July 26, 2023

As more states legalize medical and recreational cannabis, it is essential that cannabis business owners stay informed of any developments in state and local government regulation of recreational cannabis businesses. State legislatures can impose taxes and afford deductions to cannabis businesses that are not available at the federal level.

This article discusses the recent changes to New Jersey income tax deductions available to cannabis businesses and provides a brief summary of the three types of taxes applicable to recreational cannabis businesses in New Jersey: (1) sales and use tax, (2) the Social Equity Excise Fee (“SEEF”) and (3) municipal taxes.

New Jersey State Income Tax Deductions

On May 8, 2023, the State of New Jersey enacted legislation affording cannabis businesses certain business deductions for purposes of New Jersey state income tax. The new law departs drastically from the previous statutory scheme which mirrored the federal rules under Section 280E of the Internal Revenue Code. Section 280E provides that no deductions shall be allowed for any trade or business if the activity of such trade or business “consists of trafficking in controlled substances.” Under federal law, cannabis is designated as a schedule I controlled substance.

The new legislation expressly provides that cannabis businesses may disregard Section 280E when determining gross income for purposes of New Jersey state income tax. Cannabis businesses will now be able to take deductions that mirror the federal deductions available to non-cannabis businesses, such as deductions for ordinary and necessary business expenses as well as the cost of goods sold. These deductions lessen the amount of gross income recognized by the cannabis businesses, thus reducing the amount of New Jersey state income tax owed.

Sales and Use Tax 

All recreational cannabis sales in New Jersey are subject to the New Jersey Sales and Use Tax at a current rate of 6.625%. These sales must be reported on Form ST-50C and remitted to the New Jersey Division of Taxation quarterly. A recreational cannabis business may be exempt from the New Jersey Sales and Use Tax if it obtains a certificate for: (i) resale, (ii) purchase of production equipment, (iii) purchase of wrapping supplies, or (iv) farming enterprises. These exceptions apply only in certain circumstances and must be approved by the New Jersey Division of Taxation. The sale of medical cannabis is no longer subject to New Jersey Sales and Use Tax.

Cultivator Licenses: Social Equity Excise Fee (SEEF) 

All recreational cannabis businesses must obtain a license in one of the following categories: (i) Class 1 Cultivator, (ii) Class 2 Manufacturer, (iii) Class 5 Retailer or (iv) Testing Laboratories. Class 1 Cultivator license holders are required to charge a Social Equity Excise Fee on the sale or transfer of recreational cannabis to another cannabis business except when selling to another Class 1 Cultivator or a medical cannabis business. The 2023 SEEF rate is $1.52 per ounce and is determined annually by New Jersey Cannabis Regulatory Commission. The SEEF must be reported on Form SF-100 and remitted to the New Jersey Division of Taxation monthly. The SEEF is not imposed on retail consumers.

Municipal Taxes 

Under the CREAMM (Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization) Act, a municipality in New Jersey may impose a local transfer or use tax on the sale of recreational cannabis by a license holder in any of the four categories. The rates may not exceed: (i) 2% of the receipts from each sale by a cannabis cultivator; (ii) 2% of the receipts from each sale by a cannabis manufacturer; (iii) 1% of the receipts from each sale by a cannabis wholesaler; or (iv) 2% of the receipts from each sale by a cannabis retailer.

The landscape of cannabis taxation in New Jersey continues to evolve and now offers new opportunities for cannabis businesses to reduce their tax liabilities and operate on a more level playing field with non-cannabis businesses. By working with legal counsel, cannabis business owners can ensure compliance with new legislation while leveraging available deductions to maximize all provided benefits.

The full articles in their original forms can be found here and here.

Hannah Travaglini (LAW ’21) is an associate in Montgomery McCracken’s Business Department. She focuses her practice on general corporate matters, with a focus on taxation and trusts and estates. Hannah has experience drafting estate planning documents, trust instruments for charitable giving, and assists with income tax planning for business entities.