The cannabis industry is expanding and competition in new markets from cannabis startups to established industry leaders is picking up. New Jersey is one such market where demand for adult-use cannabis soared following the passing of the Cannabis Regulatory Enforcement Assistance, and Marketplace Modernization Act (CREAMMA) on August 19, 2021. Before entering the New Jersey market, cannabis companies should understand the applicable taxes and fees involved in operating their business, costs that could be substantial and will vary based on several factors, including business purpose—retail or cultivation—as well as the type of customers the company is targeting.
With the enaction of CREAMMA, New Jersey joined 18 other states that have legalized marijuana for both adult use and medicinal purposes. New Jersey previously passed the Compassionate Use Medical Marijuana Act in 2014 and the Jake Honig Compassionate Use Medical Cannabis Act in 2019, granting access to medical cannabis products for those 18 and older and for minors under the supervision of a parent, guardian, or custodian.
To compete in the New Jersey cannabis market, a business must first obtain an Employer Identification Number from the Internal Revenue Service (https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online) and then register with the New Jersey Division of Revenue and Enterprise Services (https://navigator.business.nj.gov/onboarding). The company can then apply for the cannabis license or licenses of their choosing with the New Jersey Cannabis Regulatory Commission (CRC).
Cultivation operations (Class 1 licensees)
Cultivators are subject to the Social Equity Excise Fee (SEEF) when selling or transferring cannabis to other businesses. The SEEF rate is one-third of 1 percent of the CRC-determined statewide average retail price of an ounce of usable recreational cannabis. This rate currently equates to $1.10 per ounce and is expected to be updated annually. Companies subject to SEEF will file Form SF-100 monthly, due by the 20th day of the following month.
The SEEF will apply only to business-to-business sales; cultivators’ retail customers are exempt from the fee. As well, products sold or transferred to another Class 1 license holder or sold for use in medical cannabis dispensing and treatment are not subject to SEEF.
New Jersey municipalities reserve the right to impose a Local Cannabis Transfer Tax on recreational cannabis transactions at a ceiling of 2 percent. The rate and decision to levy the tax is up to the municipality, as is the administration of the collection of the tax.
Retail operations (Class 2 licensees)
Retailers of adult-use cannabis products are subject to sales and use tax at New Jersey’s established standard rate of 6.625 percent as reported on Form ST-50C quarterly. Sales and use taxes on medical cannabis were phased out completely as of July 1, 2022.
The right of New Jersey municipalities to impose and administer a Local Cannabis Transfer Tax on recreational cannabis transactions of up to 2 percent also applies to retail sales.
Sales and use tax relief for New Jersey operators
Cannabis operators can mitigate their tax liabilities through several existing New Jersey sales and use tax exemptions. The following three forms can be used to generate substantial tax savings:
- Form ST-3 Resale Certificate: Exempts from taxation transactions of tangible personal property intended to be resold to customers or used as a component of a sellable item to customers. Ultimately, sales tax will be collected on the items when they are sold in the retail space.
- Form ST-4 Exempt Use Certificate: Exempts from taxation equipment or materials purchased to produce cannabis products, including machinery used in the production process and packaging materials. The exemption does not apply to small tools or supplies.
- Form ST-7 Farmer’s Exemption Certificate: Exempts from taxation the purchase of farm equipment or services used in cultivating adult-use cannabis and personal property used directly at the farming enterprise for the production and sale of adult-use cannabis.
Constantly evolving rules
The legal and taxable nature of cannabis products is constantly evolving. It is important for companies operating in the industry to stay current on the rules and regulations of all states where they operate. As well, because cannabis is considered a high-risk industry, companies should expect to be audited by taxing authorities and should keep detailed records of all transactions.
If you have questions on the taxes and fees for the New Jersey Cannabis Market, please contact me at KSeifert@hbkcpa.com.
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