Why the Retail Tax Must Be Calculated on the Pre-Discount Price (and the Personal Liability Risk of Getting It Wrong)
New York’s adult-use cannabis marketing and advertising rules allow retailers to offer discounts, loyalty programs and other promotions — but only if the programs are structured in a way that does not undermine New York State and local tax collections. In our experience, many operators are not computing the discount and retail tax correctly. This alert highlights two requirements in 9 NYCRR § 129.3(b)(1) and (2) that often get overlooked, and explains why tax under-collection can create exposure not only for the business, but also for certain owners, officers and managers who may be treated as “responsible persons” under New York tax law.
The Rule: Discounts Are Permitted — but Not Below “Market Value,” and Taxes Must Be Computed on the Pre-Discount Price
Under 9 NYCRR § 129.3(b), a licensee may advertise “price reductions or any other discount, coupons, points-based reward systems, customer loyalty programs, or bundled discounts” for adult-use cannabis products, but only if several conditions are met — including the following two that directly affect price and tax calculations:
- Condition (b)(1): no below-market sales. The offer must not result in the sale of cannabis products below “market value.”
- Condition (b)(2): retail tax must be calculated on the pre-discounted price. The retail tax due on discounted products must be calculated on the price before the discount is applied, specifically “so as to not subvert State and local tax collections.”
Defined term: “market value.” For purposes of Parts 128 and 129, “market value” means the minimum retail price of a cannabis product, which is one and a half (1.5) times the wholesale price paid by the retailer for the products and units that are being discounted.
Example: Permitted Discounted Pricing (Assuming a 100 Percent Retail Markup)
Assumptions: (1) The retailer paid a wholesale price of $50 for a unit. (2) The retailer applies a 100% markup at retail, so the listed (pre-discount) retail price is $100 (i.e., retail price = 2× wholesale). (3) “Market value” is 1.5× the wholesale price for the discounted unit.
- Market value floor: 1.5 × $50 = $75. The discounted selling price must not be below $75.
- Maximum discount from the $100 list price (on these assumptions): $100 − $75 = $25 (i.e., up to a 25 percent discount off the $100 list price).
- Permitted example: A 20 percent discount off the $100 list price results in a customer price of $80, which is above the $75 market value floor.
- Not permitted example: A 30 percent discount off the $100 list price results in a customer price of $70, which is below the $75 market value floor.
Important: The “market value” concept limits how low the customer price can go under 9 NYCRR § 129.3(b)(1). Separately, even when the discounted price is permitted (e.g., $80), 9 NYCRR § 129.3(b)(2) requires the retail cannabis tax to be calculated on the pre-discount listed price (e.g., $100), not the discounted price.
Example: Discount Applied, But Retail Tax Base Does Not Change
- Listed price (pre-discount): $100
- Promotion: 20 percent off (customer pays $80)
- Retail cannabis tax base per 9 NYCRR § 129.3(b)(2): $100 (not $80)
- Retail cannabis tax due: $100 × 13 percent
- Amount due from customer at checkout: $80 + $13 = $93
Common compliance gap: Many point-of-sale configurations calculate the retail cannabis tax as a percentage of the discounted selling price. The regulation requires the opposite: compute the retail tax on the undiscounted (pre-discount) price, even if the customer ultimately pays less due to a promotion.
Why Getting the Tax Calculation Wrong Can Create Personal Liability Exposure
Section 129.3(b)(2) is expressly aimed at preventing discounting practices that “subvert State and local tax collections.” If a retailer (or a vertically integrated operator making retail sales) calculates retail cannabis tax on the discounted price instead of the pre-discount price, the likely result is an under-collection and under-remittance of tax.
Responsible person liability: New York’s tax enforcement framework commonly imposes personal, joint-and-several liability on certain individuals who are under a “duty to act” for a business in collecting and remitting taxes. For example, under Tax Law § 1133 (the sales and use tax “responsible person” statute), certain owners, officers, directors, employees, managers, partners or members can be held personally liable for taxes collected, or required to be collected, and personal assets may be pursued once a liability becomes fixed and final. The New York State Department of Taxation and Finance has summarized this framework in its guidance on responsible person liability.
Application to adult-use cannabis taxes: Tax Law § 496-b(a) provides that the provisions of Part IV of Article 28 apply to the taxes imposed under Article 20-C “in the same manner and with the same force and effect as if the language of such article had been incorporated in full” into Article 20-C (subject to limited exceptions where a provision is inconsistent or not relevant). In practical terms, this cross-reference is a key reason why under-collection and under-remittance of adult-use cannabis taxes can create not only entity-level exposure, but also the potential for personal assessments against individuals who are treated as responsible persons under the Article 28 framework (including Tax Law § 1133), depending on the facts and the particular tax at issue. Operators should therefore treat the 9 NYCRR § 129.3(b)(2) pre-discount retail tax calculation rule as a compliance requirement with potential downstream tax exposure.
Who Is Most at Risk?
Personal exposure issues tend to arise for individuals who have authority over (or meaningful involvement in) financial controls, tax settings or payment decisions, including:
- Owners, members or partners with control over finances or compliance.
- Officers/executives who supervise finance, accounting or store operations.
- Controllers, finance directors and accounting personnel who configure or oversee tax computation and returns.
- Managers with authority to direct payments (including decisions about which vendors get paid when cash is tight).
Practical Steps to Fix (or Prevent) Noncompliance
- Audit your Point-of-Sale tax base logic. Confirm the retail cannabis tax is computed on the pre-discount price for every discount type you offer (manual discounts, coupons, loyalty points, bundles, etc.).
- Confirm “market value” compliance. Validate that advertised discounts do not push the selling price below “market value” as that term is defined in the regulations.
- Document discount programs. Maintain written discount/loyalty program terms and internal controls showing how taxes are calculated and remitted.
- Run periodic exception reports. Identify transactions where a discount applied but tax was computed on the discounted base; investigate and correct configuration errors.
- Consider voluntary remediation. If you identify under-collection/under-remittance, consult counsel about corrective filings and payment options before an audit or inquiry.
- Train staff. Ensure store managers and cashiers understand that “discounted price” and “tax base” may differ under 9 NYCRR § 129.3(b)(2).
Bottom Line
New York permits cannabis discounting, but it does not permit discount structures (or POS configurations) that reduce the retail tax base. Businesses should assume regulators and tax authorities will scrutinize discount programs for compliance with 9 NYCRR § 129.3(b)(1) and (2), and they should treat tax configuration as a governance issue — not merely a cashiering issue.
Our Cannabis Industry Team can assist with tax issues and other matters related to the cannabis industry. If your cannabis-related company needs assistance with such matters, please reach out to attorney Jason W. Klimek at (585) 419-8646 and jklimek@harrisbeachmurtha.com, or the Harris Beach attorney with whom you most frequently work.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach Murtha’s lawyers and consultants practice from offices throughout Connecticut in Bantam, Hartford, New Haven and Stamford; New York State in Albany, Binghamton, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Long Island and White Plains; as well as in Boston, Massachusetts, and Newark, New Jersey.