CT cannabis businesses could see some tax relief

With Connecticut on the verge of opening its first legal pot shops, an effort is underway to get the General Assembly to ease the state tax burden on licensed cannabis businesses.

The national prohibition on cannabis restricts cannabis businesses from claiming the deductions that other businesses do on their federal tax returns. But several states in recent years have moved to allow cannabis companies to write off expenses on their state tax bills.

In Pennsylvania, medical marijuana businesses can receive state tax deductions for expenses they’re prohibited from claiming under federal tax law. New York, which is also about to open its adult-use market, lets marijuana businesses take state tax deductions. Massachusetts has also eased the state tax burden on cannabis businesses as part of a package of recently passed reforms targeting its legal market.

“Federal prohibition has prevented cannabis businesses from being able to write off normal expenses like any businesses do. Because of that it adds an extra level of taxation on their goods and their products or their services rather. What a number of states have done have decoupled the federal tax prohibition from the state tax liability,” said DeVaughn Ward, senior legislative counsel at the Marijuana Policy Project.

Federal tax law allows cannabis business owners to deduct their cost of goods sold but not normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses others given marijuana is still classified as a Schedule 1 drug and federally illegal. Many state tax codes mirror the federal rules.

Retailers are hit hardest by the prohibition, according to Matthew McCarthy, founder of The Dope Tax Group in Bridgeport. "People are under the assumption that dispensaries are making tons of money but at the end of the day, the tax burden that’s on them significantly lowers that profit," McCarthy said.

If a retailer brings in $4 million, for example, and the cost of the product was $2 million, "you’re getting taxed on $2 million profit," he said. "Whereas any other company has say $1 million in deductions." 

Erin Gorman Kirk, founding partner at Cannabis Government Strategies, said she and other advocates have begun talking to Connecticut lawmakers about a proposal to ease the state tax burden on cannabis businesses ahead of the legislative session that starts Jan. 4. Gorman Kirk said that would level the playing field for cannabis businesses, which usually pay higher tax rates than other industries.

“This would lessen the burden on legal business owners and allow them to simply act as a legitimate business,” she said.

Adam Wood, president of the Connecticut Cannabis Chamber of Commerce, said the group is in the process of putting together its legislative agenda for 2023 and that the tax issue has come up frequently in conversations with new and existing cannabis businesses in the state as a top priority. "The tax implications are real," Wood said. "Seeing as though the cannabis industry has been legalized in the state of Connecticut, they should be entitled to the same types of exemptions as all other businesses."

House Majority Leader Jason Rojas, D-East Hartford, said he began researching the issue last year and is interested in bringing it up this session. But he said he is still in the early stages of consideration with many details still up in the air such as the anticipated revenue loss to the state.

It’s an issue that has united multi-state cannabis operators and smaller, new businesses.

Luis Vega, a hemp farmer from Bridgeport who received a provisional license to grow recreational cannabis, said changes to state tax law would "gives us the same fair advantage that any other business has."

While George Archos, founder and CEO of multi-state cannabis operator Verano, said removing the barriers at the federal and state level “is necessary for all cannabis companies to succeed, especially for smaller operators and entrepreneurs looking to gain entry into the industry.” Verano runs Connecticut’s largest cannabis cultivation facility and two medical marijuana dispensaries and has received approval to operate in the adult-use market.