Introduction:
The recent legalization of adult-use cannabis in New York State (NYS) marks a significant milestone in the burgeoning cannabis industry. This legislation creates a framework that promotes social equity, small-business (both plant-touching and ancillary), job creation, tax revenue for localities that have opted in to allow cannabis retail and/or onsite consumption establishments, and safe access to quality cannabis products for consumers 21-years and older. The evolving regulatory structure of this new industry, combined with the conflicting federal and state laws surrounding adult-use cannabis, also presents numerous challenges for those seeking participation in the cannabis space. At McLaud Law P.C., we are dedicated to helping individuals and businesses navigate the complexities of the New York State cannabis law. In this article, we will provide an overview of the state’s cannabis legislation, the current state of federal cannabis policy and discuss the implications for businesses and consumers alike.
Key Provisions of the New York State Cannabis Law:
New York State legalized adult-use cannabis through the Marijuana Regulation and Taxation Act (MRTA) in March 2021. The MRTA established a comprehensive regulatory framework for the cultivation, processing, distribution, and retail sale of cannabis in the state. Some of the key provisions of the MRTA include:
1. New Cannabis Regulatory Agency: The MRTA created the Office of Cannabis Management (OCM), a new state agency responsible for regulating the medical cannabis, adult-use cannabis, and cannabinoid hemp industries. The OCM is overseen by a five-member Cannabis Control Board, and is responsible for developing and implementing cannabis regulations and issuing licenses.
2. Licensing: The MRTA establishes various license types for businesses involved in cannabis cultivation, processing, distribution, and retail sales. With limited exceptions, NYS adult-use cannabis licensees are prohibited from having an interest in both the supply (i.e., cultivation, processing, distribution) and retail (i.e., retail dispensary, onsite consumption establishment, delivery) sectors of the supply chain. To promote social equity, the MRTA aims to issue at least 50% of licenses to social equity and justice involved applicants, including individuals from communities disproportionately impacted by cannabis prohibition.
3. Possession and Consumption: Adults aged 21 and older are permitted to possess up to three ounces of cannabis and 24 grams of cannabis concentrate. Consumption of cannabis is allowed in private residences and certain designated areas (e.g., public areas where tobacco smoking is allowed), with some restrictions on public consumption and in certain locations, such as schools and workplaces.
4. Home Cultivation: New York State residents are allowed to cultivate up to 6 cannabis plants per person or 12 plants per household for personal use, with three plants allowed to be mature at any given time. However, home cultivation is subject to specific rules and regulations, including secure and discreet growing practices. Per the MRTA, home cultivation for those who are not part of the NYS medical cannabis program will not be authorized until 18 months after the first authorized retail sale of adult use cannabis.
5. Expungement and Resentencing: The MRTA provides for the automatic expungement or resentencing of individuals with previous cannabis-related convictions that are no longer criminalized under the new law. This measure seeks to address the social injustices stemming from the previous prohibition of cannabis.
6. Taxation and Revenue Allocation: Cannabis sales are subject to a 13% excise tax, with 9% allocated to the state and 4% to counties and local municipalities that opted in to allowing cannabis retail and onsite consumption establishments. The revenue generated from cannabis taxes will be distributed to various funds, including educational funds, community grants, and drug treatment and public education programs.
Navigating the Conflict of Federal & State Cannabis Laws:
While all but 10 states in the U.S. (at the time of writing) have some form of legal cannabis program (i.e., medical, recreational or both), cannabis remains illegal at the federal level and is considered a Schedule 1 controlled substance. Although the federal government has enacted policies that prevent the expenditure of federal funds to take enforcement against states with legal cannabis programs, the federal illegality of cannabis poses significant challenges to the industry, such as those described below.
1. IRC Section 280E: Internal Revenue Code (IRC) Section 280E prevents state-licensed cannabis businesses from taking deductions for their ordinary & necessary business expenses on their federal tax returns. Current federal law only allows cannabis businesses to deduct their cost-of-goods sold (COGS). This draconian IRC provision forces cannabis business owners to pay federal tax on money their business has paid out for operations such as payroll, rent, utilities, insurance, etc.
2. Interstate Commerce: The federal prohibition of cannabis has prevented state-licensed cannabis operations from engaging in interstate commerce, which not only inhibits the operator’s ability to scale, but causes irregular fluctuations in the price of cannabis and prevents states with an oversupply of cannabis from selling their product in states with higher consumer demand.
3. Banking & Financial Services: State-sanctioned cannabis operators often find themselves unable to gain access to commercial banking and financial services that are available to other industries. Consequently, state cannabis businesses are unable to process credit card transactions, unable to secure SBA loans or access to capital with reasonable interest rates. They are forced to operate in cash, which creates both inequity and public safety concerns.
Conclusion:
As New York State’s cannabis industry evolves, and with federal legalization/decriminalization of cannabis on the horizon, it is crucial for businesses and consumers to stay informed and compliant with the applicable cannabis laws and regulations. At McLaud Law P.C., we continue to stay abreast of the everchanging landscape of cannabis legalization and welcome anyone who is interested in participating in the cannabis industry to contact us for a free initial consultation. We can also help you deal with all other NYS business and personal tax problems including audits, setting up state payment plans, and more.