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New York Adult-Use Cannabis THC Potency Tax

Jason Klimek, Esq.
Published Date:
Apr 1, 2023

When the Marijuana Regulation and Taxation Act (MRTA) was passed, it added Article 20-C to the New York State Tax Law. Article 20-C contains both the THC potency tax (Potency Tax), an excise tax on adult-use cannabis products, and the adult-use retail tax (Retail Tax).

Under the MRTA, most licenses are not vertically integrated—i.e., the supplier tier (cultivation, processing, and distribution)—is completely separate from the retail tier. The only exceptions are the microbusiness license and registered organizations (current medical cannabis licensees) that obtain a registered organization cultivation, processing, distribution, and dispensary license (ROD). With the exceptions of microbusinesses and RODs, the Potency Tax is an excise tax paid by the retailer to the distributor. The Potency Tax rate varies by the amount of THC in a product and the category of product. The product categories and rates are as follows: (i) $0.005 per milligram of THC for flower products; (ii) $0.008 per milligram of THC for concentrates, such as vaporizers and distillates, and (iii) $0.03 per milligram of THC for edibles, including beverages. In addition to the Potency Tax, Article 20-C also enacted a 13% retail tax, taking the place of the standard sales tax.

Adult-use cannabis sales officially started on December 29, 2022, at the conditional adult-use retail dispensary (CAURD) licensee Housing Works, a recognized 501(c)(3) not-for-profit. Because there is now a data point of adult-use sales in New York, actual price points can be modeled to determine effective tax rates as well as projected cannabis sales and tax revenue. However, there is an important caveat: virtually all cannabis flower sold at Housing Works was grown outdoors, as there was no indoor cultivation allowed during this conditional period. Typically, outdoor-grown flower prices are as much as one-third to one-half as much as indoor-grown flower prices. Therefore, the price points of the outdoor-grown flower are not reflective of eventual indoor-grown flower prices. In many other adult-use markets, the flower that is sold at retail is predominantly indoor-grown flower, with the outdoor-grown flower being reserved for cannabis products such as concentrates and edibles.

Taking the average THC percentages and price for each category (flower, concentrates, and edibles), the current averages after tax are:

  • Flower THC: 23%
  • Flower Price per Gram: $19.37
  • Vaporizer THC: 83%
  • Vaporizer Price per Gram: $96.05
  • Edible Price per Gram of THC: $33.90

Based on the above, the effective tax rates are as follows:

  • Flower: 31%
  • Concentrate: 34%
  • Edibles: 41%

The overall effective tax rate on cannabis products is assumed to be 34% based on the weighted average, assuming the following market share: flower – 50%, concentrates – 30%, edibles – 20%.

In New York State’s Fiscal Year 2023 Executive Budget Financial Plan, it was estimated that in Fiscal Year 2024 (running from April 1, 2023, to March 31, 2024), New York would receive $95 million in adult-use cannabis tax revenue. Working backwards from that estimate, using the effective tax rates calculated above, New York appears to estimate that there will be $285 million in adult-use cannabis sales revenue. The Budget also estimates cannabis tax year over year growth rates to be 19% in Fiscal Year 2025, 55% in Fiscal Year 2026, and 38% in Fiscal Year 2027.

Based on a recent whitepaper suggesting a 20% flat tax at retail and updated data looking at growth rate of cannabis taxes in Washington, Colorado, Michigan and Massachusetts, each of which has a flat percentage-based cannabis tax, adult-use cannabis tax revenue could be increased in New York by 89% for Fiscal Year 2025, 63% for Fiscal Year 2026, and 37% for Fiscal Year 2027. The increases in year over year tax revenue would also result in a tremendous increase in the growth of sales revenue. By Fiscal Year 2026, it is calculated that sales revenue would increase by over 100% as compared to the estimations calculated from the Budget’s tax revenue projections. This increase in cannabis sales revenue could create more jobs, resulting not only in increased cannabis tax revenue for community reinvestment, but in higher overall tax revenues for New York State.

Some of the largest barriers to a successful legal cannabis market are the illicit market and non-enforcement. Since legalization in New York, thousands of shops have popped up purporting to be legally selling cannabis under dubious legal theories such as purchasing a legal product and gifting cannabis or paying a membership fee to join a cannabis club. These practices are illegal in New York and result in lower cannabis tax revenue and unfair competition with the legal market. Recently, New York has stepped up enforcement to combat illicit sales. Further, State Senator Liz Krueger has introduced Senate Bill 159 to amend various laws to further deter illicit operators and provide assistance to New York agencies enforcing the cannabis law. The bill increases tax penalties associated with illicit cannabis, in some cases, increasing the penalty by 1,000%. The bill also enables the Tax Department and the Office of Cannabis Management (OCM) to seize illicit cannabis.

In its response to public comments on the packaging, labeling, marketing, and advertising regulations, the OCM stated that products such as Delta 8 THC, Delta 10 THC, and THC-O are considered controlled substances under New York State Public Health Law Section 3306. However, lack of clarity and enforcement on these and other psychoactive cannabinoids has caused retailers to sell these products while avoiding the adult-use cannabis taxes; further, certain cannabinoids can be much more powerful than Delta 9 THC, the main psychoactive cannabinoid in cannabis. Therefore, even if properly regulated through licensed retailers and subject to adult-use taxes based the milligram of THC content, the tax realized would be drastically reduced due the fact that some substances purport to be over 30 times more powerful than Delta 9 THC. Processors and retailers thus may be incentivized to create and sell these products because they can sell a product with 3 mg of a synthetic cannabinoid that would be equivalent to a product with 90 mg of Delta 9 THC.

Recently, New York State Senator Jeremy Cooney and Assembly Majority Leader Crystal Peoples-Stokes introduced Senate Bill 4831 and Assembly Bill 4619, which would repeal the THC potency tax and increase the retail tax to a flat 20%.

Lowering the tax rate would be a boon to New York’s nascent cannabis industry. To quote Senator Cooney’s justification for the bill

“No other state in the country has implemented the potency (THC) tax on adult-use cannabis that New York State has. This tax is excessively complex, costly to cannabis enterprises, and will lead to shopping for the best lab results. Furthermore, such a tax results in burdens that fall disproportionately on small business and social equity applicants.

There is a large amount of data now available from other cannabis-legal states that strongly suggests that lower overall rates and simpler tax structures facilitate higher tax revenues and create an environment in which smaller businesses can thrive.

New York State already has a massive and well-established illicit market that has continued to flourish even after adult-use cannabis was legalized, and the THC tax and total tax burden will make this problem far worse.

This bill, by replacing the current potency tax with an increase in the current excise tax, will better shift the costs away from businesses and consumers while facilitating a cannabis market in New York State that is flourishing and will provide real economic benefits for all.”

Though the bill was introduced as a standalone bill in both the Senate and the Assembly, the bill was not included in each Chamber’s one-house budget. At this time, it is unknown whether it the THC potency tax repeal will be enacted.

Jason Klimek, Esq., is Barclay Damon’s cannabis team co-leader. He is also the Chair of the Tax Committee for the New York State Bar Association’s Cannabis Law Section and the Chair of the Policy Committee for the Cannabis Association of New York. Jason’s practice focuses on the nuanced processes of structuring, licensing, and maintaining compliant cannabis businesses at the federal, state, and local levels. He also has extensive experience advising clients on various complex federal and state tax compliance issues affecting cannabis-touching businesses.