Cannabis legislation made significant strides on Election Day throughout the United States. All five states with cannabis measures on the ballot in the November 2020 election voted affirmatively for either medical or adult-use cannabis legislation. New Jersey, Arizona, and Montana voters legalized adult-use cannabis, Mississippi passed medical marijuana, and South Dakota passed both medical and adult use. As a result, today 35 states have medicinal cannabis, and 15 states have legalized cannabis for adult use.

Authored By: Aleece Burgio / Special Counsel

Aleece Burgio / Special Counsel

Many insiders expect that New York State will legalize adult use cannabis in 2021 through the budget process by adopting either the Cannabis Regulation and Taxation Act (“CRTA”) or the Marijuana Regulation Taxation Act (“MRTA”). Regardless of which law is ultimately enacted, the market will struggle if the legislation does not strike the right balance on key issues, such as social equity, tax rate, and the sale of marijuana flower.

 

Social Equity Provisions

Social equity has been both a sticking and selling point among New York legislators when weighing whether to implement adult use legislation. More recent states to enact adult-use marijuana legislation, such as Massachusetts, have included social equity provisions.[1] Focusing on individuals that have been most adversely impacted by the criminal prohibition of marijuana, Massachusetts’ Social Equity Program for example, provides technical assistance and skill-based training for success in the cannabis industry.[2]

Within New York State, previous versions of the CRTA and MRTA have adopted divergent positions on the social equity component. The CRTA, proposed by Governor Cuomo, has been contentious in the past few years precisely because it did not include any concrete plans for creating state-supported social initiatives. By contrast, the MRTA proposed to dedicate 50% of the use of revenue to go back to communities that have been disproportionately impacted by the prohibition of cannabis.

If New York proceeds in 2021 with the governor’s proposed CRTA, as is like the case, the legislation will need to contain social equity provisions to promote inclusion in the marketplace and reduce barriers for entry for communities though out the state that have higher poverty rates and unemployment.

 

New York should consider the following:

  • Developing incubator programs to provide direct support to small-scale operators;
  • Requiring licensees to use good-faith efforts in hiring employees who meet the equity eligibility criteria, and certify annually that 25% of their employees meet the criteria or that they have used a good-faith effort to achieve that 25% threshold;
  • Dedicating a percentage of local cannabis tax and non-licensing fee revenue to support a Community Reinvestment Fund to assist in reentry services, job training, and criminal record-change assistance to residents of disproportionately impacted areas; and
  • Authorizing local government to facilitate resentencing and expungement to restore the civil rights of cannabis arrestees and to fund these efforts through cannabis taxes.[3]

 

Tax Rate

States have designed different excise tax systems for recreational cannabis, and a pattern appears to be emerging: a lower tax rate equates to higher per capita tax revenues and discourages growth of the grey and illicit markets. The CRTA has historically proposed two distinct taxes: a cultivation tax (based on weight) and a separate state sales tax on the sale to a retail dispensary.[4] This taxing structure has been widely-viewed as anti-competitive and likely to discourage market participation. In addition, taxation on the basis of weight may encourage growers to limit production to certain biochemical makeups, thereby curtailing production potential. Also, a cultivation tax based on weight does not give appropriate consideration to the potency or value of the crop.

A more effective approach to taxation is through a marijuana sales tax. A marijuana sales tax does not differentiate between products and is instead a function of price. New Jersey is proposing one of the nation’s lowest taxes on marijuana, with a state tax rate of 6.625% on its sale, coupled with an excise tax and municipal sales taxes capped at 2%. In Massachusetts, the combined state and local tax rate is 17%, plus a local tax, which has proven to provide sufficient revenue but also keeps prices competitive and attractive to adult-use consumers. In the first two years of operation, Massachusetts’ cannabis market has hit $1 billion in gross sales.[5]

By contrast, California had a tax rate of up to 70% in certain jurisdictions when combining cultivation, excise, retail, sales, and local taxes. As a result, California’s projected revenues have fallen short, and California is actively working to lower taxes to facilitate the legal cannabis industry. Lower taxes allow for an easy conversion from the illicit market and encourage participation in the industry.

 

Ban on Flower

One of the largest deterrents to entering New York States’ cannabis market may be the potential ban on all flower for adult-use cannabis. Currently New York’s medical marijuana market bans smokable flower, and the new hemp regulations proposed in New York would ban the sale of CBD flower. New York State has cited public health concerns as its justification for the ban on smokable flower. However, flower/plant-type marijuana is responsible for 54.21% of cannabis distribution in the American market.[6]

If New York does not allow smokable flower in the 2021 adult use legislation, the state will not only miss out on significant revenue, it may inadvertently create insurmountable barriers to market entry as the costs of market entry (permitting, real estate, production, taxation) will outweigh the benefits to market participants. On the other hand, by authorizing the sale of full flower, companies will be able to realize a cost savings and prioritize the farming of the plant. In addition, permitting the sale of flower would promote niche “craft cannabis” businesses under a New York’s proposed micro-license rules.

New York’s primary goal should be to facilitate a low barrier to entry for applicants. To have a successful program in New York State, the legislation must include a robust social equity program, provide for reasonable tax rates, and authorize the sale of flower.

 

Aleece Burgio is special counsel and leader of Barclay Damon’s Cannabis Team. If you have any questions regarding the content of this article, please contact Aleece at aburgio@barclaydamon.com or Patty Naughton, a partner in Barclay Damon’s Regulatory Practice Area and a member of the firm’s Cannabis Team at pnaughton@barclaydamon.com.

 

[1] Massachusetts.gov, Cannabis Control Commission, Social Equity (Adult-Use Marijuana) available at https://mass-cannabis-control.com/equityprograms/

[2] Massachusetts has an Economic Empowerment Priority Review Program, which prioritizes reviewing and licensing decisions for applicants seeking retail, manufacturing, or cultivation licenses who are able to demonstrate business practices that promote economic empowerment in communities disproportionately impacted by high rates of arrest and incarceration for marijuana possession offenses under state and federal laws.

[3] See Minority Cannabis Business Association’s Ten Model Municipal Social Equity Ordinances available at https://cannabis.ca.gov/wp-content/uploads/sites/13/2019/07/MCBAs-Ten-Model-Municipal-Social-Equity-Ordinances.pdf

[4] The cultivation tax was at the rate of $1 per dry weight gram of cannabis flower, 25 cents per dry weight gram of cannabis trim, and 14 cents per gram of wet cannabis. The sale by an entity to a retail dispensary is taxed at 20% of invoice price.

[5] Massachusetts Marijuana Sales Exceed $1Billion Since Adult-Use Sales Launched, Regulators Announced, Kyle Jaeger, Marijuana Movement, available at https://www.marijuanamoment.net/massachusetts-marijuana-sales-exceed-1-billion-since-adult-use-sales-launched-regulators-announce/#:~:text=Massachusetts%20marijuana%20sales%20have%20officially,logged%20as%20of%20October%2030.

[6] Marijuana Statistics 2020, Usage, Trends and Data, available at https://americanmarijuana.org/marijuana-statistics/