Although Rhode Island is the USA’s smallest state, it has traditionally taken an out-sized dislike for cannabis and its users. It first banned cannabis in 1918 and, up until recently, had some of the strictest mandatory minimum sentences for large-scale possession, sentencing those with more than 5 kg (11 lbs) to 20 years’ imprisonment and fines of between $25,000 and $100,000.
Rhode Island’s Change of Heart
These days, however, the Ocean State has turned over a new leaf. It legalized medical cannabis in 2006, and on May 25, 2022, legalized adult use sales as well. Starting in December 2022, Rhode Island residents could purchase cannabis from five of the six medical cannabis dispensaries across the state which have also been approved to sell to adults.
Over the course of 2023, the state is expected to issue licenses for an additional 28 dispensaries, including a portion reserved for social equity applicants and worker-owned cooperatives. At the same time, 33 cities and towns across Rhode Island voted to determine whether cannabis businesses would be allowed in their jurisdiction. 25 of these municipalities ended up approving these measures.
Like many retail-legal states, Rhode Island has enacted social equity support for cannabis licensees. The state is divided into six retail license zones, and within each zone, one retail license will be reserved for a social equity applicant and one for a worker-owned cooperative. In addition, the state’s cannabis legislation provides for a $1 million fund to help support the social equity license recipients. Funded by all fees collected from adult-use cannabis businesses, this assistance fund will provide grants, promote job training and workforce development, and administer programming for restorative justice. The legislation also establishes a process whereby individuals may have their misdemeanor or felony convictions for cannabis possession expunged.
How Tax-Friendly Toward Cannabis is Rhode Island?
The Ocean State still has a way to go to be considered a truly cannabis-friendly state. For one thing, the state is forcing both individuals and corporations to conform to Internal Revenue Code section 280E which disallows deductions and credits for expenditures connected with trafficking in controlled substances under the Controlled Substances Act, schedule 1 or 2. This means cannabis companies will only be permitted to reduce their sales by cost of goods sold when determining their taxable income on their state tax returns unless they decide to take more aggressive tax positions. For example, with a conservative IRC 280E tax position, a cannabis dispensary would only be allowed to deduct the cost of the product purchased and the cost to transport the product to the dispensary, while disallowing such significant expenses as rent and payroll. All cannabis businesses must forgo expense deductions related to selling, general and administrative expenses, as they are disallowed under the tax code under this traditional method. Rhode Island has also disallowed cannabis businesses from taking an R&D tax credit as a result of conformity with federal tax law.
In addition, Rhode Island is requiring retailers to collect 10% state cannabis excise tax plus 3% local cannabis excise tax from its customers, along with the standard 7% sales tax. Good news: sales tax is not calculated on the excise tax collected (unlike California, which does impose tax-on-tax). Medical sales are subject to sales tax but not to excise tax, and excise tax is not charged on cannabis accessories. Excise tax, like sales tax, must be remitted to the state by the dispensary on or before the 20th of the following month.
Rhode Island has taken a big step forward from its anti-cannabis past by legalizing adult use sales and by supporting equity applicants as well as the expungement of past criminal convictions for many of those victimized by the war on cannabis. While Rhode Island’s excise taxes are not the worst we’ve seen, the state’s support of 280E will make it a lot harder for cannabis businesses to thrive.