May 18, 2022

Some NM cannabis producers may face higher than expected tax bill

New Mexico recreational-use cannabis companies, for the first time, are required to file their gross receipts and cannabis excise taxes in one week. It’s unclear exactly how much the state is set to collect, but cannabis regulators reported more than $20 million in recreational-use sales for the month of April. 

Since an announcement from the New Mexico Taxation and Revenue Department earlier this month, though, it seems that most if not all recreational-use cannabis companies may have under-collected taxes from customers compared to what those companies will owe. For some companies that could mean cutting costs on things like packaging and raising prices. For at least one company, it will mean a formal appeal with the state. 

On May 5, the state’s Taxation and Revenue Department issued a press release with specifications on how the newly established cannabis excise tax will be calculated with state gross receipts taxes. The guidance from the department was to apply the 12 percent cannabis excise tax to total sales before figuring in the roughly 7 to 8 percent gross receipts tax. For example, on a $100 sale, cannabis companies owe the state $12 in excise taxes and an additional 7 to 8 percent, depending on the county, of $112. But the handful of cannabis producers NM Political Report spoke with said they were under the impression the two taxes were applied independently. Those two taxes applied separately under the same hypothetical $100 sale would come out to about $.84 less than the total from the department’s calculation. But cannabis producers said those small amounts add up.  

Mathew Muñoz, the chief innovation and financial officer for cannabis microbusiness Carver Family Farm didn’t know exactly how much the different calculations would cost the company but said it would be more of a “headache” than it would be “detrimental” financially. 

“Tax-wise, it’s not going to put us under,” Muñoz said. “I don’t want to speak for anybody else’s margins, but we’ll be able to pay that, we just won’t be able to order nicer packaging for a little while.”

But Muñoz said there are more practical problems with the department’s announcement. He said because the cannabis tracking software that all producers are required to use calculated the taxes separately, Carver Family Farm was effectively undercharging customers. 

“The biggest issue is that BioTrack and every other point of sale system doesn’t calculate the tax the way [the Taxation and Revenue Department] want us to collect. We’ve literally had a month of sales, and we’ve under-collected tax because of the way the point of sale system is.” 

Len Goodman, co-founder of cannabis producer Best Daze, has been in the New Mexico cannabis industry since the inception of the state’s medical cannabis program. Goodman said he has never seen an instance where a tax is applied to another tax, a process generally known as stacking. 

“I can’t imagine a point of sale system that would stack taxes, because it’s not the way it normally works,” Goodman said. 

Goodman estimated that Best Daze will have to pay about $14,400 to make up for the difference between what it owes and what it collected from customers. But, he said, there’s a more important issue than what it will cost businesses. 

“The bigger issue of what’s coming out of pocket is if we were charging this to patients, I would be screaming and yelling,” Goodman said. “You’re asking our patients to pay an extra $14,400 in six weeks and I don’t see any difference between the retail customer and the patient. This is screwing New Mexicans.”

Duke Rodriguez, the president and CEO of cannabis producer Ultra Health seemed to agree with Goodman on the impact on New Mexicans. Citing a recent poll released by KOB-TV that reportedly found that more cannabis purchases are made by those with lower income, Rodriquez said the cannabis tax structure is somewhat regressive. 

“What Tax and Rev is doing, is in fact increasing the effective tax rates on the most vulnerable populations, those with the lowest income,” Rodriguez said. 

Rodriguez, a long-time adversary of state cannabis regulators, has filed a number of legal challenges and administrative appeals on cannabis issues and said this time is no different. Most recently Ultra Health won an appeal against the Taxation and Revenue Department regarding a state law that prohibits cannabis companies from writing off certain business expenses. Before that, Ultra Health joined a suit against the state over medical cannabis and gross receipts taxes, which ended with a New Mexico Court of Appeals decision that the state should not have been charging taxes on medical cannabis.   

“We fully intend to file an appeal, but we’re going to pay their interpretation upfront. And we hope for the same outcome we had in those two other matters, that we will prevail and we will receive a full refund plus interest,” Rodriguez said. 

Charlie Moore, a spokesperson for the Taxation and Revenue Department said there was no official policy implemented to stack the two taxes and that the decision was based on how the state’s tax law is written.  

“Gross receipts specifically excludes amounts collected for GRT and some other taxes, but it does not specifically exclude receipts attributable to other taxes, such as the cigarette tax or the cannabis excise tax,” Moore said. “So, under statute, businesses do need to include the cannabis excise tax collected when calculating GRT on cannabis sales. GRT on cigarette sales works the same way.”

The difference between state cigarette tax and the cannabis excise tax is that cigarette taxes are applied on a per-pack basis, whereas the cannabis tax is a percentage of sales. 

As for announcing the calculation of the two taxes on cannabis, Moore apologized on behalf of the department. 

“We do apologize for that,” Moore said. “The issue arose as we were getting ready to implement the new tax and we provided guidance as quickly as we could consider the statutory language.”

Moore said the department is also preparing a proposal for the state Legislature that, he said, would clarify the calculation of both the cannabis excise tax and taxes on cigarettes. 

Richard Anklam, the president and executive director of the New Mexico Tax Research Institute told NM Political Report that state law gets very specific about what can and cannot be included in the gross receipts tax base, but the law is vague when it comes to the cannabis excise tax. 

“From age-old practice and administration interpretation, I would say that whether it’s intended or not, the cannabis tax is in the GRT base because it’s not otherwise excluded,” Anklam said. “I didn’t think that was intended, which is why, a year ago, I was trying to raise the question, but I couldn’t get anyone to talk to me about it.”

Anklam said while he doesn’t believe the state’s intention was to raise more money, he also doesn’t see a good policy reason for it. 

“There’s no reason to pyramid the two taxes on each other. I mean, there’s no policy reason to do it,” Anklam said. “You raise a little more money because you increase your tax base. But I don’t think it was intended that way.”

Anklam pointed to the definition of the cannabis excise tax that says it is applied to “the price paid for a cannabis product,” but does not specify what “price paid” means. 

“All the department really needs to do is define what price paid means to make that issue go away or to clarify it,” Anklam said. 

Rodriguez agreed that a statutory fix would be helpful, but maintains that the Taxation and Revenue Department could fix the situation sooner. 

“We appreciate the offer for a statutory fix, and a statutory fix would certainly make it clear beyond any reasonable doubt,” Rodriguez said. “That should be considered, no matter the circumstances. But in the interim, TRD can easily interpret it in favor of the consumer and the taxpayer.”

Gross receipts and cannabis excise taxes are due to the state by May 25. Moore said it’s important for cannabis businesses to at least file their taxes on time to avoid any problems. 

“Businesses should always file their returns by the deadline to avoid late penalties, even if they cannot pay the full amount due,” Moore said. “Payment plans are always an option, but they do incur interest.”

Update: This story was updated to correctly reflect the amount Best Daze will have to pay to make up for the difference in what was collected.