NJCPA Urges NJ Legislature to Make Tax Code Change if Cannabis is Legalized in New Jersey
February 13, 2019
NJ Tax Law Should Decouple from IRS Code 280(E)
Statement by Ralph Albert Thomas, CPA (DC), CGMA, CEO and Executive Director, NJCPA
If adult-use cannabis is legalized in New Jersey, it is crucial that the state decouples from the federal law governing cannabis — Internal Revenue Code 280(E) — to have a viable cannabis industry. As it stands, the federal provisions in IRS Code 280(E) make it impossible for cannabis business owners to receive a tax benefit for any of their operating expenses due to cannabis’ status as a federally controlled substance. This creates an immense challenge to the cash flow of cannabis operations in the United States. Only by separating New Jersey from the IRS tax law will cannabis owners be able to deduct ordinary and necessary expenses in the same manner as their non-cannabis counterparts.
Though the New Jersey Society of Certified Public Accountants (NJCPA) does not have a position on legalizing adult-use cannabis, we understand the need for the tax law change. The specific changes to decouple New Jersey from federal 280(E) for gross income tax and corporate income tax calculations are underlined in this document.
By not allowing cannabis owners in New Jersey to receive this tax benefit, it deters them from reinvesting the funds and growing their businesses. It would also force these businesses to retain cash to satisfy their federal tax liabilities, which would be three times higher than a typical business tax bill, and it would create tremendous barriers to entry for others. On a broad level, it also runs counter to Governor Murphy’s plan of creating sustainable tax revenues for New Jersey.
To correct these inequities, we are asking the New Jersey Legislature to consider changing the tax code to ensure a successful business environment, if adult-use cannabis is indeed legalized.
New Jersey would not be alone in making this tax change. Many of the states that have legalized cannabis have decoupled from 280(E). Of the 10 states with a regulated, 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. Of those, the most advanced and developed markets are those which specifically decoupled, such as Colorado and Oregon.