New York Cannabis Legislation: Expanded Social Equity and Tax Deductions

27 Dec New York Cannabis Legislation: Expanded Social Equity and Tax Deductions

In the last two months New York Senator Jeremy Cooney has introduced two pieces of cannabis legislation that could impact New York’s cannabis industry significantly. The first is Senate Bill S7517A, which expands the definition of social and economic equity applicant under the Marijuana Regulation and Taxation Act (MRTA) to include gender equality. The second is Senate Bill S7518 to permit tax deductions for commercial cannabis activities. Let’s go through them both in detail:

S7517A – Expanding the Definition of Social and Economic Equity Applicant

This bill expands the list of qualifying social and economic equity applicants to include “transgender, gender non-conforming and non-binary individuals.” The bill defines “transgender, gender non-conforming and non-binary individuals” as “any person who has a gender identity or expression different from the sex assigned to that individual at birth.”

Senator Cooney has repeatedly spoken about the importance of expanding qualified social and economic applicants to include transgender, gender non-conforming and non-binary individuals. The justification for the legislation explains why:

“Every New Yorker deserves the right to express and identify their gender as they choose. An unintended consequence of [the MRTA] would force certain individuals from choosing between their gender identity and receiving priority for a license. The social equity aspect of the MRTA is meant to uplift historically marginalized groups through economic opportunities in the cannabis industry and this bill furthers that effort.”

S7518 – Permitting Tax Deductions for Commercial Cannabis Activities

The language of this bill is pretty straightforward: the prohibition on deducting expenses in connection with the illegal sale of drugs shall not apply to a licensee under the MRTA. The bill expressly lists each of the license types and incorporates by references the definition of “licensee” under the MRTA. Other cannabis friendly states have passed similar tax deduction laws.

The text of the proposed bill references the underlying Federal tax law upon which the prohibition is (was) based: Section 208E of the Internal Revenue Code. We have written extensively on the subject (e.g. here, here, here, here and here). The short of it is that a cannabis business cannot deduct or credit any amount paid or incurred as part of operating its business, outside of what can be captured in “costs of good sold.”

The impact of S7518 would be significant. By allowing cannabis businesses to deduct their operating expenses at the state level, the legislation would allow them to operate like legitimate business in New York. (Note: this legislation would not change Federal tax law).

The bill’s justification section highlights two of the goals in passing the MRTA: the promotion of social equity and a competitive business environment. As stated in the justification section:

• “New York cannot realize the goals set in the MRTA for social and economic equity if the cost of doing business prevents the equity candidates from actually participating. . . If [the tax code] goes unchanged, people will be unable or unwilling to leave the legacy market for a licensed business.”
• The bill will “ensure that adult-use cannabis market will not be dominated solely by large multi-state operators who can afford to pay the higher effective tax rate.”

It is important to note that neither S7517A nor S7518 are law. But the justifications for both pieces of legislation are sound. Stay tuned for further developments in New York cannabis industry, legislative or otherwise!