The cannabis space in New Jersey is evolving each day. As more progress is made, the state’s cannabis industry is on track to level up its economy with various business opportunities.
But is the newly-created legal adult-use market worth investing in just yet?
Let’s just say, if you’re considering starting a cannabis business in the Garden State, now is the time to do it! And if you’re already operating as part of the state’s cannabis sector, it’s time to start scaling your adult use business!
This article serves to discuss New Jersey’s Cannabis Regulatory Commission, its medical and recreational marijuana businesses, and other updates on the state’s cannabis space.
Thinking about scaling your operation in NJ? Let Northstar lead the way!
Contact us now to learn how our financial services will grow your endeavor in this budding space!
New Jersey Cannabis Regulatory Commission
The NJ Cannabis Regulatory Commission, established in September 2018, is a newly created agency dedicated to ensuring that the state has a well-regulated marijuana industry. This Commission analyzes and implements updates and changes to the marijuana market.
At this point, we’re still waiting to learn how the Cannabis Regulatory Commission plans to regulate adult-use cannabis products through cannabis legalization. However, for now, it’s responsible for the medical marijuana program within the state, giving patients access to products including:
Infused oral lozenges
Recently, there have been some announcements about how cannabis legalization will proceed in New Jersey. While the state has made it legal to use cannabis for medical and recreational purposes, legalization requires New Jersey to create and implement rules for the space.
Medical Marijuana in New Jersey
Medical marijuana in New Jersey is restricted to those with specific medical conditions. In fact, the list of qualifying conditions is extensive and includes:
Amyotrophic lateral sclerosis
Inflammatory bowel disease, including Crohn’s disease
Intractable skeletal spasticity
Opioid Use Disorder
Positive status for Human Immunodeficiency Virus (HIV) and Acquired Deficiency Syndrome (AIDS)
Post-Traumatic Stress Disorder (PTSD)
Seizure disorder, including epilepsy
Terminal illness with a prognosis of fewer than 12 months to live
To qualify and become a registered patient with the state’s Medicinal Marijuana Program (MMP), a person must:
Have and maintain a bona fide relationship with a physician who has registered with the program. This relationship involves having a physician responsible for handling the assessment, care, and treatment of the patient’s debilitating condition.
Be a Jersey resident.
Be diagnosed with one of the qualifying medical conditions the New Jersey health care practitioner registered with the MMP has outlined.
Before adult-use marijuana legalization, the state’s medical marijuana operations were limited to serving patients. But with legalization, New Jersey marijuana laws now allow these operations to apply to begin serving weed to the local adult marijuana market.
New Jersey Marijuana for Recreational Use
New Jersey legalized adult-use marijuana. Now that the law is catching up to this progress, the regulations are in place, and sales will likely begin very soon.
Delivery operations will be allowed to support dispensary sales and other local endeavors. Besides delivery within all state municipalities, sales will be permitted in the state municipalities that allow them.
The law also allows cultivation. However, important to note is that municipalities will decide on how the law works within their jurisdiction.
Dispensary operations will not be allowed to open everywhere within the state. But many municipalities will allow them for the tax revenue benefits.
When Did Recreational Cannabis Become Legal in New Jersey?
Governor Phil Murphy signed the new marijuana law into effect on Monday, February 22, 2021. This made Jersey the 14th state to make marijuana legal, effectively creating the way for these adult use operations to become established.
While Murphy couldn’t outline the process the state would use to implement legalization, his team would begin working on the laws and regulations. It’s now August, and we’ve seen a lot of progress. But everyone is still waiting for the final word from Governor Murphy to begin legal sales.
It’s been years since Governor Murphy said these sales would happen. And now that we finally see the light at the end of the tunnel, it’s easy to see why consumers and cannabusiness operators are eager to ignite this industry.
The process has been a long and hard one. But now that Murphy has taken this massive step in the right direction, it’s only a matter of time until we see the state’s cannabusiness operators reap the rewards.
Cannabis Regulatory Updates
New Jersey Dispensaries Cannot Sell Certain Edibles
New Jersey’s dispensaries have been barred from selling edibles that resemble food. But what does this mean exactly?
For starters, the CRC rules highlight cookies and brownies by mention. So, we can expect that baked goods are out.
The CRC regulations state, “Ingestible forms … shall only include syrups, pills, tablets, capsules, and chewable forms.” This measure has already been approved by the panel.
CRC Executive Director Jeff Brown has stated that some gummies would be allowed under the new regulations. This includes the soft lozenges already available at the state’s medical marijuana dispensaries.
At this point, there is no timeline as to when additional regulations for food-related items for consumers will be issued. However, when the time comes, we can expect the CRC to issue waivers to manufacturers.
New Jersey Still Developing Standards for Workplace Marijuana Testing
The NJ Cannabis Regulatory Commission has made some rules. However, at this point, they have not addressed workplace marijuana testing standards.
The Commission released a 160-page Personal-Use Cannabis Rules that address the cannabis space. But this does not touch upon employer drug testing. This set of rules does temporarily waive CREAMMA’s “physical examination” demands until the Commission “develops standards for a Workplace Impairment Recognition Expert certification.”
For now, employers do not have to physically evaluate employees for drug testing purposes.
NJ CRC Pauses Physical Evaluation Requirement for Drug Testing
The latest alert from the NJ CRC involves new employment protections offered by CREAMMA for employees and job applicants who are legally allowed to use marijuana off-duty.
CREAMMA also preserved employers the right to drug test their workforce. However, there’s a new requirement: testing for suspected cannabis use must include a physical evaluation to check the employee’s level of impairment while performing job duties. This will have to be conducted by someone certified to gauge a person’s state of impairment.
These employment protections under CREAMMA have been enforceable since August 19, 2021. This was when the NJ CRC issued its first set of Personal Use Cannabis Rules. These rules are outlined below.
Commission Approves Specially Adopted Personal Use Cannabis Rules
On August 19, 2021, the Commission approved Specially Adopted Personal Use Cannabis Rules. These rules will remain in effect for at least one year.
Through these rules, New Jersey’s recreational cannabis industry has been established. The CRC can start licensing cannabis businesses while these rules promote social equity, safety, and accessible cannabis as it allows municipalities to remain in control of how cannabis businesses can operate in their jurisdiction.
Cannabis Business Licensing in New Jersey
These new rules allocate different license classes to each stage of the state’s cannabis supply chain. The classes include delivery services, distributors, retailers, manufacturers, and cultivators.
Furthermore, these rules establish a microbusiness license for each license class. This license is for cannabis businesses that do not have more than ten employees and operate at a facility that does not exceed 2,500 square feet.
Small business ownership in the state’s recreational marijuana industry will flourish as the Commission has not limited the number of microbusiness licenses available. Microbusiness license applications will receive priority over other cannabis business applications as the Commission continues the licensing process.
Microbusinesses will have to pay 50% of the license fee for their class. Through these rules, Alternative Treatment Centers licensed under the state’s medical cannabis law will be able to expand their operations to include recreational cannabis.
Furthermore, the Commission plans to limit how many cultivation licenses it will award over the two years from February 22, 2021 to 37. This includes expanded ATCs, but it does not include microbusiness cultivators. After the 24-month period, the Commission will decide if it will increase how many cultivators the state needs to meet the medical and recreational market demand.
New applicants can apply for a conditional license or an annual license. The conditional license applications will receive priority over annual license applications. For application purposes, business owners must show that they’ve made less than $200,000 the previous year or $400,000 if they’re filing jointly.
Initial/Annual License Fees
ATC Expansion Fees
Municipalities receive considerable control over shaping the cannabis space within their jurisdiction. They can:
Opt out of the recreational cannabis program. With this rule, around half of all New Jersey towns have decided to refuse adult-use marijuana;
Limit the number of specific types of businesses operating within their jurisdiction;
Restrict cannabis businesses’ hours of operation and location. This includes using the law to ban legal cannabis businesses in school zones and setting restrictions regarding how far these operations must be away from playgrounds and places of worship;
Set local licensing requirements and civil penalties;
Limit the kinds of cultivation that are allowed within the municipality. One example is that some municipalities might use the bill to demand all cultivation occur indoors;
Place a 2% transfer tax on marijuana and marijuana products a business transfers within the jurisdiction; and
Communicate municipality preferences regarding licensure to the Commission.
Limit cannabis delivery within their jurisdiction; or
Limit cannabis transports routed through their jurisdiction.
Through the recreational legalization bill, social equity becomes the focus. The state regulations increase opportunities for people who have been significantly impacted by the War on Drugs by designating three types of priority licenses.
The marijuana bill incorporates industry licenses that aim to increase the following:
Social equity businesses,
Diversely-owned businesses, and
Impact zone businesses.
Here’s a bit about each.
Social Equity Businesses
The regulations define a social equity business as follows. To qualify, the majority of the ownership interest must be held by someone who has resided in an economically disadvantaged region for five of the past ten years and whose household income is 80% or less of New Jersey’s average median household income. The second method is to have a person or persons who have been convicted of at least one marijuana-related offense.
A company is listed as “diversely-owned” if the majority of the ownership interest is held by people who are minorities, women, or disabled veterans. The term “diversely-owned business” also applies to businesses with minority, female, and disabled veteran management and operational control. These operations must be controlled by at least one of these types of owners to qualify as diverse.
Impact Zone Businesses
An impact zone is a municipality with a significant population that, as a result of previous criminal cannabis enterprises, contributes to higher levels of law enforcement activity, unemployment, and poverty. A business in an impact zone is controlled by someone who resides in an impact zone and has lived there for at least three consecutive years before the date of application.
Garden State Cannabis News Updates
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No one thought it was possible when cannabis was first legalized, but there is a growing problem in the cannabis industry: expired inventory.
Cannabis is, ultimately, a green and leafy plant. It conforms to all the rules of plant life, including the fact that it can go bad. Once you remove a cannabis bud from the stalk, it dies just like any picked flower. It begins to dry out, wither, and eventually rot if not cured correctly. Even processed cannabis products go bad over time, just more slowly. Cured bud becomes too dry and crumbles into dust. Refined concentrates slowly break down chemically until the quality is degraded.
The Growth of Expired Cannabis
Unfortunately, some states have been a little too effective at creating an inventory before demand has a chance to catch up. Even Canopy Growth, the world’s largest cannabis company, is shutting down over half it’s greenhouses. Partly to grow outdoors, now that this is legal, but also because they are producing more buds than anyone knows what to do with. And the excess is expiring in storage.
This is a problem for dozens of cannabis grow-ops across the country. When demand doesn’t meet the cannabis plant’s incredible ability to produce, you wind up with expired extra. now let’s talk about what that expired cannabis inventory is really costing you, and why to trim your production to meet local demand.
The first cost of expired inventory needs to be assessed right at the beginning: the resources you use to grow. How much do you spend on lights, climate control, nutrients, soil, and of course the green house space itself? That all adds up. Together, your growth costs can be calculated as a lump sum. Now divide that sum by the total number of ounces of bud you harvested. That’s your cost per ounce of cannabis to grow.
Now multiply your growing cost-per-ounce by the number of ounces that were expired and had to be thrown out. That’s the amount in grow-costs (or the Grow-ROI loss) incurred by expired inventory.
Product Processing Costs
If you process your own bud, as many grow-ops do, then expired finished products that go unsold also cost you every step along the way. Just like your greenhouse growing costs for unsold cannabis, you’ll be losing a similar percentage of the investment you put into processing the cannabis products.
Whether you are curing bud to last longer in a jar or you’re refining concentrates into butters and shatters, the resources you use to produce expired products are part of that expiration cost.
Every cured batch of cannabis uses up a few key supplies. Chemicals used to cure the leaf or concentrate the dab must be restocked, even if you don’t sell what they were used to produce. Dishes and implements, disposable gloves and safety gear, and the supplies used to clean up afterward are all part of the cost.
Don’t forget the value of your employee work hours as well. From the growers who tended and harvested to your teams working carefully to cure and concentrate, no doubt a few hours went into every product that goes unsold. Pay those wages without direct ROI from revenue.
Wasted Packaging Materials
For brands that package their own products, as many do, packaging costs should also be considered. There are many precise regulations on how cannabis products must be packaged and labeled. Seal, child-proof, label as cannabis, and include finer details. This means engineered custom packaging every time.
Most brands package all of their created products, whether or not a sale is guaranteed. Of course you do, how else would your products get into customer hands? But each package put on cannabis that expires is technically wasted material. It must ultimately be thrown out rather than reaching customer hands.
Storage and Transportation
Another consideration is the cost of storage and transportation. When larger volumes of cannabis expire in storage, this can equal a significant cost in what you spent to keep the products. Commercial storage space, especially space that is zoned or will accept cannabis as the contents, is not always cheap or easy to find. Likewise with services or drivers who will comfortably transport your cannabis between facilities or out to local dispensaries.
One of the worst things about expired inventory is that it takes up the maximum amount of storage cost for its volume. After all, it sits in your storeroom or warehouse for the longest possible time before you throw it away.
Men using a digital tablet in storage room.
Finally, there’s disposal to consider. Cannabis is classified as a controlled substance, even where recreational use is legal. This means that you can’t just chuck your expired product into the nearest dumpster and call it a day. Dispose of cannabis like a medication, which means contracting with a medical disposal service.
Each disposal is a pickup order and many services charge by weight as well as number of pickups. The more cannabis you must dispose of, the more medical disposal costs you incur.
Plan Ahead Carefully to Avoid Cannabis Inventory Waste
The cannabis industry is in a constant state of flux. Every state is changing differently as the laws evolve to support or challenge the system. You never know when the playing field is going to change again, the costs that change will incur, or even if that change is for better or worse. For example, part of the reason Canopy Growth is closing greenhouses is because outdoor cultivation has been legalized, and is more affordable in the long-term. Good in the long-term, but costly to adapt this year.
The good news is that savvy grow-op owners can plan for the future like any other retail supplier. Look at the numbers and watch not just where dispensaries are opening, but how many people are buying. Don’t expand too fast, and only increase your inventory size when there is a demand to meet your growing supply.
Sound Financial Advice for Cannabis Business Owners
Here at Northstar Financial Consulting, we know it can be challenging for Cannabis entrepreneurs, business owners, and industry leaders to get the kind of sound financial advice you need. Financial professionals and institutes often shy away from this brand-new and legally complex industry. That is exactly why we’re here to help.
Whether you need CFO services or someone to help you look over the trends and plan for next quarter’s inventory, we’re here to help.
The cannabis industry is a rapidly growing market. We have helped many cannabis businesses reach financial success and grow exponentially. Even though there are exciting success stories, the cannabis industry and cannabis business owners are still facing massive challenges specifically related to their niche market.
Many challenges to the cannabis industry involve unique complicated accounting and tax laws. For instance, federal income taxes are based on a simple equation: start with gross income, subtract business expenses to calculate taxable income, and then pay taxes on this amount.
Unlike most traditional businesses, the cannabis industry is subject to Section 280E of the Internal Revenue Code. Section 280E is a federal statute that forbids businesses dealing with Schedule I or II controlled substances, such as cannabis, from deducting ordinary business expenses from their taxable income.
Simply put, unlike most businesses, cannabis businesses are likely paying a substantially higher effective tax rate just because they cannot take normal deductions associated with selling cannabis, such as employee wages, accounting, systems, rent, and more.
With that being said, our most common question from clients is: Okay, how can we avoid 280E?
Well, you can’t.
At least not entirely. There are a few things you can do to significantly reduce your tax costs while staying within the 280E regulations, if you just keep on top of your game. Many cannabis companies aren’t aware of these exceptions. Knowing what to do, what you’re looking for, and having a team of financial experts to point them out, can save you big bucks on your IRS tax return.
How to calculate “Cost of Goods Sold” (COGS) under 280E
Section 280E does not prevent cannabis businesses from deducting the cost of goods sold. Identifying whether deductions can be allocated as COGS can make a significant impact to minimize the tax on your cannabis business.
If you are a cannabis cultivator, examples of COGS are raw materials and supplies, including seeds, clones, fertilizer; indirect product costs, such as equipment maintenance, utilities used to grow cannabis, wages of supervisors; and quality control and inspection costs. Labor-related COGS could be deducted for cleaning, trimming, curing, packaging or inventory.
For businesses that are exclusively a dispensary, COGS are limited to the cost of the product and the costs of acquiring the merchandise. This can include transportation costs to purchase wholesale cannabis. Deductions may also be claimed for electric bills for designated inventory areas. Virtually everything else, such as employee salaries, marketing, advertising costs, rental fees for facilities and more, are subject to 280E limitations in a retail environment.
Having an accountant who specializes in cannabis businesses can help you go over all of your expenses and determine what items can be considered deductible. It is worthwhile to have someone with this experience so that they may guide you to maximize your potential deductions.
Does your cannabis business perform another function?
The tax court lets businesses separate cannabis sales from other types of business transactions. If you have other parts of your business that isn’t directly related to cannabis and it generates real income, then this could be an option. This means the second business can deduct business expenses as usual for the non-cannabis business activities. This will require “proof” that the non-cannabis part of the business could stand on its own, separate from the cannabis business itself. That means separating out payroll, operating costs, etc.that are specifically for the “second business”.
The separateness and business expenses must be documented because there is a likelihood of an audit. Your financial professional should be able to assist you in separating out the expenses.
Accurately track employee timesheets for COGS
Hours worked by employees doing tasks related to cannabis production are deducted under COGS. Therefore, employee time spent cultivating, packaging and doing inventory management is deductible under Code 280E.
Accurately tracking time could make a big difference in your COGS number, so you want to pay close attention to this. To help facilitate the process try using a time tracking system. The time tracking system should be customizable and allow employees to record time by individual activity.
Understand corporate structures
Choosing a structure for a company is an important decision. This decision must be well researched and strategically thought out because it could either help or harm your business. For a cannabis business, you generally are choosing between a C-Corporation, S-Corporation, or Limited Liability Corporation (LLC).
For larger scale cannabis business, CPA’s and legal advisors usually recommended setting the business up as a C-Corporation. Under United States federal income tax law, a C-corporation refers to any corporation that is taxed separately from its owners. A C-corporation is different from an S-corporation because an S-corporation is generally is not taxed separately.
Since a C-Corp is a tax-paying entity, the corporation pays taxes on the company’s gross profit. That means the business owner only pays taxes on salaries or dividends.
Keep your accounts updated and in order
The IRS requires you to keep receipts for all transactions as evidence on your tax return. This means all revenue and expense must be accounted for, no matter how small. Since 280E only permits the deduction of COGS, the IRS generally goes through these numbers with a fine-toothed comb. If there are mistakes or inaccuracies in your deductions, your business may be subject to a fine.
As a cannabis business owner, your company is more likely to be audited. Cannabis is considered a federally illegal substance and is subject to more scrutiny than other products. This is why staying organized, well-versed on tax laws and tracking employee hours is so vital for the survival of your business.
Local and state taxes vary depending on where your business is operating. You will be responsible to know and adhere to all of your local state laws or to find a reputable tax advisor to help you.
Expert accountants in the cannabis industry are familiar with the laws better than anyone else. They understand all the details and tricks of Section 280E, what is considered a COGS and what isn’t and how to correctly, and legally, minimize your taxes. They can help ensure your tax return is filed promptly and accurately, provide required supporting documentation, and help you avoid an audit.
This might all sound very overwhelming, but it could save you a lot of cash. Contact us today for a free consultation, and find out how we can help you significantly improve your cash flow.