A New Senate Bill Could Crack Down on the Gray Area of Non-Licensed Cannabis Businesses in New York

Though recreational cannabis has been legalized in New York, citizens have yet to see the implementation of the legal market. While regulators have been working on licenses that are expected to come to light in late 2022, non-licensed cannabis businesses have since created a gray area in which they sell non-taxed cannabis products or "gift" them to consumers if they buy other products, including T-shirts and stickers.

However, a new bill may serve to crack down on illicit possession and sales, effectively shutting down non-licensed businesses that have started commercial operations before the Office of Cannabis Management (OCM) has fully implemented the legal cannabis market in New York.

Senator Liz Krueger (D) introduced one such bill in late May 2022. The proposed legislation would authorize the commissioner of Taxation and Finance to revoke certificates of registration for the sale of adult-use cannabis, increase penalties relating to illicit cannabis sales, and authorize the OCM to enforce such measures.

According to the proposed bill, "illicit cannabis" is defined as taxable cannabis products for which no taxes were paid. This means that any cannabis that wasn't grown by or purchased from a licensed operator in New York would be considered illegal.

Fines for the possession of illicit cannabis under the bill would rise from $200 to at least $400 per ounce of flower, from $5 to $10 per milligram of THC in edibles, from $50 to $100 per gram of concentrate, and from $500 to $1,000 per plant.

Furthermore, non-licensed businesses could be prevented from applying for licenses issued by the OCM in the future if they are caught selling non-taxed cannabis products.

The phenomenon of non-licensed businesses selling cannabis products quickly caught the attention of New York regulators, and in early February 2022 they issued over two dozen letters in response that ordered the non-licensed businesses suspected of illegally selling or gifting cannabis to cease and desist. The letters stated that the unlawful behavior of these businesses would threaten their ability to participate in the state's adult-use market under the Marihuana Regulation and Taxation Act (MRTA), New York's adult-use cannabis legislation that was approved in March 2021.

When asked whether the gray market established by non-licensed businesses would end with the full implementation of cannabis legislation, Sen. Krueger told NYSCC that she aims to discourage illegal activities within the legislation's framework.

"I have no illusion [that] illegal trade of marijuana will disappear as soon as we start issuing licenses. My goal for our state is to discourage illegal activity by ensuring that people buy safe products from legal businesses and ensure the illegal market doesn't undermine our goal. It will require different steps over time to move up in the right direction," she said.

Joshua Waterman, cofounder of the Legacy Growers Association, told NYSCC that he would have supported Sen. Krueger's bill if it specifically targeted sticker shops only, but it targets legacy operators as well.

"The intention of shutting down sticker shops and the cannabis that has been brought in from other states is 100 percent appropriate. It is really hard to operate because of these sticker shops for the legacy operators. New Yorkers have not been educated about cannabis quality unless they are legacy individuals who have actively operated with the local cultivators. However, the bill and the fines on the quantity of cannabis people can possess directly affect the legacy people," he said.

"One of the big issues I have with the bill is that senators are spending their precious time to think [about] how to stop the legacy operation[s] from going on. This is pretty ridiculous," he added.

Sen. Krueger told NYSCC that the bill seeks to clarify that if legacy operators wish to move into the legal market, they must refrain from setting up an illegal shop before New York regulators issue licenses.

"We want to discourage legacy people from taking the view to remain in the legacy market. So, we are trying to shut down illegal businesses that have already opened stores with no licenses, in many cases giving cannabis away by charging a lot of money for T-shirts to get free cannabis. We want to make [it] clear that those behaviors won't be acceptable, and [those] doing that behavior will not be getting licenses to go legal," she said.

However, Waterman noticed that the OCM is evidently unprepared to regulate the recreational cannabis industry, as the draft licenses don't seem to involve the legacy industry at all.

According to Waterman, the fact that the legacy operators have been working undercover for such a long time would represent an obstacle for the OCM, as it would be difficult for them to understand how they operate and make regulations that would ease their access to the legal market.

"Why do these people think that excluding legacy or trying to punish legacy would be successful? They have an option to invite us to work together to create an industry that works for both of us," Waterman says.

In particular, he refers to the OCM's decision to issue provisional cultivation licenses to hemp farmers to grow adult-use cannabis for the first dispensaries expected to open in late 2022 or early 2023.

The legacy market's concern over the proposed bill, which would not only shut down non-licensed cannabis businesses but also limit their ability to participate in the legal market, is directly linked to how legacy operators perceive the OCM's efforts (or lack thereof) to involve them in the implementation of cannabis legislation.

Excluding legacy growers from the provisional licenses immediately raised concern among veteran illegal operators.

However, Sen. Krueger backed the OCM's decision and told NYSCC that the OCM intentionally moved those licenses up faster because it wanted to ensure that when it rolls out licenses for retailers, they have reasonable supplies of cannabis.

"What we learned from the mistakes of the other states was that they picked the date and licensed everybody, and there were no products to sell in the stores. So, we intentionally set up on our schedule so that growers could start earlier and have time to cultivate and sell to licensed retailers," she said.

However, Waterman thinks giving provisional licenses to hemp cultivators was a mistake.

"They don't know how to cultivate cannabis the way the legacy does. Hemp cultivators can get licenses, but the legacy needs to be involved. They don't have the infrastructure to succeed. It is ridiculous that legacy hasn't been involved. We are going to see how poorly hemp farmers can [operate] with the legacy market. It is probably a good idea not to involve legacy. At the end of the day, we are going to make more money, and they are going to fail," he said.

Sen. Krueger refutes the claims of a lack of cooperation between New York regulators and the legacy industry.

She told NYSCC that New York State set aside $200 million in funds specifically intended to assist with providing new licenses, leasing for physical facilities, loan funds, technical assistance, and management assistance to help transition legacy operators into the legal system.

"We have [had] many conversations with many legacy operators. We have made clear a legal path for them to get licenses and be very successful legal businesspeople and are trying to prioritize them with the first-round licenses and the financial system [for] those people who have been in the business," she said.

Sen. Krueger told NYSCC that the New York Senate passed the bill in early June, but the State Assembly did not pass it. Therefore, it has been put on hold until the 2023 legislative session in January.