The devilish details of legal pot

 

Customers shop inside Canna Provisions, a recreational marijuana store in Lee, Mass. photo by Scott Langley

 

By EVAN LAWRENCE
Contributing writer

 

With New York facing a pandemic-driven budget gap of nearly $15 billion, some say this is the year the state will finally commit to legalizing marijuana for recreational use.

The state Department of Health estimated in 2018 that New York’s marijuana market was worth up to $3.5 billion, which industry observers say is the largest on the East Coast.

By regulating and taxing that market, Gov. Andrew Cuomo estimates the state could bring in about $300 million a year. The governor called for legalization last month in his State of the State address, and many legislators already support the idea. Polls show strong public support.

But just across the state line in Massachusetts, where voters overwhelmingly backed legalization in a 2016 referendum, people involved in the state’s new cannabis industry warn that visions of a quick flood of revenue are unrealistic.

“Cannabis ventures are not simple, cheap or easily profitable,” Erik Williams wrote in an opinion column in the January issue of Berkshire Trade & Commerce.

Williams, who is co-owner of the Canna Provisions store in the Berkshires town of Lee, said in an interview that despite the demand for its products, the recreational marijuana industry faces many financial hurdles, including discriminatory treatment in the federal tax code and a lack of access to basic financial tools such as credit card processing.

Setting up a safe and viable recreational market will take careful planning and well-crafted regulations, he cautioned.

Success will depend on how New York decides to handle issues such as local control, licensing and whether entrepreneurs are restricted in the size and types of their operations.

Farmers who currently are permitted to grow hemp, marijuana’s non-intoxicating variant, want to know if they’ll be allowed to expand into the recreational market. Other questions to be resolved include whether production and sale of medical marijuana, which is already allowed in New York, would be kept separate from the recreational market, and whether marijuana businesses will be allowed to vertically integrate – such as by having growing and retail operations – or whether these activities will require separate licenses.

 

 

A display case shows off the wares at the Canna Provisions store in Lee, Mass. The store is one of several that opened in the Berkshires after the state’s voters backed marijuana legalization in 2016. Scott Langley photo

 

Neighboring states push ahead
Although Massachusetts currently is the only state in the region offering retail marijuana sales, New York might soon trail all of its neighbors except Pennsylvania in moving toward a legal recreational marketplace.

Vermont, which legalized recreational use in 2018, approved a new law in October that provides for a legal system of taxable sales by next year. New Jersey voters approved recreational sales in a November referendum, and enabling legislation is awaiting the signature of Gov. Phil Murphy. And Connecticut legislators give that state a 50-50 likelihood of following suit this year. Retail pot sales are already legal in Canada.

New York has allowed sales of medical marijuana since 2015. But the state’s program, overseen by the Department of Health, is widely criticized as difficult to access. Only 10 medical marijuana suppliers serve the entire state and are limited to a maximum of four locations each. They aren’t allowed to offer marijuana in any form that can be smoked, which is how most users consume it, and medical marijuana patients are prohibited from growing their own supply at home.

New York’s previous attempts to legalize sales of recreational pot have foundered over concerns about what the state would do with tax revenue – and how it would ensure justice for minority communities that have been disproportionately harmed by marijuana prohibition. Some opponents continue to raise public safety concerns.

After Congress acted in 2018 to legalize the production of hemp, the non-intoxicating variant of marijuana, some farmers in eastern New York began growing the crop, chiefly to produce the popular cannabidiol or CBD oil. But the state’s new hemp growers have been buffeted by a combination of oversupply and sometimes contradictory regulations. Now they’re wary of how the state’s move toward full marijuana legalization might affect them.

Cuomo has said he wants legalization considered as part of the state’s budget for the 2022 fiscal year, which begins April 1. The broad outlines of the governor’s legalization proposal are included in the state’s 2022 budget briefing book, but many details remain to be worked out and reconciled with bills already in the Legislature.

 

Repealing prohibition
State Sen. Liz Krueger, D-Manhattan, has been introducing bills since 2013 to allow regulated, taxable sales of marijuana products. She and the current bill’s 19 co-sponsors hold that marijuana prohibition “is a failed policy that disproportionately affects communities of color and wastes valuable law enforcement resources.”

Krueger’s bill, like a companion version in the Assembly, would remove legal liabilities for adult use and possession, and it would direct funds and assistance to communities that have been most harmed by prohibition policies.

In New York, bills can advance either through the Legislature or the budget process.
“Either approach is a reasonable one,” said Brad Usher, Krueger’s chief of staff.
He said Krueger’s bill draws on the experience of other states with legal markets.
“It’s a moving target” as more states open markets, he added. “Each time a new state does it, there are improvements.”

Krueger’s bill emphasizes social equity, which was not part of early legalization bills, Usher said.
Now, “a lot of states are starting to move down the road of social equity,” he said, citing Massachusetts, Illinois, and Colorado. New York legislators are talking with other states about what has worked and what hasn’t.

“Not going first is sometimes an advantage,” Usher said.
Both Krueger’s legislation and the governor’s proposal would create a state Cannabis Control Board, which would set up an Office of Cannabis Management. The office would bring recreational marijuana, non-psychoactive cannabis products and industrial hemp under one agency, which will issue licenses for regulated parts of the market.

A limited number of recreational licenses would go to existing medical marijuana providers, Usher said.

“If medical marijuana can’t play at all in retail, they won’t be viable,” Usher added.
Krueger and her allies want people with medical conditions to have access to products recommended by their doctors, rather than having to go to a retail shop and guessing which products might be helpful, he said.

“But we don’t want medical marijuana dominating the industry to the exclusion of everyone else,” Usher added.

 

Licensing and testing
For the most part, vertical integration would be discouraged under New York’s current legislative proposals. Except for micro-businesses and medical providers, entrepreneurs would only be able to hold a license for one part of the industry, such as growing, processing, testing, transportation or retail.

The control board would determine the number of licenses in each sector based on demand. That would help prevent takeover by a few large companies and keep retail markets independent.

“We want to make sure small players have a space,” Usher said.
The Senate bill would allow individuals to have up to two pounds of dried material, 4.5 ounces of concentrate, or six live plants, and they could share those amounts with other adults.
Testing to ensure potency and purity is an important feature of both proposals.

“It’s clear that a well-regulated market will give consumers a much better sense of what they’re consuming,” Usher said.

Cuomo’s proposal would impose an excise tax at the wholesale level as well as taxes based on the product’s potency. With state and local taxes included, the tax to consumers could total about 30 percent.

The rate in Krueger’s proposal is significantly lower, at 22 percent, which Usher said is in the range of what other states have imposed.

“The tax rate is critical to reduce the illegal market,” he added.
The social equity aspect of the Senate bill encourages people in minority communities with a historically high rate of marijuana-related arrests and convictions to start legal businesses. For example, people with established black-market customers could become licensed retailers and possibly expand their businesses. That would bring revenue into their communities, Usher said.
As with alcohol, towns that don’t want to be part of the industry can opt out. The governor’s bill makes that easier, Usher said.

He predicted most “dry towns” would have second thoughts when they see revenue going elsewhere.

Unlike Cuomo, Krueger and her colleagues aren’t predicting how much revenue a legal marijuana market would generate.

“We’re just saying there will be a significant increase in revenues,” Usher said.
Some of it will support the regulatory system and to help develop new marijuana-related businesses, especially in communities that suffered under prohibition. Other funds will go to improving drug enforcement, including hiring and training law enforcement officers who are able to recognize and document drug-impaired driving.

But Usher stressed the legal marijuana sales may not necessarily result in more consumption.
“People are driving stoned right now,” he said.

In some cases, he suggested, public safety risks would be reduced if people are able to buy marijuana legally near their homes rather than having to drive long distances to obtain it.
Some revenue from legal marijuana could also pay for drug treatment and education.
“We could offer more treatment for opioid addiction,” Usher said. “The danger of death from other drugs is much higher.”

The chances of legalization appeared good last year until the pandemic upended everyone’s priorities.

“The longer New York delays, the more New York loses out,” Usher said.
Massachusetts is convenient to a relatively small number of upstate residents, he said. But New Jersey is “just a couple of subway stops away” from millions of New York City residents.
Usher said he’s “cautiously optimistic” that legalization will happen this year. It has many supporters and not many opponents, he said.

But it will take time to set up a regulatory system and build enough inventory to supply businesses. Usher said he doesn’t expect sales could start until late next year at the soonest.

 

Agricultural opportunity?
One issue for New York’s legalization push is how it will affect the state’s farmers, particularly those who are already growing hemp as a cash crop for fiber and CBD oil.

The Farm Bureau of New York, an advocacy group for farmers, takes no position on legalizing recreational marijuana, but spokesman Steve Ammerman said “farmers should have a seat at the table” when the state sets rules for growing and regulating the crop. Marijuana would “provide some diversification” for the state’s farmers and expand their markets, he said.

Although hemp and its intoxicating cousin are botanically the same, marijuana is “a completely different crop” that would come with “new regulations and security measures,” Ammerman said.
The state’s medical marijuana program bypassed farmers, Ammerman said, with contracts going to a few nonfarm companies. He said the Farm Bureau supports vertical integration, which would allow farmers to market their products directly to consumers. That’s not part of the current legislative proposals.

“That needs to be part of the discussion,” Ammerman said. “There could be some advantages for a New York crop grown by New York farmers. Nobody does it better.”

Seth Jacobs and his family started growing hemp in 2019 at their farm in the Washington County town of Argyle, after changes to federal and state laws cleared the once-prohibited crop. Jacobs’ Slack Hollow Farm markets its own line of CBD products, aimed at the natural remedies market. The farm is a member of the New York Cannabis Growers and Processors Association.
Because it’s still illegal at the federal level, any marijuana sold in New York under a state legalization effort would have to be grown in the state.

“I would dearly love to get into it,” Jacobs said. “There’s a big change around the corner, and I’d like to be part of it.”

The recreational industry “wants to be regulated with good quality controls,” Jacobs said.
But how the state approaches regulation is crucial to whether legalization succeeds, he said, adding that imposing high taxes will just drive customers to the black market.

The state’s handling of the CBD industry doesn’t leave Jacobs hopeful. He pointed to a recent ban on marketing the CBD flower, which can be smoked.

“We can sell anywhere else, but not in New York,” Jacobs said. “It borders on the absurd.”

Small farms vs. big business

Jacobs said he fears Cuomo’s proposal would benefit mostly big businesses, keeping farmers from selling their own products and prohibiting homegrown marijuana.

In some states, existing medical marijuana producers have had priority when recreational markets open.

“We have no clue on what terms they’ll let us in on, if they let in small growers at all,” Jacobs said.

Micro-licenses for small growers and producers “would be really nice,” Jacobs said. “With the buy local movement, who wouldn’t want to buy their products locally?”

What happens at the federal level matters to local farmers too. Jacobs pointed to a final rule published by the U.S. Department of Agriculture on Jan. 19, the last full day of the Trump administration, sharply lowering legal limits of THC in hemp. The change, he warned, would be “very damaging to the CBD industry.” The rule change was set to take effect March 22 but was frozen along with other new federal rules by the incoming Biden administration.

Another possibility is that Congress will reconsider federal prohibition of marijuana. In December, the House passed a bill to end criminal penalties under federal law and allow cannabis businesses access to banking services and normal business deductions. The bill had been expected to die in the Senate, but after control of that chamber flipped in January, Majority Leader Charles Schumer, D-N.Y., and other Democratic senators issued a statement Feb. 1 pledging to take up “comprehensive cannabis reform legislation.”

DeVaughn Ward, senior legislative counsel for the Marijuana Policy Project, a national advocacy group, called Cuomo’s proposal “a starting negotiation point” for talks with the Legislature. He called Krueger’s bill “more progressive.”

Marijuana enforcement “has largely been on communities of color,” Ward said. “A large part of the revenues should be directed to their needs. The communities most harmed should reap the benefits.”

Although a number of states are looking to marijuana for revenues and job growth, crafting cannabis legislation is “a complicated undertaking with competing interests,” Ward said. “It has to be transparent and thoughtful.”

New York needs to avoid New Jersey’s situation, Ward said. There, despite overwhelming support for legalizing marijuana, legislation to create a regulated marketplace is bogged down in disputes over details.

In the meantime, “people are still being arrested for cannabis violations,” he said.

 

A focus on local control
Williams and Meg Sanders co-own Canna Provisions in Lee and two other recreational marijuana retail stores in Massachusetts. They’ve also built cannabis businesses in Colorado and Illinois, and they consult nationally and internationally on the cannabis industry.
Their Lee store opened in July 2019.

“It took longer than expected,” Williams said. “There were delays across the board” as the state set up its regulatory system and as Williams and Sanders worked out agreements with the town.
But the regulatory system developed in Massachusetts could be a model for New York, Sanders said.

“Massachusetts did local control right,” she said. “When you have the diversity of communities that you have in New York, having strong local control makes sense.”

For many reasons, she added, “the worst thing for New York is to let a bunch of wealthy white men run the whole cannabis industry.”

She said limiting the number of licenses is a bad idea.
“That makes it tough for equity and social justice empowerment,” Sanders said. “It keeps some people with talent and a great work ethic out.”

Canna Provisions sells only to the recreational market in Massachusetts, as the rules for medical marijuana dispensaries are very different, she said. A medical license could increase their market, Sanders explained, but it also would require them to grow their own supply, which they don’t want to do.

“We support making sure customers and patients can get the products they want at the same location,” she said. “People with a medical card should be able to get what they need anywhere.”
The Lee shop is just off the Mass Pike, only 10 miles from the New York line. Although a significant number of their customers have New York plates, Williams and Sanders said they aren’t worried about competition from across the state line.

“We’re a known and trusted source,” Williams said.
Sanders said many of their out-of state customers are attending an event or spending a weekend in the Berkshires. They shop locally for their cannabis just as they do for food or wine. That won’t necessarily change, she said.

Williams said they’d consider expanding to New York, depending how the state sets up its system.

He predicted New York’s market will take time to grow and develop, with prices going down as production becomes more efficient and supply increases. The key is keeping the door open to small innovators, he added.

“In a true competitive market, you can get one small business with one product,” Williams said. “A lot of us really have a passion about manufacturing. If New York doesn’t do that, it will never compete with Massachusetts.”

 

‘Listen to your voters’
Another marijuana store in the Berkshires, Silver Therapeutics in Williamstown, opened in April 2019 with a medical license, which allows the company to grow and make its own products. But Brendan McKee, a partner in the business, said it has only sold as a retail outlet.

“Our products are medical grade,” McKee said. “Regardless of whether you have a medical card, everyone is treated like a patient.”

Because of the rules and stigma around getting a medical marijuana card, some people can’t or choose not to get one, he said.

In its first nine months, almost 40 percent of the store’s customers were from Massachusetts, 30 percent from New York, and 20 percent from Vermont, according to a January 2020 story in The Berkshire Eagle. Silver Therapeutics paid Williamstown $207,000 in sales taxes and host community fees from April through November 2019.

Sales halted in March 2020 when the Covid-19 pandemic began. Gov. Charlie Baker declared retail marijuana a “non-essential business” and ordered stores shut for several months. Liquor stores were allowed to remain open.

Cannabis products are perishable and proprietors had to destroy thousands of dollars worth of inventory.

Since then, “business has come back,” McKee said.
“The response has been overwhelmingly positive,” he said. “We’re grateful to have the team and community we serve.”

Before a New York market opens, “there’s a tremendous amount that has to happen at the state and local level,” McKee said.

One of the partners in the business, Joshua Silver, lives in Saratoga Springs.
“We would love nothing more than to bring our expertise to New York,” McKee said.
But if there’s no vertical integration, “that’s a tough one,” he added.

New York legislators need to “just keep an open mind and listen to your voters,” McKee said, citing polls that show support for legalization and sales.

“Understand that the sky won’t fall if a cannabis facility opens in your area,” he said. “We’ve done nothing but help people. Having a medicinal plant in these times is helpful. It’s better than turning to alcohol or opioids.”