As New York anticipates windfall from marijuana legalization, still many details to be worked out

(The Center Square) – New York’s first year recreational marijuana sales are estimated to be at $1.18 billion in its first full year of operations, according to data analytics firm Headset.

The bill signed by Gov. Andrew Cuomo this week allows retail sales and personal cultivation for individuals 21 and older. The state is taxing marijuana at the wholesale and retail levels, with 9 percent of the 13 percent retail tax allocated to the state and the rest staying in the local community.

But businesses may face some regulatory tax hurdles when setting up shop, according to a tax attorney. New York law limits vertical integration for new businesses, which limits deductions on taxable income, according to Jennifer Benda, a partner/shareholder at the national law firm Hall Estill. It’s an issue the federal courts have yet to address, Benda said.

“So far, those cases have held that retailers/resellers are limited in the costs that can be included in inventory costs, because the courts have concluded that marijuana businesses cannot take advantage of more expansive inventory costing rules added to the Internal Revenue Code in the mid-1980’s,” Benda said. “Rather, current law requires a marijuana retailer to rely on an older set of inventory costing rules which allow minimal inventory costs for resellers but give more leeway to producers.”

Business owners cannot deduct those expenses from their state taxes, either, according to Benda.

“Unfortunately, this detail is often overlooked during the euphoria of state legalization and is often a step that occurs several years after legalization,” Benda said. “Until IRC Section 280E is repealed, or the courts determine that the more expansive inventory costing rules of the 1980’s apply, the profitability of New York marijuana retailers will be limited.”

New York officials are predicting the marijuana industry will add $350 million to the state coffers and create between 30,000 and 60,000 jobs in its first year. That would mean marijuana sales would be near $3 billion. Retail dispensaries will not open until later this year.

“This seems plausible in the long run but not very likely in the first year of operation,” according to the analysis from Headset.

Headset based its analysis on data from Massachusetts’ first year of marijuana sales. Massachusetts had 33 cannabis retailers by the end of the first year of legal sales. New York is expecting 38 dispensaries and two more may be on the way, according to Headset.

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