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August 5, 2021

IRS law will add to CT cannabis companies' state tax bills

PHOTO | YEHYUN KIM/CTMIRROR.ORG A staff member at Rocky Hill-based medical cannabis grower CTPharma checks on the marijuana flowers.

As Connecticut stands up its adult-use cannabis industry, the plant's status as federally illegal could add a substantial state tax burden to companies in the sector.

Part of the federal tax code known as Section 280E prevents any business trafficking substances that are federally illegal from deducting business expenses, which adds to the company's tax bill. But the law applies by default to state taxes even when that state has legalized cannabis, said Bill Claffey, head of the state and local tax practice at Glastonbury accounting firm FML.

Say a dispensary sold $1 million worth of cannabis, and after deducting the costs of goods sold (COGS) — like employees' salaries and inventory spending — they posted $400,000 in profit. If that company had another $300,000 in spending on non-COGS things like rent and electricity, they would still have to pay both federal and state taxes on $400,000, rather than paying taxes on $100,000 after taking a deduction, like a company in a different industry could do.

It's unclear if or when the federal government will legalize cannabis, or if there is any appetite to revoke Section 280E, Claffey said. But when it comes to state taxes, the company in the above example would pay $30,000 in state taxes, as opposed to the $7,500 tax bill a non-cannabis would pay.

"The [Connecticut] legislature would have to enact legislation to decouple [state taxes] from 280E," Claffey said, adding California took that step, and now allows cannabis companies to deduct non-COGS items.

As the framework exists now, 280E applies to state taxes incurred by cannabis companies in Connecticut.

Sales taxes for the adult-use cannabis market depend on what kind of cannabis the user is buying, Claffey said.

First of all, unlike with Connecticut's medical marijuana sector, the state's 6.35% sales tax applies to purchases. In addition to that, the state will tax cannabis sales mostly based on THC content, Claffey said. Customers will pay 0.625 cents per milligram of THC for plant material — i.e. cannabis flower — 0.9 cents per milligram for concentrates and 2.75 cents per milligram for edibles. Additionally, there's a 3% (of the gross price) municipal cannabis tax that goes to the city or town in which the business operates, Claffey said.


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