Why New York’s THC Potency Tax Needs to Go

By Dan Livingston | February 7, 2023

You likely know that New York State has started adult-use cannabis sales. Perhaps you’ve heard that adult-use cannabis is subject to a THC potency tax – a tax on the amount of milligrams of THC in a given product – and a 13 percent retail tax. Maybe you saw a recent post by the Office of Cannabis Management (OCM) stating the cannabis tax is only a 20 percent effective tax rate.

So, why is the Cannabis Association of New York (CANY) saying that the THC potency tax needs to go, and New York needs to adopt a 20 percent retail tax?

Sometimes, math is complicated, and this is one of those times. Without getting too far into the weeds (pun intended), the 20 percent effective tax rate touted by OCM is misleading. Using current pricing at Housing Works, the first adult-use dispensary to open in New York and one of just two currently operating, the effective tax rates actually range from about 32 percent to 41 percent depending on which product you buy.

Why the disparity? It’s the reality of retail and federal taxes. The Internal Revenue Code denies deductions for most business expenses incurred by cannabis businesses; dispensaries are hit particularly hard by this provision. Because of this, dispensaries are looking to increase their margins wherever they can and the THC potency tax, believe it or not, gives them the ability to do just that.

Here’s what the OCM incorrectly believes happens: A retailer buys a pound of 20 percent THC cannabis for $2,000 and pays the distributor an additional $454 for the THC potency tax. The retailer then doubles the price of the cannabis to make up their margin resulting in a retail price of $4,454. When the customer buys the cannabis there’s also a 13 percent tax. In that situation, there’s an effective tax rate of about 25 percent.

Here’s what actually happens: A retailer buys a pound of 20 percent cannabis for $2,000 and pays the distributor an additional $454 for the THC potency tax. The retailer then doubles the entire price, resulting in a retail price of $4,908. When the customer buys the cannabis, the 13 percent retail tax is added resulting in an effective tax rate of about 38 percent.

The high tax rates affect all sides of the market.

With competition that includes states like Massachusetts with its 20 percent rate, indigenous reservations, with much lower tax rates, and the illicit market; licensed operators have products that can be twice as expensive as their competition. Smaller operators – particularly those that the MRTA designates as social equity licensees – tend to have less access to capital in general, and in particular cheap capital. Usually a large multi-state operator (MSO) may be able to get a loan at 10 percent. If a small operator can get a loan it will be at 15 percent or more. This tax represents a strategic advantage for large players and a structural barrier for smaller players. Those same MSOs can also go raise money from accredited investors, something smaller businesses will find difficult.

For consumers it results in decreased access to the regulated market. If the prices are twice as high as the product they’re used to buying, most consumers – based on national data – will not buy from the regulated market.

For the state it results in less tax revenue and a public health concern. With less people buying from the regulated market smaller operators may go under resulting in less cannabis taxes paid. This results in less money for community reinvestment. Furthermore, people buying from the unregulated market poses a public health concern, as the likelihood of tainted products increases when purchasing from unregulated markets.

For the reasons above (and more), CANY supports removing the THC potency tax and simply making a flat 20 percent tax at retail to match Massachusetts’ current tax rate. This reduction could result in substantially higher cannabis sales revenue, meaning more businesses getting licensed and hiring employees, and more cannabis tax revenue flowing into the state coffers for community reinvestment.

We’ve seen this type of tax work in many states like Colorado, Washington, Massachusetts, Nevada, Oregon and Michigan. Despite cannabis prices falling over time, which is inevitable, on average, the states continue to increase their tax revenue, year over year.

However, to see the downside of a weight-based tax (which is, at its core, what the THC potency tax is) we just need to look at California. Their weight-based tax, as well as local taxes, pushed the tax rate of cannabis to about 40 percent. This put many licensees in jeopardy of losing their businesses, as they were unable to compete with the unregulated market. In a lifeline to the industry, last year, about four years after legal sales began, California repealed its weight-based excise tax and instead kept just their 15 percent retail sales tax.

The industry really hasn’t gotten off the ground in New York yet and necessary changes can still easily be made. To avoid an outcome like California, New York should repeal the THC potency tax and replace it with a flat 20 percent retail tax.

Dan Livingston is the executive director of the Cannabis Association of New York (CANY) and a former Binghamton City councilman. He has been working with CANY since its inception in 2019.