August 31, 2022 | Written By Victoria Litman
On Saturday at the New York Cannabis and Hemp Convention in Albany, New York, I presented a talk titled: 501(c) What? An Introduction to Tax Exempt Organizations in Cannabis. My goal with this talk is to educate those involved in the cannabis industry about tax-exempt organizations and ways they can be utilized now and in a federally legal future. In terms of New York, I focus on two categories: the things we know about tax-exempt organizations in New York State Cannabis and the much bigger category of unanswered questions.
One thing we know for sure is that the Office of Cannabis Management (OCM), New York’s Cannabis regulatory body, contemplates that nonprofits can and should apply for licenses. The first and only licensing application that has opened in New York, the Conditional Adult Use Retail Dispensary (CAURD) License, includes special requirements if the applicant is a nonprofit. The OCM has provided an FAQ which outlines the requirements for nonprofit related applicants but the long and short is that it will be difficult for a nonprofit to realize this license due to its stringent requirements, lack of ability to access funding, and the fact that nonprofit CAURD licensees would be required to find their own location within 6 months of getting the license. What can be gathered from this is that the OCM is open to nonprofits applying for these licenses, but there is work to be done to make it truly accessible. This suggests another thing we know, which is that there is a substantial need for advocacy in shaping the emerging industry and ensuring the regulations reflect the needs of patients, consumers, and other special interests. The last thing we know for sure is that there is a need for consumption places, community centers, and education.
The list of things we don’t know is much larger. For one, even though NYS contemplates that a nonprofit that is a 501(c)(3) can be involved with commercial sales of cannabis, the IRS would likely disagree. The CAURD proposed regulations initially required that to apply the nonprofit had to be a federally recognized 501(c)(3). As part of the International Cannabis Bar Association legislative advocacy committee, I submitted comments which noted that it was unlikely the IRS would be permissive of a 501(c)(3) engaging in retail sales and suggested a subsidiary model instead as a harm reduction approach. The final regulations now require that the 501(c)(3) be a majority owner of the entity which is the licensee. This change will not totally eliminate risking the tax-exempt status of the 501(c)(3) but it will lessen it or potentially limit it by blocking the attribution of the illegal activity to the tax-exempt parent but even this is probably aspirational. So far, the IRS has not recognized sales of cannabis, even in a medical or religious context, as being charitable as opposed to illegal. In fact, the IRS has even been wary of allowing organizations which it says promotes illegal activity such as a business league or 501(c)(6).
That being said, the IRS has approved some cannabis related tax-exempt organizations, especially those engaged in education and advocacy, and there is the potential for more. Through my talk, I provide information about three of the most primary types of tax-exempt organizations, 501(c)(3)s, 501(c)(4)s, and 501(c)(7)s. An extremely simplified overview: 501(c)(3)s are organizations, either public charities or private foundations, which provide charitable services, typically in the areas of education, healthcare, and religion and are subject to the strictest limits on political activity but allow for charitable donation deductions; 501(c)(4)s are called social welfare and sometimes advocacy organizations and are not limited politically but cannot take deductible donations; and 501(c)(7)s are private social clubs which are required to be members only and organized purely for social or recreational purposes, and not commercial ones. As a reminder, these are federal tax designations which are granted to a state level entity after formation and application to the IRS. The major benefit of tax-exempt status is of course the ability to generate income, in furtherance of the purpose of the organization, that is exempt from any corporate level income tax. Due to their public benefit nature, none of the earnings of the organization may inure to any private shareholder or individual. Limitations on impermissible private benefit and requirements that all salaries be reasonable, in addition to filing requirements are the primary burdens associated with tax-exempt organizations. There are dozens if not hundreds of approved 501(c)(3)s and 501(c)(4)s related to Cannabis. Some of my favorites include: National Organization for the Reform of Marijuana Laws, Parabola Center, and the Weldon Project.
But these organizations are just the tip of the iceberg. There is a need for advocacy, community, and charity in the state and local legal cannabis ecosystem which require tax-exempt organizations of a variety of kinds. Given that the national nonprofit sector is among top employers in the country, it is great that the OCM contemplates nonprofit licensees, but it will need to work harder to make it a reality. Continuing with the list of things we don’t know yet: Will the OCM allow broad purpose charitable nonprofits or continue to require a narrow/specific purpose? Relatedly, will NY continue requiring there to be an existing 501(c)(3) involved for a nonprofit to get licensed or allow fiscally sponsored organizations? Will there be licensing fee waivers or discounts for nonprofit applicants? Will the OCM permit a nonprofit consumption lounge that does not engage in sales? My impression is that as long as cannabis remains federally illegal, the IRS will be more likely to tolerate non plant touching and noncommercial activity. Consequently, I will be taking it upon myself to pay attention and actively comment on the proposed regulations for consumption licenses and cooperative licenses, among others, to ensure there remains an option for nonprofits to get licensed in New York while trying to maintain federal tax-exempt status. I hope you will join me.
Victoria Litman is a cannabis and psychedelic tax lawyer with an emphasis in tax exempt organizations. As a Graduate Tax Scholar, she earned honors from Georgetown where she completed a Master's in Tax Law and focused her studies at the intersections of drug law, constitutional law, and tax law. A long-time medical cannabis patient and Ganjier in training, Victoria brings a deep and personal understanding of the cannabis plant and its use to her legal practice and advocacy. Victoria is counsel at Parlatore Law Group and licensed in New York and Rhode Island.
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