What to Expect if Recreational Cannabis Passes in New Jersey

Over the past several years, New Jersey has had a tumultuous history with attempting to legalize the recreational use of cannabis, in spite of the fact that medicinal marijuana sales have been permitted in the state for some time. However, the vote will be placed in the public’s hands in the upcoming election, potentially adding New Jersey to the list of states legalizing the adult-use cannabis for personal, non-medicinal consumption. If the referendum passes, it will undoubtedly lead to an influx of new business opportunities for cannabis entrepreneurs and investors in the state.

The Marijuana Legalization Amendment is now Question 1 on the 2020 ballot, and there are many implications, both socially and economically, to the passing of the vote; there seems to be quite a multitude of New Jerseyans who believe the state is ready. If voted yes, an amendment would be added to the state constitution legalizing the recreational use of cannabis for people over the age of 21 as well as the cultivation, processing, and sale of cannabis in a retail setting. This amendment would take effect on January 1, 2021. Additionally, the amendment would provide a state sales tax of 6.625% for the sale of the plant and would also allow all local governments to add an additional 2% at their level. New Jersey will essentially be tapping into a new source of much-needed tax revenue, especially after the budget hit resulting from the current pandemic.

The amendment itself is left relatively open-ended with regard to how the new market would be overseen. Still, it would be in the hands of the Cannabis Regulatory Commission, the same commission created in 2019 to oversee the medical cannabis program. If adopted, we will not immediately see retail stores popping up the next day. Aside from the existing barriers to enter into this industry (licensing, financing, banking, security), legislators will need to draft regulations to govern the New Jersey cannabis market. It’s safe to say that in order for entrepreneurs to pierce this market, they’ll need to be resilient to the potential harsh regulations and hurdles in order to become successful in this space.

Cannabis is still classified as a Schedule I drug, which means that the product remains illegal under federal law. On top of the already high entry cost from both application and licensing fees, this makes for unusually high taxes as well. Since the product is federally illegal, every cannabis business is subject to the potential disallowance under IRC Sec. 280E of otherwise deductible business expenses. The tax burden is something that start-up companies will need to consider and navigate to maintain and budget their cash flow. Further inherent with illegal federal status is the barrier to entry of national banks and financial institutions, notably credit card companies. As a result, companies are moving significant amounts of cash in their day to day operations. A strong internal control environment is paramount to curbing a multitude of risks surrounding misappropriation.

This upcoming election is one that has the potential to transform the cannabis industry in New Jersey. Support for recreational legalization is strong. We will wait for the people to speak next Tuesday! If the vote is “yes”, we anticipate many obstacles and complexities after the bill is passed. Withum’s team of professionals is here to help navigate the intricacies that come along with starting and operating a cannabis business.