On Thursday, April 14, 2022, the New York State Cannabis Control Board (CCB) held its eighth public meeting. Here’s what happened.
I. Conditional Adult-Use Cultivation and Processing Licenses
The CCB opened conditional adult-use cultivator license applications on March 15. In its meeting agenda, the CCB posted a resolution stating the intention to approve 52 conditional cultivators. After opening remarks from the CCB chair, Tremaine Wright, the CCB approved the list of conditional cultivators. It is presumed within the next several weeks, the CCB will approve an additional round of conditional cultivation licenses.
The licensees are subject to the guidance and FAQs posted by the Office of Cannabis Management (OCM). OCM has not issued formal regulation for cultivators and, therefore, licensees must continually check with OCM to determine if there is additional guidance.
An important open question that will have major impacts on cultivators and every other licensee is the extent of the prohibition on “direct or indirect interest” under the law and regulations. OCM has yet to flesh this question out thoroughly, which has left applicants unsure how to proceed on various types of agreements that many contain industry-standard language but may nonetheless be prohibited under a yet-to-be-announced OCM interpretation.
II. Medical Home Cultivation Regulations
The CCB approved a resolution to publish revised medical home cultivation regulations. The first draft of the regulations was published last November and went through the 60-day comment period. Based on public comments, OCM has revised the regulations and will go through another comment period lasting 45 days. This comment period will start May 4.
The proposed changes in the revised regulations include:
- Updated definitions to clarify outdoor cultivation permitted
- Revised storage and security requirements
- Clarification of designated caregiver plant limits
- Provisions for the sale of medical cannabis seeds and immature plants for home cultivation by entities licensed or registered by the OCM
Until the regulations are finalized, home cultivation by medical patients is prohibited. Once finalized, the regulations will allow medical patients to cultivate up to three mature and three immature plants at home, with no more than six mature and six immature plants being cultivated in a residence containing at least two medical patients over the age of 21. Patients will be allowed to possess up to five pounds of cannabis in their residences.
III. Decoupling New York State From Section 280E of the Internal Revenue Code
Though not discussed at the CCB meeting, an amendment to the New York State Tax Law was passed in the budget purporting to decouple New York State’s taxes from Section 280E of the Internal Revenue Code. Section 280E prohibits cannabis companies from receiving the benefit of deductions and credits. The medical cannabis companies that have operated in New York State have been denied these deductions and credits at both the state and federal level since the inception of New York State’s medical program.
The new amendment would allow both medical and adult-use cannabis businesses to take deductions for ordinary and necessary business expenses for New York State purposes. The bill would have no effect on a company’s federal taxes. However, the language of the bill indicates the deductions would be limited to the those deductions disallowed under Section 280E “related to the production and distribution” of adult-use cannabis. Because the term “distribution,” as used in the Marijuana Regulation and Taxation Act (MRTA), is limited to the transfer of cannabis between wholesaler and retailer, the language would appear to exclude cannabis retail businesses from deducting expenses other than the cost of goods sold. Retail businesses, because of Section 280E, can face tax rates up to 90 percent, whereas, cultivators and processors have more typical tax rates of between 50 to 60 percent. Those rates are still far above the 21 percent federal corporate tax rate or the maximum 37 percent ordinary income rate for pass-through businesses.
Stakeholders are attempting to obtain clarification on this point and will likely seek an amendment to the language of the bill that would allow for all licensed cannabis businesses to deduct expenses otherwise prohibited under Section 280E.
Barclay Damon’s Cannabis Team will continue to closely monitor developments pertaining to the MRTA’s rules and regulations. If you have questions about the MRTA, please contact one of Barclay Damon’s cannabis attorneys.
If you have questions regarding the content of this alert, please contact Jason Klimek, Cannabis Team co-leader, at jklimek@barclaydamon.com, or another member of the firm’s Cannabis Team.