The cannabis business in New York continues to evolve since it was first legalized more than two years ago, Renata Serban said at the Cannabis Conference Webcast on Aug. 2. The event was presented by the New Jersey Society of CPAs and co-sponsored by the Foundation for Accounting Education.
The manager of Citrin Cooperman’s Cannabis Advisory Services and the vice chair of the NYSSCPA’s Cannabis Industry Committee, Serban began her “New York Update” presentation with some context of the state’s journey to becoming the 15th one to legalize the recreational use of cannabis with the passage of its Marihuana Regulation and Taxation Act (MRTA) in March 2021. Her session was one of six state-specific breakout sessions at the conference.
Cannabis was allowed in New York state from when it first emerged in the 1800s, she told the attendees. Cannabis was legal until June 1906, when the Food and Drug Act required clear labeling of cannabis products. The state then restricted its recreational use in 1914 by requiring a prescription.
Serban then paused to say that “it is very important to understand the difference between New York state and New York City. New York City is, sort of, a little country within New York state, she said. New York City has an independence when it comes to certain laws and regulations. While the state allowed medical cannabis, New York City criminalized it in the same year.”
Despite the release of a city-commissioned report in 1944 that concluded that cannabis was not widely associated with addiction or violent behavior, no amendments were made to existing laws. In fact, they got tougher; the federal Controlled Substances Act of 1970 banned any manufacturing, importation, possession, or use, medical or otherwise, of cannabis. Three years later, the state’s so-called Rockefeller Drug Laws mandated 15-year minimum prison sentence for selling 2 ounces (57 grams) or more for substances that included cannabis.
That was the apogee of harsh penalties for cannabis. The 1977 Marijuana Reform Act reduced possession of 25 grams from misdemeanor to violation. In 2011, New York City eased its policy on public possession and, in 2014, the state passed its Compassionate Care Act, which permitted medical marijuana use—a return to the status quo that existed a half century earlier. The state decriminalized possession in 2019 before legalizing adult-use cannabis with the MRTA two years later.
The MRTA created the Cannabis Control Board (CCB) to oversee the administration of the law, and the Office of Cannabis Management (OCM) to implement the regulations adopted by CCB. Serban noted that Tremaine Wright, the CCB chair, “frequently attends various conferences and networking events. She tries to be close to the applicants and is trying to open up lines of communication, and to position OCM and CCB as the agencies that are listening to the applicants in trying to make their environment better within the state.”
“New York has a different approach than other states by issuing conditional cannabis licenses,” she continued. Adult-use conditional cultivator licenses have been issued to 280 registered hemp growers, and 40 adult-use conditional processing licenses were issued to registered hemp farmers who distribute cannabis products to licensed-adult use dispensaries.
As of July 2023, 467 conditional adult-use retail dispensary (CAURD) licenses have been approved. Due to various factors, such as an inability to find suitable locations, “it is not likely that all of these applicants will be able to open their doors and start [their] cannabis retail activity,” she said.
Another hurdle for potential cannabis entrepreneurs is that more than half (845 of 1,528) of New York municipalities chose to opt out of hosting retail dispensaries or consumption sites, or both. “This represents a challenge for CUARD applicants who are trying to get their operations off the ground.” Serban said.
Other challenges concerned lawsuits, which further delayed a full rollout. In one case, a Michigan-based company sued over being denied a CUARD license due to the company’s being owned, in part, by a Michigan resident with a previous cannabis conviction in that state. The suit was settled in June in the company’s favor. A March 2023 suit filed by the Coalition for Access to Regulated and Safe Cannabis, an organization of medical cannabis companies, asked a judge to compel state regulators to open up licensing for all retail dispensary applicants immediately.
After explaining the various forms of taxation levied by the state, Serban confronted the issue of the federal tax law that still considers cannabis a to be a controlled substance. Under Section 280E of the U.S. Code, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Serban said that the New York State Legislature recently passed Senate Bill 7508, which would allow cannabis businesses to take tax deductions for business expenses and claim credits at the state level that they are barred by Section 280E from taking on their federal returns. Gov. Kathy Hochul is expected to sign the legislation into law, which would be retroactively effective as of Jan. 1, 2023. “New York City has its own tax laws and currently still follows 280E,” she said.
Serban then discussed the efforts of law enforcement to curb the illicit cannabis market. Those efforts received a boost in May, when the governor signed legislation to that effect. The new laws empowered the OCM and the New York State Department of Taxation and Finance (DTF) to take actions against unlicensed dispensaries through such tactics as levying large finds, holding landlords responsible for any unlicensed activity taking place in their properties, and establishing new penalties for tax fraud crime related to cannabis.