A New Jersey Tax Recipe? A Pizza Topping of Fresh Marijuana Leaves.
The Royal Law Firm, originally founded in New Jersey, continues to serve its strong client base in the state. So, of course, we were watching closely as the whispers over the legalization of cannabis grew louder, because at the core of the issue is — taxes. This election year, the state’s voters opted to legalize marijuana, although implementation is pending. It will be a New Year’s treat – for New Jersey’s treasury. Until then, it is technically illegal to possess marijuana and arrests are permissible.
Even 20 years ago, the “scent of weed” scantily teased the air in New Brunswick – an always vibrant college town. The intoxicating plant is no stranger to the state. But the opportunity to fill the state treasury with over $300 million in sales tax revenue likely motivated the push for legalization more than any desire to accept existing practices. A publicly stated incentive by Gov. Phil Murphy is also to impact positive justice reform as low end drug crimes contribute significantly to the racial disparity in incarcerations in the state.
Sales tax enforcement would be interesting as it is developed, defined, and likely redefined. Where, how, and what would be subject to the marijuana tax would impact the sales, distribution, and development of cannabis based products. Additionally, out of state and in-state entrepreneurs may develop businesses and structure or restructure them to maximize the benefits of legalization while reducing the tax implications. How far the state decides to use its long arm statutes to reach out-of-state actions remains to be seen.
In terms of revenue, the tax rate is under 9 percent and the legislators are not seeking to impose an excise tax on marijuana. Treating it as just another commodity without penalizing it with excise taxes may be more encouraging for new business ventures.
For entrepreneurs, the interplay between federal and state laws become critical. For example, cannabis products cannot be trademarked under federal laws but a competent legal advisor can navigate the conflict successfully to protect the brand and the products, limit liability, and evaluate valuations of this complicated asset where its value is impacted by its legality, to properly protect products and industries involving aspects that may have varying levels of legality across jurisdictions.
One of the critical tax issues with marijuana based businesses is the federal income tax. IRC 61 essentially subjects all income from all sources, including illegal sources to federal tax. However, IRC 280E also prevents commonly applicable deductions against this income where the income is derived from “trafficking a controlled substance.” The net result is that the cost of tax compliance during this time of state and federal law disparity is extremely high. Tax compliance is not negotiable and the IRS will likely increase its already high audit rate for noncompliance (eg. Not reporting IRC 280e income,) in this area.
Even if cannabis is broadly decriminalized federally, a recently proposed bill would still impose excise taxes on the revenue generated in the marijuana industry and create additional reporting and administrative burdens such as requiring trust fund deposits of related revenues. Although a 5 percent excise tax may not seem as high as expected, internationally, it may disincentivize businesses in a competitive marketplace. Also, it is unlikely the bill will pass Congress given the general rhetoric on the topic and lack of movement of the bill.
Thus business tax strategy is paramount to navigate the interplay between the conflicting state a federal law for the cannabis industry. Businesses can be segmented, structured, restructured and revenue, expenses, and activity allocations structured in consultation with a tax attorney in a tax efficient manner for any business, but in the cannabis industry, the short term tax and liability reduction impact would likely be even more noticeable.
Marijuana legalization will likely have a significant impact in the state of pharmaceuticals and pizza – whether for medication, recreation, or pizza toppings.
Contact us to discuss business impact and legal solutions further for businesses and individuals involving assets impacted by rapidly changing laws and practices in various industries, including cannabis, technology, hospitality, and entertainment.