Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

The Buzz on the Medical Marijuana Excise Tax

The excise tax will be imposed on each RO’s gross receipts from sales of medical marijuana to a certified patient or designated caregiver. It is imposed on and payable by the RO and cannot be added to the retail customer’s receipt. And since the Department of Health will be setting the retail price, the ROs cannot pass the tax on to customers – even indirectly. That’s a buzz-killer.

Another relevant tax consideration is income tax. Indeed, the tax treatment of income derived from marijuana sales is a particularly heady issue. On the one hand, all sales of medical marijuana, be they medical or recreational, constitute federal crimes, and reporting income from such sales on one’s federal income tax return could be rather incriminating. Of course, not reporting the income presents a host of other potential problems. But for now, the federal government appears to be deferring to the states to “address marijuana activity through enforcement of their own narcotics laws.”

Another more imminent income tax issue lies in a provision of the Internal Revenue Code whereby no deductions or credits may be claimed for federal income tax purposes. This is because marijuana—medical or not—is still classified as Schedule I under the federal Controlled Substances Act. But in calculating taxable income, the ROs—and similar entities in other states—may adjust gross receipts with respect to cost of goods sold. Since federal AGI is typically the starting point for state and local-level income tax computations, this limitation can have also have state and local income tax implications, unless the state acts to ensure a different result. And there is no indication that New York State will deviate from the standard rule, at least not right away. Of course, much of this is still being rolled out, and once the Department of Health has selected the ROs from the applicant pool, I expect that the Tax Department will begin issuing guidance on these and other tax issues.

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