Cuomo’s Plan for Recreational Marijuana | FTI Consulting

Governor Cuomo’s Plan to Roll Out Recreational Marijuana: What Are the Near-Term Issues?

Statue of Liberty and hemp leaf

On January 15, 2019, New York Governor Andrew Cuomo and his team — led by Assistant Counsel to the Governor for Health Axel Bernabe and Assistant Counsel to the Governor Jason Starr — published draft budget legislation for New York State cannabis legalization.1 A separate bill has been introduced in the New York State Senate but it has not made it out of committee.2

Governor Cuomo’s proposed budget legislation plans to legalize, tax and regulate adult-use cannabis, including the opportunity to expunge past cannabis-related conviction records, allowing former drug law offenders to apply for licenses. It also acknowledges that it is in the public interest to choose license applicants who will contribute to communities and people disproportionately harmed by cannabis law enforcement.

The proposed budget legislation would establish an independent Office of Cannabis Management that would cap the number of cultivation, distribution and retail licenses allowed in the state. It would prohibit adult-use cannabis companies from vertically integrating, which would result in a larger number of smaller businesses, unlike New York’s medical cannabis market, which currently has 10 vertically integrated businesses up and running.

The plan would impose three taxes on the industry:

  • The first tax is imposed on the cultivation of cannabis at the rate of $1 per dry weight gram of cannabis flower and $0.25 per dry weight gram of cannabis trim.
  • The second tax is imposed on the sale by a wholesaler to a retail dispensary at the rate of 20 percent of the invoice price.
  • The third tax is imposed on the same sale by a wholesaler to a retail dispensary at the rate of 2 percent of the invoice price, but collected in trust for and on account of the county in which the retail dispensary is located.

Near-Term Issues

While creating a new Office of Cannabis Management is a big part of Governor Cuomo’s plan, it lacks details on how it would operate. (The Cannabis Office would assume regulation of medical marijuana in addition to the newly added recreational businesses under the plan.)

One key unknown is how the new office would control a legal weed marketplace threatened by illicit trade. The plan seems to prohibit New Yorkers from growing their own marijuana, but enforcement could prove difficult, as the maximum penalties are one year imprisonment and/or $5,000 per violation.

Marijuana companies could see the restrictions on retail ownership as potentially harmful to pricing, so the debate is sure to include concerns that high taxes would trickle down to small businesses and consumers, driving some to the black market.

While Governor Cuomo’s plan aims to empower poor communities hit hardest by decades of racially biased marijuana policing by creating cannabis business opportunities for them, cannabis industry players in New York and across the country are expected to push back. Some have invested millions of dollars in medical marijuana growing operations and dispensaries while awaiting the addition of recreational cannabis. A trade group has urged Governor Cuomo to allow co-located dispensaries selling medical and recreational cannabis.

Business Implications

New York is expected to be one of the largest cannabis markets in the world, and while the details may change prior to implementation, there are a few interesting items to note.

Perhaps the most interesting new license type being introduced is the onsite consumption license, which addresses the problem of having a safe place to consume the product. Alcohol consumption spaces (e.g., bars) provide a legal venue for consumption outside of private homes, but a similar type of venue has been lacking in most cannabis markets. Medical cannabis consumers living in federally subsidized public housing are prohibited from using legally obtained products in their own homes. By adding this license type, New York is addressing a social inequity problem and creating a major opportunity for businesses.

The adult-use retail dispensary license appears to restrict retailers from possessing any manufacturing, growing or distribution licenses. If correct, this will have major tax implications for retailers, as vertical integration is a major component of IRC 280E tax mitigation for many organizations. This restriction, combined with competition from the black market, will squeeze profit margins for retail licensees.

New York City is one of the largest retail delivery markets in the world, and the “special use permits” section provides an avenue for making this existing market legal. However, these traditional delivery services typically follow the “mobile dispensary” model, where the delivery person brings multiple products from which the purchaser makes selections. This model may be restricted, as the general restrictions prohibit transactions “… where the sale is consummated and delivery made concurrently at the residence or place of business of a cannabis consumer.” How these restrictions will affect the mobile app delivery model popular in other markets remains to be seen.

Riding a Green Wave

For now, most studies show that the overwhelming majority of the U.S. would like to see cannabis legalized in its many forms. With Colorado and California leading the way and New York now in the adult-use mix, only time will tell how laws can begin to adapt to meet the needs of what the public would like to see.

NOTES:
1. 2020 New York State Executive Budget, Revenue, Article VII Legislation.
2. New York State Senate Bill S3040C.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals. Copyright ©2019. All rights reserved.


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