New Guidance on Recreational Cannabis Taxation and Cannabis Business Deductions in New Jersey

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As more states legalize medical and recreational cannabis, it is essential that cannabis business owners stay informed of any developments in state and local government regulation of recreational cannabis businesses. State legislatures can impose taxes and afford deductions to cannabis businesses that are not available at the federal level.

This article discusses the recent changes to New Jersey income tax deductions available to cannabis businesses and provides a brief summary of the three types of taxes applicable to recreational cannabis businesses in New Jersey: (1) sales and use tax, (2) the Social Equity Excise Fee (“SEEF”) and (3) municipal taxes.

New Jersey State Income Tax Deductions
On May 8, 2023, the State of New Jersey enacted legislation affording cannabis businesses certain business deductions for purposes of New Jersey state income tax. The new law departs drastically from the previous statutory scheme which mirrored the federal rules under Section 280E of the Internal Revenue Code. Section § 280E provides that no deductions shall be allowed for any trade or business if the activity of such trade or business “consists of trafficking in controlled substances.” Under federal law, cannabis is designated as a schedule I controlled substance.

The new legislation expressly provides that cannabis businesses may disregard Section § 280E when determining gross income for purposes of New Jersey state income tax. Cannabis businesses will now be able to take deductions that mirror the federal deductions available to non-cannabis businesses, such as deductions for ordinary and necessary business expenses as well as the cost of goods sold. These deductions lessen the amount of gross income recognized by the cannabis businesses, thus reducing the amount of New Jersey state income tax owed.