The Tax Landscape for New Jersey's Cannabis Marketplace
On Nov. 3, 2020, New Jerseyans voted to legalize the cultivation, processing and sale of retail cannabis. As of the date of this writing, the results have been certified with just over 67 percent of New Jerseyans favoring legalization. Prior to resorting to passage via a ballot measure, a point of contention in the executive and legislative branches of New Jersey government was how to handle the taxation of retail cannabis sales.
The Tax Debate
Higher tax revenues would benefit the state but proponents for lower taxes argued that this would keep consumers looking to the black market instead of taking advantage of the new commercial industry. Accordingly, accountants, consumers and hopeful industry participants are eager to know what the tax landscape will look like. The ballot question provided little insight in that regard, merely acknowledging that cannabis would be subject to the state’s sales tax with a municipal option if enacted by the Legislature.
The New Jersey Legislature makes use of Concurrent Resolutions to express the opinion of state legislators as to how the ballot initiative should come to form in the state’s constitution. Regarding the taxation of cannabis purchases, Senate Concurrent Resolution No. 183 said the following:
“The receipts from retail purchases of cannabis or products created from or which include cannabis shall only be subject to the tax imposed under the ‘Sales and Use Tax Act,’ P.L. 1966, c.30 (C.54:32B-1 et. seq.) as amended and supplemented, or any other subsequent law of similar effect; provided, however, that a municipality, subject to authorization by law enacted by the Legislature, may adopt an ordinance to impose an additional municipal tax on the sale, or any other form of transfer, of cannabis or products created from or which include cannabis by an authorized party located in a municipality. The municipal tax rate shall not exceed two percent of the receipts from each sale of cannabis or products created from or which included cannabis by an authorized party or the equivalent value from any other form of transfer by an authorized party”
Other Taxes Imposed
The New Jersey Society of CPAs was intrigued by the ambiguity of the language contained in Senate Resolution No. 183, specifically the reference to cannabis only being subject to the Sales and Use Tax Act or any other subsequent law of similar effect. This speculation was validated upon the passage of the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (S21) on Dec. 17 which, as of the date of this writing, was passed in the Senate and Assembly and is sitting on Governor Murphy’s desk pending additional changes that he has requested of lawmakers. Regarding the taxation of cannabis purchases, S21 provides the imposition of the following consumption-based taxes:
- Sales tax — The standard New Jersey sales tax rate will apply to the sale of cannabis but will not apply to the points in the supply chain that are subject to the local cannabis transfer and user tax, discussed below. The bill provides that at least 70 percent of tax revenues from retail sales shall be appropriated to investments in impact zones, or municipalities that have been most adversely affected by criminal cannabis enterprises (e.g., law enforcement activity, unemployment, poverty or any combination thereof)
- Local cannabis transfer tax and user tax — This optional tax will be imposed on a municipality-by-municipality basis and can take place at various points in the supply chain including cultivator to cultivator, establishment to establishment, retailer to consumer, or any combination thereof.The municipality has the discretion to set the rate, but it may not exceed 2 percent at the cultivation, manufacturer and retailer levels, and 1 percent at the wholesaler level. If enacted at each point in the supply chain, it can be discerned that this may amount to an additional 7-percent tax.
- Social justice excise tax — The Cannabis Regulatory Commission has the authority to exercise a social justice excise tax, which will apply to sales at the cultivation level to adult-use sales only. While this tax will take the place of the sales tax at the cultivation level, the amount of excise fee to be charged is determined based on an inverse relationship to the price of the product; meaning as the cost of cannabis goes down, the tax goes up. Unlike the sales, transfer and user taxes, these funds are to be exclusively earmarked for investing in social equity programs.
- Stamp fee — As part of the Cannabis Regulatory Commission’s responsibility to develop and maintain a system for tracking the product from seed to sale, the Legislature has called for the use of stamps to affix to the product. The stamps will be available for purchase to those at the various points in the supply chain — cultivators, manufacturers, wholesalers, distributors, retailers and delivery services — and could, in effect, be viewed as a tax. While the bill does not provide the price of the stamps, it states that the price “shall be reasonable and commensurate with the cost of producing the stamp.”
The language in S21 provides that New Jersey cannabis sales are not only subject to the standard sales and use tax, and that it is the intention to enact “other subsequent law of similar effect.” It is also clear that the goal of the Legislature is to ensure revenues generated from these sales will primarily be invested into communities that have been adversely affected by the historic prohibition on cannabis.
For more information on the cannabis market in New Jersey, visit njcpa.org/cannabis and consider joining the NJCPA Cannabis Interest Group at njcpa.org/groups.
Alex E. Krasnomowitz
Alex E. Krasnomowitz, CPA, is the owner of Alex E. Krasnomowitz, CPA, LLC, and is a member of the NJCPA Cannabis Interest Group.
Nicholas J. Young
Nicholas Young, CPA, is a staff accountant at Princeton Financial Group, LLC. He is a member of the NJCPA Cannabis Interest Group.