New York Update: Governor Cuomo's Adult-Use Cannabis Legalization Proposal

By Elliot Choi, Counsel; Jennifer Cabrera, Counsel

Feb 20, 2020

In January 2020, New York Governor Andrew Cuomo released a draft budget that included a proposal for adult-use cannabis legalization for the Empire State. Known as the “Cannabis Regulation and Taxation Act” or “CRTA,” Cuomo’s bill contains provisions legalizing adult-use, as well as amending the state’s medical cannabis and hemp programs. Governor Cuomo previously proposed an adult-use bill in 2019, also named the Cannabis Regulation and Taxation Act (the “2019 Proposal”). This article summarizes certain key components of the adult-use provisions in the revamped CRTA.

Regulatory Authorities

The CRTA proposes the creation of a new cannabis regulatory authority, the Office of Cannabis Management (OCM), which would operate as an independent office within the State Liquor Authority’s  Division of Alcoholic Beverage Control. The OCM would exercise its authority through an executive director (ED) appointed by the Governor. The ED must appoint two deputies to oversee the medical cannabis program and the social and economic equity plan and is authorized by the CRTA to appoint additional deputies within its discretion.

In addition to the OCM, there would be a Cannabis Control Board (CCB) consisting of 5 members appointed by the Governor. While the relationship between the OCM and the CCB is not entirely clear from the draft text, it appears that the CCB would promulgate rules and regulations governing the adult-use, medical, and cannabinoid hemp programs, while the OCM would enforce those rules and regulations, and oversee licensing and day-to-day decision-making. This understanding has been corroborated by recent comments from the Governor’s office.

The CRTA proposes that the OCM and the CCB would regulate adult-use cannabis, medical cannabis, as well as cannabinoid hemp (e.g., CBD and hemp extracts for human consumption which contain less than 0.3% THC) manufactured and sold in New York. The regulation of hemp cultivation, however, would remain with the New York Department of Agriculture and Markets. It is worth noting that the CRTA diverges from current practice and from New York’s new hemp law, which contemplates the Department of Health overseeing the processing and retail sale of cannabinoid hemp. Read our summary of New York’s recently passed hemp law here.

Licenses

The adult-use provisions of the CRTA provide for at least the following classes of licenses: cultivation, processing, cooperatives, distribution, retail, and on-site consumption. The CCB is empowered to prescribe new license types, as well.

The CRTA sets some boundaries on the rights that pertain to each license. Of particular importance is the CRTA’s restriction on common ownership of a retail license and any other kind of license. However, a license-holder may simultaneously hold an interest in one cultivation license, one processing license, and one distribution license. The CRTA also restricts the supply chain, restricting cultivators to only sell to processors, who in turn may only sell to distributors, who then may only sell to retail dispensaries (although an exception exists for licensed cooperatives and microbusinesses, which may sell directly to retailers).

Cultivation (Sec. 68)

Individuals are limited to having a financial or controlling interest (whether direct or indirect) in one cultivator license. However, a single cultivation license may authorize cultivation “in more than one location,” suggesting that a cultivation license-holder could operate more than one cultivation facility. The CRTA permits, but does not require, the CCB to issue regulations permitting cultivation license-holders to conduct minimal processing without the need for a processor’s license. A cultivator that wishes to obtain a distribution license must also hold a processing license. In other words, a cultivator that wants to distribute products must also process those products, for a total of 3 licenses.

Processing (Sec. 69)

 A processing license allows the “blending, extracting, infusing, packaging, labeling, branding and otherwise making or preparing cannabis products.” The CRTA restricts processing license-holders from holding more than one processing license but, unlike cultivation licenses, it does not appear to impose this restriction on direct and indirect interest holders of processing licensees. A single processing license appears to permit operations in more than one location. Processors may not be engaged in any other business on the licensed premises, unless the license holder also holds cultivation and distribution licenses, in which case all activities can take place in the same location.

Distribution (Sec. 71)

A distribution license authorizes the acquisition, possession, distribution and sale of cannabis from a licensed processor, microbusiness cultivator, adult-use cooperative, or registered organization, to duly licensed retail dispensaries. The CRTA does not appear to restrict distribution license holders from engaging in other business on licensed premises.

Retail (Sec. 72)

Individuals are limited to having a financial or controlling interest (whether direct or indirect) in three retail licenses. It is unclear whether a single retail license will authorize license holders to operate in multiple locations. In addition, a retail license holder is prohibited from owning an interest in any other type of license. The major exception is for “registered organizations” (New York’s term for a licensed medical operator), which may continue vertically integrated operation if it is also licensed for adult-use (explained in further detail below). Retail locations must be situated at least 500 feet from a school and 200 feet of a place of worship.

The CRTA also provides for cooperative (Sec. 70) and microbusiness licenses, the former being limited just to New York residents, which allow for cultivation, processing and sale of cannabis and cannabis products direct to retailers, subject to CCB regulations.

The proposal does not include any specific caps on the number of licenses that may be issued. However, this could change once regulations are promulgated. For example, if a license award is dependent on proximity issues and concentrations of other licenses, resulting in an informal or soft cap.

Registered Organizations (Sec. 40)

As previously noted, Cuomo’s proposal empowers the ED to grant adult-use licenses to registered organizations. Although not required to do so, the OCM may hold a competitive bidding process to determine which registered organizations will be licensed to enter the adult-use market. Alternatively, registered organizations may forego a competitive bidding process (if any) and apply for an adult-use license. Importantly, any registered organization licensed for adult-use would not be subject to the general license restrictions on vertical integration described above. Any registered organization that receives an adult-use license must also maintain an adequate supply of medical cannabis.

Social and Economic Equity Plan (Sec. 84)

The failure of Cuomo’s 2019 Proposal can be attributed in large part to discontent among some legislators about the scope of social and economic equity provisions. Following the release of the CRTA in January 2020, a competing bill that places heavy emphasis on equity provisions and is known as the Marihuana Regulation and Taxation Act, S1527B/A1617B (the “MRTA”), was re-introduced in the Senate and Assembly for the second year running. The success of the CRTA, and indeed of adult-use legalization in New York in 2020, is to a large degree contingent on the success of negotiations on these important points.

Governor Cuomo has attempted to address these concerns by adding new details (primarily in Section 84 of the CRTA) for a social and economic equity plan (SEEP), many of which track provisions in the MRTA. For example, the CRTA requires that the SEEP provide “priority access” to the adult-use cannabis market for social and economic equity applicants by “by being the first licensees allowed to commence licensed activities” and also by providing “first or exclusive access to license locations and geographic areas of operation.” Other specified features of the SEEP include priority and/or expedited application review, access to specific classes or categories of licenses, reduced or deferred fees, low or zero interest small business loans, and access to an incubator and other programs.

The CRTA does not strictly define who qualifies as social and economic equity applicants, other than to say it includes minority-owned businesses, women-owned businesses, minority and women-owned businesses, disadvantaged farmers, as well as “social equity applicants,” which the CRTA defines as an applicant that:

1. Is or has been a member of a community group or resident of an area that has been disproportionately impacted by the enforcement of cannabis prohibition, as determined by the office in regulation

2. Has an income lower than eighty percent of the median income of the county in which the applicant resides

3. Was convicted of a marihuana-related offense prior to the effective date of this chapter or had a parent, guardian, child, or spouse who, prior to the effective date of this chapter, was convicted of a marihuana-related offense.

As drafted, the CRTA appears to require that social equity applicants meet all three of these criteria, therefore weeding out many deserving applicants. It is not clear if that was the intention, or if applicants meeting any one of these criteria would quality. The MRTA, by contrast, does not limit who qualifies as a social equity applicant this narrowly.

The CRTA does not earmark a percentage of the total collected adult-use tax revenue specifically for the SEEP, for the communities disproportionally impacted by cannabis prohibition, nor for any other specified causes. The absence of such provisions in the 2019 Proposal was a major reason it failed to collect enough support in the legislature, and their absence from the CRTA likewise could prove a stumbling block once again. The MRTA, to the contrary, allocates 100% of tax revenue for specified causes, including 50% for community reinvestment.

Taxes (Sec. 492 et seq.)

The proposed tax rates for adult-use cannabis are as follows:

• $1 per dry weight gram of cannabis flower

• $0.25 per dry weight gram of cannabis trim

• $0.14 per gram of wet cannabis

• 20% of sales or transfers of adult-use cannabis products to a retail dispensary

• 2% of sales or transfers of adult-use cannabis products to a retail dispensary for the account of the local county or city

The Governor’s office has estimated the effective tax rate based on the above to be between 20-25%. However, because the CRTA is imposing taxes based on weight, this number will change as prices change. Assuming that supply will increase after legalization and wholesale prices will fall, an effective rate of 25-30% may be more likely, thus placing NY’s proposed cannabis tax among the highest in the country. As many industry participants are aware, such high tax rates incentivize the legacy market to remain in place.

Further, the taxes would not be collected from cannabis consumers and would be collected at the wholesale level. The result is that cannabis consumers will see high retail prices that incorporate previously imposed taxes, in addition to any applicable sales tax that would be charged directly to consumers. This may result in sticker shock that further entices consumers to buy from the legacy market.

Local Opt-Out (Sec. 132)

Similar to last year, the proposal empowers municipalities with populations over 100,000 to opt-out of the adult-use market, whether by restricting the types of licenses that may operate within the municipality or banning licensed cannabis businesses entirely. Unlike the 2019 Proposal, the only other permissible municipal regulations relate to hours of operation and the location of retail dispensaries, provided such regulations are not unreasonably impracticable. Community host agreements, as they are used in Massachusetts, are expressly prohibited. The CRTA, therefore, attempts to concentrate regulatory authority at the state level.

Home Growing (Sec. 41)

The CRTA allows limited home grow for certified medical cannabis patients, marking a policy departure from several neighboring states that have restricted home cultivation. Eligible patients must apply for home grow registration with the OCM, which would allow them to cultivate up to four plants in designated areas. This right is subject to requirements including the tracking of individual plants and produced cannabis, the use of odor mitigation systems, and home inspections. Home growers must also demonstrate that they own the location or have received the approval of their landlord or applicable governing body. This latter requirement makes it highly unlikely that home cultivation will be possible in most cities, many of which lack sufficient infrastructure (electrical and fire prevention) for indoor home growing.