NJ Weed Industry May Be Hijacked By 'Big Players,' Group Warns

NEW JERSEY — After New Jersey’s unofficial Election Day victory for marijuana legalization, the state is primed to become one of the largest cannabis markets in the nation. But if lawmakers don’t take steps to change the tax code, it could give an unfair edge to large, “out-of-state” businesses, a group of accountants say.

On Thursday, the New Jersey Society of CPAs (NJCPA) called for state lawmakers to cut ties with Internal Revenue Code section 280E, which bans any company “illegally engaged in drug trafficking” from deducting business expenses on income tax returns.

Since cannabis is still illegal on a federal level, the code makes sense for federal taxes, but not in New Jersey, where it’s about to become legal, the group said.

• See related article: NJ Legalizes Marijuana, Early Election Results Show

“To ensure New Jersey small businesses, minorities and women can compete in the cannabis market, it’s critical that the state change an obscure section of its tax statute,” the NJCPA argued. “Otherwise, this new market will be dominated by large and already established players, many of which will come from out-of-state.”

• See related article: Big Spending On Historic Vote For Legal Pot In NJ Election

“Deducting business expenses is a routine and integral part of operating a business and is critical for a company to be profitable,” the group continued. “However, cannabis businesses don’t have access to this tax benefit, even though it is available to all other New Jersey businesses.”

It’s something that can make or break a small cannabis enterprise, many of which are minority and women-owned, the NJCPA stated.

“Larger operators generally have enough cash on hand to withstand the drain on profits that section 280E will cause in initial years, but smaller businesses often do not,” the group said. “It could stifle the ability of small cannabis businesses to get off the ground.”

The states that have the most robust cannabis industry, Colorado and Oregon, have specifically decoupled from section 280E, according to the NJCPA. It’s a move that needs to happen in New Jersey – immediately, the group added.

“This needs to be done now, before the issue gets buried in the process of passing enabling legislation and drafting regulations for this promising new industry,” the NJCPA said.

There are other financial challenges that the state’s marijuana industry has recently faced, including access to banks and insurance.

Over the past year, U.S. Sen. Robert Menendez of New Jersey has repeatedly pushed for more financial freedoms in the industry, introducing the SAFE Banking Act in 2019, which ensures that legal cannabis businesses can access banking services.

Also that year, Menendez separately introduced the bipartisan Clarifying Law Around Insurance of Marijuana (CLAIM) Act, which ensures legal marijuana and related businesses have access to “comprehensive and affordable” insurance coverage.

• See related article: New Jersey Pot Industry May Find Itself Cash-Only, Senators Warn

LEGAL POT IN NJ: BIG BUCKS AT STAKE

New Jersey has the potential to be one of the largest marijuana markets in the country, according to Marc Press, co-chair of the cannabis law group at Cole Schotz.

The state Legislature and Cannabis Regulatory Commission still need to roll out the framework for legalization. And it could mean a delay of at least 12 months before any legal weed hits the market. But anyone looking to get into the marijuana game in New Jersey should already be preparing, Press said.

“Each company or potential company needs to consider what aspect of the industry in wants to participate in: cultivation, processing and/or distribution,” Press told Patch. “This will help in determining the amount of capital needed and how to obtain it. From there, identifying real estate, assembling a team, structuring the company and obtaining community support are critical steps.”

• See related article: 14 Kinds Of Weed Jobs In NJ: 'Cannabusiness' Grows In The Garden State

Legalizing recreational cannabis could raise some big bucks for the state as prepares to borrow billions of dollars to help it weather the coronavirus pandemic, some experts say.

The public question will apply the state sales tax of 6.625 percent to recreational marijuana purchases. Local municipalities will be able to enact an additional sales tax up to 2 percent.

Legalization could also create a domino effect in the neighboring states of New York, Connecticut, Maryland and Pennsylvania, according to Kris Krane, president of 4Front Ventures.

Krane, a founding member of Students for Sensible Drug Policy and a former executive member of the National Organization for the Reform of Marijuana Laws, said people from nearby states will flock to New Jersey to purchase legal cannabis that isn't available to them at home.

That will mean two big victories for the Garden State, he said: tax revenue and jobs.

In 2017, Roseland-based law firm Brach Eichler estimated that if New Jersey embraced an "aggressive privatization" of the cannabis industry, it could generate up to $1 billion in the state within the first year of legalization.

• See related article: Legal Marijuana Could Bring New Jersey $1B In 1st Year, Law Firm Says

A 2019 report from the Office of Legislative Services estimated that New Jersey could generate revenues up to $126 million annually from a sales and use tax once a cannabis market is established. Some advocates have argued that the total could be even higher, setting their own estimates at roughly $300 million.

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