannabis-related business cannot be deducted for federal purposes, New York law permits and encourages these businesses akin to any other legitimate business occurring in the State,” a memo attached to the bill says. “The City’s business taxes should similarly encourage these business activities.”
It also notes that the reform legislation has the support of New York City Mayor Eric Adams (D).
Lawmakers in several states have pursued the tax workaround as congressional marijuana reform legislation continues to stall, leaving state-licensed cannabis businesses with significantly higher federal effective tax rates under prohibition.
For example, the Illinois legislature recently approved a budget bill that includes similar provisions to allow licensed marijuana businesses to take state tax deductions that they’re currently prohibited from utilizing at the federal level. That measure has been sent to the governor’s desk.
In April, the governor of New Jersey signed legislation to allow licensed marijuana businesses to deduct certain expenses on their state tax returns as a partial IRS 280E workaround.
Lawmakers in Iowa, New York, Pennsylvania and Virginia have similarly pursued tax relief for each of their state’s marijuana markets.
At the congressional level, Rep. Earl Blumenauer (D-OR) reintroduced a bill in April that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.
The congressman told Marijuana Moment that he believes the reform would ultimately generate additional tax dollars, as the existing code acts as a disincentive for marijuana businesses to report taxes honestly.
Also, a newly formed cannabis coalition that launched on Tuesday is advocating for marijuana rescheduling or descheduling. If cannabis is placed in Schedule III, IV or V, that would place the industry outside of the parameters of the 280E ban, the group pointed out.
For the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And as the Congressional Research Service (CRS) noted in a 2021 report, IRS “has offered little tax guidance about the application of Section 280E.”
Back in New York, state regulators are moving to allow cultivators to sell cannabis to consumers at farmers market-style events.
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