SENATE BUDGET AND APPROPRIATIONS COMMITTEE

STATEMENT TO

SENATE, No. 340

with committee amendments

STATE OF NEW JERSEY

DATED:  JANUARY 19, 2023

      The Senate Budget and Appropriations Committee reports favorably and with committee amendments Senate Bill No. 340.

     This bill decouples the corporation business tax from the federal income tax provision that prohibits deductions and credits for cannabis businesses. The bill also decouples S corporation income under the gross income tax from the federal provision.

     Under the State’s corporation business tax, and for S corporation income under the gross income tax, the starting point for calculating income that is taxable is that which is taxable under the federal income tax. Federal law (26 U.S.C. s.280E) prohibits deductions and credits for businesses trafficking in federally defined schedule I and II controlled substances, which includes cannabis. Deductions for business expenses are therefore not available to cannabis businesses, which results in a higher federal income tax liability than other businesses with similar amounts of income. Because the corporation business tax is currently linked by State law to federal law in this respect, cannabis businesses subject to the corporation business tax would also have a higher tax liability than other businesses with similar amounts of income. The same is true for S corporation income under the gross income tax. In contrast, other forms of business income under the gross income tax are not linked to the federal provision by State law, but this bill nevertheless includes a provision to state explicitly that the federal provision does not apply.

     As a result of enactment of this bill, a business subject to the corporation business tax will be allowed to deduct from income all ordinary and necessary business expenses incurred in carrying on a licensed cannabis business. The deduction will also be allowed when calculating S corporation income from S corporations, and will continue to be allowed for other forms of business income under the gross income tax regardless of total gross receipts.

      This bill was pre-filed for introduction in the 2022-2023 session pending technical review.  As reported, the bill includes the changes required by technical review, which has been performed.

     As amended and reported by the committee, Senate Bill No. 340 (1R) is identical to Assembly Bill No. 3946 (2R), as also amended and reported by the committee on this date.

COMMITTEE AMENDMENTS:

      The committee amended the bill to provide taxpayers that have total gross receipts of greater than $15 million access to deductions and credits for ordinary and necessary business expenses incurred in carrying on a licensed cannabis business.

      The committee amendments provide that, for purposes of determining a cannabis licensee’s income under the Corporation Business Tax Act, income is to be determined without regard to section 280E of the Internal Revenue Code (26 U.S.C. s.280E). 

      The committee amendments allow, in the case of a taxpayer that is a cannabis licensee, a deduction in an amount equal to any expenditure that would qualify as a specified research or experimental expenditure pursuant to section 174 of the Internal Revenue Code but is disallowed as a deduction for federal tax purposes because cannabis is a controlled substance under federal law.  In addition, the committee amendments allow any expenditure that is claimed as such a deduction to also be claimed as a qualified research expense for purposes of the credit allowed pursuant to section 1 of P.L.1993, c.175 (C.54:10A-5.24).

      The committee amendments make technical changes to a citation to section 280E of the Internal Revenue Code (26 U.S.C. s.280E) as well as to the definition of “licensee” to provide that a licensee means the same as that term is defined in section 3 of P.L.2021, c.16 (C.24:6I-33).  The committee amendments add this definition to section 3 of the bill.

      The committee amendments clarify that the provisions of section 3 of the bill are to only apply to cannabis licensees.

      The committee amendments revise the effective date of the bill to provide that the bill is to take effect immediately and apply to taxable years beginning on and after January 1, 2023.

FISCAL IMPACT:

      The Office of Legislative Services (OLS) estimates that this bill will result in an indeterminate annual State revenue loss for the State. The OLS notes that the bill may help generate more economic activity by cannabis businesses. Therefore, the State and local governments that tax cannabis businesses may indirectly realize an indeterminate amount of additional annual revenue.