When New Jersey voters approved a constitutional amendment to legalize cannabis Tuesday, experts quickly said the next steps will be up to the Legislature to build the regulatory framework.
Ralph Thomas, the longtime CEO of the New Jersey Society of CPAs, said adjusting some of the tax statutes is just as important — especially if the Legislature wants to make sure small businesses and minority- and women-owned businesses have equal access to the opportunity.
A statute that covers business deductions — a lifeblood of small businesses — currently prohibits those engaged in businesses that involve the sale of illegal drugs. While the vote Tuesday eliminated that distinction in New Jersey, cannabis is still considered illegal at the federal level, causing the tax problem, Thomas said.
“Deducting business expenses is a routine and integral part of operating a business, and is critical for a company to be profitable,” Thomas said. “However, cannabis businesses do not have access to this tax benefit, even though it is available to all other New Jersey businesses 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.”
Thomas said the New Jersey Society of CPAs is calling on state lawmakers to decouple New Jersey from 280E.
“While we would prefer decoupling for all cannabis businesses, it is most important for small businesses, many of which are minority- and women-owned,” he said. “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, Thomas said.
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, he said.
Thomas said the states that have the most robust cannabis industry, Colorado and Oregon, have specifically decoupled. He’s encouraging New Jersey to do the same.
“It’s critical that the state change an obscure section of its tax statute,” Thomas said. “Otherwise, this new market will be dominated by large and already established players, many of which will come from out of state.”
All this being said, cannabis should be a big hit, the organization said.
In a survey of NJCPA members, 66% of respondents indicated that having a commercial cannabis industry in New Jersey will help the state’s economy.
Thomas said that only will take place if the Legislature acts.
“If lawmakers and the public want a prosperous cannabis industry, with small businesses participating and thriving, then New Jersey needs to decouple from 280E,” he said. “This needs to be done now, before the issue gets buried in the process of passing enabling legislation and drafting regulations for this promising new industry.”