Most New York cannabis operators to save big without potency tax

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Image of Naturae's cannabis extraction facility in Hoosick Falls, New York

Naturae, a cannabis extractor based in Hoosick Falls, hopes to offer lower prices on certain products thanks to New York's new flat excise tax plan. (Photo courtesy of Naturae)

New York Gov. Kathy Hochul’s push to replace the state’s potency tax on cannabis products with a flat excise tax went into effect June 1, the beginning of the new fiscal year for the state.

Most marijuana operators in the developing East Coast market are applauding the move, which particularly will benefit smaller retailers and processors as well as social equity licensees, industry sources told MJBizDaily.

The tax change, implemented as part of the state’s $237 billion fiscal 2025 budget, is considered a win for consumers as well.

Retail cannabis products are expected to drop in price – a key development as state-regulated marijuana companies compete against hundreds of unlicensed weed shops in the state, particularly in New York City.

Hochul, who has called the state’s rollout of an adult-use cannabis market a “disaster,” recommended in January that the potency tax on marijuana products be repealed and replaced by a flat 9% excise tax.

Under the state’s 2021 legalization law – the Marihuana Regulation and Taxation Act (MRTA) – operators were required to pay:

  • A half-cent per milligram of total THC for flower.
  • Eight-tenths of 1 cent per milligram for concentrates.
  • 3 cents per milligram for edibles.

“For most operators, with the average market pricing, it created a 25% to 30% tax,” said Nicolas Guarino, CEO and co-founder of Naturae, a Hoosick Falls-based cannabis extractor that distributes solventless hash, live rosin and distillate products to more than 100 retailers in the state.

Corporate and consumer savings

The potency tax also established untenable prices on some products, such as tinctures, which faced a $60 tax markup per unit, in some cases.

With the tax change, Naturae plans to lower prices on roughly 30% of its offerings, with discounts of 15%-35%.

“That should allow operators to now have some profitability, to reinvest in growth and reinvest in their marketing,” Guarino added.

“And it’s going to allow big companies, of course, to lower their pricing.”

New York cannabis retailers rejoice

In the first three months of the year, Silly Nice, a Black- and veteran-owned brand headquartered in New York City, paid nearly $20,000 in THC taxes, cutting significantly into its profit margins.

The potency tax change is a welcomed relief for co-founder LeVar Thomas, who said the brand now will be able to offer more affordable prices, enhanced variety and support to small-business growth.

“With the recent tax change, we can now use these funds to better serve our community,” Thomas said.

“We can invest more in marketing to grow our brand and reach more customers – and also support local charitable initiatives.

“This change allows us to make a bigger positive impact.”

The tax change will make adult-use cannabis more affordable while reducing the appeal of the illicit market, according to Vladimir Bautista, CEO and co-founder of Happy Munkey, which is opening its first store in the Washington Heights neighborhood of Manhattan.

“The removal of the potency tax is a game changer for the New York cannabis industry,” he said.

Economic impact ‘a wash’

For New York’s vertically integrated operators, such as Chicago-based PharmaCann, the economic impact of the policy shift is expected to be nominal.

That’s because registered organizations (ROs) – New York’s term for the 10 multistate operators licensed to initially serve its medical market – are taxed in the adult-use market at the wholesale and retail levels.

“In rough terms, the economic impact is a wash for registered organizations,” PharmaCann spokesperson Jeremy Unruh told MJBizDaily via email.

“Time will tell whether suppliers who truly benefit from the change pass those savings on to the consumer.”

PharmaCann was one of six ROs that regulators approved to enter the recreational market on Dec. 29, exactly one year after the state launched adult-use sales.

The controversial policy shift effectively eliminated a three-year waiting period for ROs to enter the expanded market and erased the first-mover advantage for social equity retailers and smaller suppliers.

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New cannabis-payments dilemma

While the elimination of the potency tax has garnered widespread support in the New York market, collections on the flat 9% excise tax already are creating problems because of unpaid invoices.

Lack of payment is one of the largest challenges in the cannabis industry – one that ultimately led to the collapse of retailer MedMen Enterprises, distributor Herbl and others.

Under the current tax-payment structure, New York operators have only 20 extra days to collect accounts receivable from the previous quarter, a daunting task given the cash constraints of nearly every marijuana business.

Complicating matters, nearly all New York-licensed marijuana operators currently are in some type of tax-payment plan with the state, sources told MJBizDaily.

“We have a good mechanism for collections in place – a delinquency-posting list – but our average collection time is about 42 to 45 days, even on 30-day net terms, which is the most the market allows,” Naturae’s Guarino said.

“They didn’t realize that the net-30 terms they were putting in place were going to jeopardize operators collecting the money that they want to get paid on.”

The situation is likely to worsen, according to Aaron Riley, founder and CEO of Certified Testing and Data, a state-licensed cannabis product testing lab in Albany.

“Stores aren’t paying producers as fast as they had previously agreed to, so there’s this huge cash-flow gap, where a processor or cultivator owes this potency tax,” Riley said.

“And they haven’t even gotten paid for their product yet.”

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.