BILL NUMBER: S7508

SPONSOR: SEPULVEDA
 
TITLE OF BILL:

An act to amend the administrative code of the city of New York, in
relation to permitting certain tax deductions related to the sale,
production, or distribution of cannabis products

 
SUMMARY OF PROVISIONS:

This bill would allow a deduction for business expenses, incurred by
taxpayers authorized by the Cannabis Law to engage in the sale, distrib-
ution, or production of adult-use cannabis products or medical cannabis,
for purposes of the unincorporated business tax ("UBT"), the general
corporation tax ("GCT"), and the corporate tax of 2015, commonly
referred to as the business corporation tax ("BCT").

Section one of the bill would add a new paragraph to subdivision (c) of
section 11-506 of the Administrative Code of the City of New York
("Administrative Code") to allow a deduction under the UBT in an amount
equal to any federal deduction disallowed by section 280E of the inter-
nal revenue code ("IRC").
              

Section two of the bill would add a new subparagraph to paragraph (a) of
subdivision 8 of section 11-602 of the Administrative Code to allow a
deduction under the GCT in an amount equal to any federal deduction
disallowed by section 280E of the IRC.

Section three of the bill would add a new subparagraph to paragraph (a)
of subdivision 8 of section 11-652 to allow a deduction under the BCT in
an amount equal to any federal deduction disallowed by section 280E of
the IRC.

Section four of this bill would make this tax credit retroactive and
applicable to tax years beginning on or after January 1, 2022.

 
REASONS FOR SUPPORT:

New York's Cannabis Law permits the sale, production, and distribution
of adult-use cannabis products by licensed persons or entities. The
Cannabis Law also permits registered organizations to sell, produce, and
distribute medical cannabis. A person or entity engaging in one or more
of these activities must be authorized to do so under the Cannabis Law.

In computing federal taxable income, the federal IRC generally permits
the deduction of all "ordinary and necessary" expenses incurred while
carrying on any trade or business, as prescribed in Section 162 of the
IRC. However, section 280E of the IRC specifically disallows the
expenses incurred while carrying on any trade or business consisting of
trafficking in products determined to be controlled substances under
schedule I and II of the Controlled Substances Act, which includes
adult-use cannabis products and medical cannabis. Under section 280E,
entities engaged in a cannabis business are not permitted to deduct
their normal business expenses at the federal level, even if authorized
to carry on a business under New York's Cannabis Law.

New York City's BCT and GCT subject a taxpayer to tax on their entire
net income. The starting point for computing entire net income is a
taxpayer's federal taxable income. Similarly, the UBT relies on federal
taxable income as a baseline for determining taxable income.

However, New York State allows the deduction for business expenses
incurred by taxpayers engaging in the distribution or production of
adult-use cannabis products under the State's corporation tax. The value
of the deduction is equal to the any federal deduction that would be
disallowed by section 280E of the IRC. This deduction to the State
corporation tax was enacted by Part PP of Chapter 59 of the Laws of 2022
and is codified as subparagraph (23) of paragraph (a) of subdivision 9
of section 208 of the Tax Law.

Similar to the deduction allowed under the State corporation tax, this
bill would allow businesses authorized to engage in the production,
distribution and sale of adult-use cannabis products or medical canna-
bis, to deduct their business expenses when computing taxable income
under New York City's UBT, GCT, and BCT, in the amount such a deduction
would be disallowed by section 280E of the IRC. This modification to
income is appropriate because, while the expenses of cannabis-related
business cannot be deducted for federal purposes, New York law permits
and encourages these businesses akin to any other legitimate business
occurring in the State. The City's business taxes should similarly
encourage these business activities.

Accordingly, the Mayor urges the earliest possible favorable consider-
ation of this proposal by the Legislature.

Respectfully submitted,

CHRISTOPHER G. ELLIS, Jr. Director NA: 5/25/23