New York State's recently passed 2024 budget includes many cannabis-related provisions, addressing enforcement, licensure, and penalties, with the goal of curbing the state’s illicit marijuana market. To fully assess the impacts of the budget provisions on the state's growing cannabis industry, we will consider each of these categories in turn:
Enforcement
The budget provides broad enforcement powers to various agencies, including the Office of Cannabis Management (OCM) and, somewhat surprisingly, the Department of Taxation and Finance (DTF). These agencies have the power to order illicit cannabis operations to close (temporarily or permanently), seize illegal products, and levy hefty fines on the illegal retail operations, discussed in detail below. As a part of these enforcement efforts, the agencies may conduct regulatory inspections of adult-use businesses, including their vehicles, books, records, invoices, and products, as long as the inspections take place during normal business hours. These regulatory inspection powers are meant to assist the OCM and DTF in confirming appropriate licensure, operations, and tax payments while identifying any potential tax fraud in the cannabis space.
Licensure
The budget lays out various ways that an adult-use business may have their license revoked (temporarily or permanently), including refusing one of the aforementioned inspections, willfully failing to file a report or return, willfully falsifying a report or return, or willfully failing to truthfully collect or account for taxes imposed. Importantly, the NYS budget also states that a license application may be refused to anyone who has possessed or knowingly distributed illicit cannabis. Additionally, unless the premises are transferred in arms-length transaction, a license application may be refused to anyone who is located on a premises of a previously revoked license. The budget also describes the procedural processes whereby someone who has had a license revoked may have the opportunity to attend a hearing to request cancelation of the revocation.
Penalties
There are many newly enacted penalty provisions in the 2024 budget, as well as hefty increases to preexisting penalties. One of the most extreme examples is a civil penalty of up to $10,000 per day for anyone who cultivates for sale or sells cannabis without having appropriate registration, with an additional civil penalty up to 5 times the revenue from the prohibited activities possible as well. If an order to cease the activities is ignored, a civil penalty of up to $20,000 per day is possible.
Many existing penalties for improper possession and distribution were increased across the board, including:
- Up to $25,000 for a first offense and up to $50,000 for subsequent offenses for possession of certain threshold amounts of illicit cannabis (i.e., 5-12 lbs. of illicit cannabis, or 1-4 lbs. of illicit concentrates or edibles), and
- Up to $75,000 for a first offense and up to $100,000 for subsequent offenses for possession of certain threshold amounts of illicit cannabis (i.e., >12 lbs. of illicit cannabis, or 4+ lbs. of illicit concentrates or edibles),
- Up to $50,000 in additional penalties for a first offense and up to $100,000 for subsequent offences for “possessing for sale” certain threshold amounts of illicit cannabis (i.e., >5 lbs. of illicit cannabis, or >1 lb. of illicit concentrates or edibles) in a commercial location, and
- Up to $50,000 for a first offense and up to $100,000 for subsequent offenses for a distributor who knowingly sells to an unregistered seller.
To knowingly and unlawfully sell, give, or cause to be sold any cannabis products without the required license is now a Class A misdemeanor, which also carries with it additional enforcement measures such as the power for the OCM to compel a landlord to begin eviction proceedings and the power to bring a civil proceeding to permanently enjoin unlicensed activity at a business location, amongst others
Importantly, because the DTF is now empowered to conduct tax-related inspections, as discussed above, there are tax-specific penalties in the budget to be aware of as well. The DTF may levy civil penalties, of up to two times the amount of the tax for a first violation and up to three times the amount of the tax for subsequent violations, on businesses not appropriately paying taxes. Additionally, failure to have a proper license is now considered “presumptive evidence” of failure to appropriately pay taxes such that the person may be liable for the unpaid taxes unless evidence of payment can be provided.
The 2024 budget also aims to crack down on the indirect sales loophole that appeared to previously exist in the state's cannabis legislation. These indirect sales, or "sticker store" operations, are structured to sell customers admission to an event, membership to a group, stickers, shirts, or other miscellaneous merchandise, and in conjunction with that transaction would also give away, or "gift", that customer cannabis product. The structure was meant to not "sell" any cannabis product, thus skirting the licensing, reporting, and taxation rules and regulations. The OCM has previously issued guidance meant to deter these kinds of operations, by clarifying that they existed fully outside the bounds of legal cannabis activities, and the 2024 budget language on "indirect sales" expressly prohibits these kinds of cannabis "gifting" operations, effectively closing this loophole and imposing a possible civil penalty of the lesser of three times the revenue for such sales or $2,500 per sale.
The NYS 2024 budget's impacts on cannabis regulation cannot be overstated, the changes outlined above touch nearly every facet of the industry with increased enforcement powers and huge potential penalties. The budget's penalty provisions specifically, meant to target the “most egregious” illicit operators, carry strong criminal, civil, and financial deterrents for those operating outside of the bounds of the legally defined process. It is important that businesses engaged in the legal distribution of cannabis take note of these changes as well, as the enforcement powers granted in the budget may impact their day-to-day operations. As the industry continues to grow in the state, ongoing legislative changes are likely and should be continually monitored to ensure ongoing compliant and legal operations. The state's fiscal year 2024 runs April 1, 2023, through March 31, 2024.
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