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NextGen Magazine


Study: NYS Potency Tax on THC May Drive Cannabis Consumers Underground

S.J. Steinhardt
Published Date:
Jan 26, 2023

Cannabis Industry

One manner in which legal cannabis is taxed in New York state—based on the percentage of THC—could harm licensed businesses if it causes consumers to seek out cheaper, unlicensed alternatives, according to a study by two lawyers, Crain’s New York Business reported.

A white paper by the tax lawyers—Jason Klimek and James Mann—correctly predicted that a legal eighth of cannabis flower (weighing an eighth of an ounce) in New York with 30 percent THC would cost about $75. An eighth of cannabis flower ranges in price and potency from $40  for 19 percent THC to $60 for 27 percent THC  at Housing Works, the first licensed dispensary in New York City. A 13 percent excise tax is added to sales, for a total price of between $45 and $68, respectively.

Unlicensed street vendors in New York City were selling cannabis eighths for between $10 and $45 last month, according to Green Market Report, a Crain’s subsidiary.

Lax enforcement against the underground market could undercut the fledgling licensed retailers, particularly those that are smaller and less-capitalized, Klimek and Mann, said.

“I think people know that you’re paying for quality, you’re paying for the taxes and all the rest of what goes with the regulated, licensed market,” said Charles King, the CEO of Housing Works, adding that there will have to be more of a focus on enforcement against illicit competition by state authorities.

Some illicit operators sell legally produced, but illegally shipped, product from states such as Oregon and California. “For some cannabis operator who’s competing with the smoke shop next door [that is] able to sell California eighths for $30 [and] that’s better weed than what they’re selling at Housing Works, it’s tough,” New York City resident Joel Lustberg, managing partner at Upwise Capital, told Crain’s.

The New York State Legislature may change the tax structure in order to make the system more business-friendly, Crain’s reported.

“I do feel confident that the state is very much aware of the issue with the potency tax and, at the very least, open to reform,” Brittany Carbone, a board member of the Cannabis Association of New York and a  cannabis farmer upstate, told Crain’s. “It’s been well proven that more reasonable tax structures actually result in higher rates of purchase in legal dispensaries, which results in a net positive win for the state, in terms of tax revenues.”