ROSELAND, N.J. – On Feb. 22, Governor Phil Murphy signed legislation that legalized marijuana for adult recreational use, making New Jersey the first in the region and the 13th state in the nation to do so. That was step two in allowing cannabis sales to proceed in New Jersey. The final step will be adoption of the regulatory framework that will be drafted by the Cannabis Regulatory Commission.
To ensure New Jersey small businesses, minorities and women can compete in the cannabis market, it’s critical that the state change an obscure section of its tax statute. Otherwise, this new market will be dominated by large and already established players, many of which will come from out of state.
Deducting business expenses is a routine and integral part of operating a business and is critical for a company to be profitable. However, cannabis businesses do not have access to this tax benefit even though it is available to all other New Jersey businesses. And that’s because New Jersey “piggybacks” onto Internal Revenue Code Section 280E, which prohibits any company illegally engaged in drug trafficking from deducting business expenses on personal or corporate income tax returns. Since cannabis is still illegal on a federal level, this makes sense for federal taxes, but not here in New Jersey where it’s now legal.
That’s why the New Jersey Society of CPAs (NJCPA) supports legislation (S3240) introduced in December by Senator Troy Singleton (D-7) that would decouple New Jersey from §280E for businesses with less than $15 million of gross receipts. While we would prefer decoupling for all cannabis businesses, it is most important for small businesses, many of which are minority- and women-owned. Larger operators generally have enough cash on hand to withstand the drain on profits that §280E will cause in initial years, but smaller businesses often do not. It could literally stifle the ability of small cannabis businesses to get off the ground.
Many of the states that have legalized cannabis have decoupled from §280E. Of the 10 states with an adult-use market, two have specifically decoupled completely, one has specifically decoupled corporations, and two have no state tax at the business level thus decoupling by default. The states that have the most robust cannabis industry, Colorado and Oregon, have specifically decoupled.
In a survey of NJCPA members, 66 percent of respondents indicated that having a commercial cannabis industry in New Jersey will help the state’s economy. If lawmakers and the public want a prosperous cannabis industry, with small businesses participating and thriving, then New Jersey needs to decouple from §280E. This needs to be done now, before the issue gets buried in the process of drafting regulations for this promising new industry.