The Higher the THC Levels, the Higher the State Tax? – A Boom or Bust for the Cannabis Industry?

January 29, 2023 · Cannabis.net

As the legal cannabis industry begins to blossom, a new threat looms on the horizon: the dreaded potency tax. Retailers and consumers alike would feel the pinch as products with higher levels of THC, the psychoactive compound in cannabis would be taxed at a higher rate. This buzzkill of a tax would target the very heart of what makes cannabis so beloved – its potency.

Imagine walking into your favorite cannabis dispensary, only to find that your go-to strain now comes with a hefty price tag thanks to the potency tax. The once affordable indulgence now feels like a luxury, forcing you to settle for a less potent option. It’s like ordering a craft beer only to discover it’s been watered down to save on taxes.

But it’s not just consumers who will feel the sting of this tax. Small business owners and independent farmers, who often operate on slim margins, would also be hit hard. They may need more resources to navigate the complexities of such a tax, leading to a further concentration of the industry in the hands of a few large corporations.

New York’s new recreational cannabis tax system

As New York’s recreational cannabis market lights up, one aspect has sparked fiery debate – the tax system. Like a puff of smoke, some fear it will blow out the flame of licensed businesses, chasing consumers to seek cheaper deals from illicit dealers.

A December white paper by two New York tax attorneys fueled the fire of concern just before the official launch of recreational cannabis sales on Dec. 29th. They predicted, and sadly it came true, that a legal eighth of cannabis flower in New York with 30% THC would go for $75. A hefty price for a simple indulgence, and one that could drive consumers to seek greener pastures from illegal sellers.

Housing Works, the trailblazer of state-sanctioned cannabis retailers in the five boroughs, opened its doors to eager customers, ready to experience the legal high. However, the prices proved to be a bit of a buzzkill, fluctuating due to taxes based on THC potency. The nonprofit’s online menu offered a range of options, from the subtle 19% THC costing $40 to the more potent 27% costing $60. But like a hidden trap door, an additional 13% excise tax would be added, bringing the final price range between $45 to $68, respectively.

As the legal cannabis market grows, so do the concerns about pricing. Data from other recreational marijuana markets suggest that customers are price-sensitive and are only willing to pay a premium of 10% to 15% above prices on the illicit market.

This information guides the paper authored by attorneys James Mann and Jason Klimek. They suggest that for the legal market to thrive, prices must remain competitive with the underground market, as customers won’t be willing to pay more for the same product.

It’s a delicate balancing act, ensuring that prices are fair for consumers and retailers. The legal cannabis market is still young, and prices must be set correctly to avoid driving customers back to the black market.

In stark contrast, unlicensed street vendors in New York City were offering cannabis eighths at rock-bottom prices, with Green Market Report finding prices ranging from $10 to $45.

This, coupled with the lack of enforcement against the underground market, can cripple state-licensed retailers, notably smaller businesses that are less well-capitalized. Klimek and Mann argue that this could prevent them from establishing themselves in the market before they even have a chance to take off.

The Situation Isn’t Too Dire.

Charles King, CEO of Housing Works, is optimistic about the future of legal cannabis retailers. He believes that as long as companies stick to a solid retail business plan and capitalize on the tourism market, they will be able to survive.

He believes that consumers understand that when they pay for legal cannabis, they are paying for quality, taxes and all the other expenses associated with being a regulated and licensed market. He remains confident that legal cannabis retailers can thrive despite the competition from underground markets.

Despite King’s optimism, he acknowledges that there will need to be a greater focus on enforcement against the illegal competition by the government. This is a significant task, as many unlawful operators have already established brand recognition by selling legally produced but illegally shipped cannabis from California and Oregon, such as the well-known SoCal brand Jungle Boys.

Joe Lustberg, the Managing Partner at Upwise Capital, said he recently ran into this brand name at a smoke shop. New York City residents like Lustberg may be tempted by these illegal but familiar options, making it even more crucial for state authorities to crack down on the illicit market.

“It’s a tough situation for legal cannabis operators competing with the smoke shop next door, which can sell California eighths for $30. Asides from that, the weed is better than what they’re selling at Housing Works,” said Joe Lustberg.

The legislature may also change the tax structure, as improving the system to be more business-friendly is a top priority for industry interests in Albany, including the Cannabis Association of New York. With the current tax system, it’s hard for licensed retailers to compete with illicit operators who can offer better prices and products.

According to a cannabis farmer in upstate New York and a board member of the Cannabis Association of New York (CANY), Brittany Carbone, she is confident that the state is aware of the issue with the potency tax and is open to reforms. She explained that it has been well-established that more reasonable tax structures lead to higher purchase rates in legal dispensaries. And that ultimately results in a net positive gain for the state regarding tax revenues.

Even if the tax structure doesn’t change, cannabis attorney Lauren Rudick said, the THC-based potency tax will probably encourage the creation and sale of a more diverse range of cannabinoid products that don’t rely only on THC to please consumers. And that could be just what the burgeoning industry needs: more product variety.

Cannabis attorney Lauren Rudick believes that even if the tax structure remains unchanged, the THC-based potency tax will likely inspire the development and sale of a broader range of cannabinoid products that appeal to consumers without relying solely on THC. This could be a significant positive for the emerging cannabis industry, as it would lead to a greater variety of products available to customers.

Conclusion

As the legal cannabis market in New York takes shape, the potency tax has become a contentious issue. Critics argue that it could drive consumers to cheaper underground dealers, undermining licensed businesses. However, others see the potential for the tax to foster innovation and diversity in the industry, with a broader range of cannabinoid products being developed and sold to appeal to customers. Only time will tell if the tax will prove to be a major buzzkill for sanctioned cannabis retailers or if it will pave the way for a thriving legal market. Regardless, the industry will face challenges as it continues to evolve, but with some creativity, it could rise above them and flourish. (Full Story)

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