New York’s Cannabis Social Experiment and How You Can Participate
Happy 420!
You can find our article, New York’s Cannabis Social Experiment and How You Can Participate, in the latest publication of Bloomberg Tax here:
Reprinted with the permission of Bloomberg Tax
This is part of a two-day series by Bloomberg Tax Insights looking at the tax challenges facing cannabis businesses and how they can navigate conflicting state and federal laws.
In awarding its recreational cannabis licenses, the state of New York is attempting to right generations of wrongs caused by the war on marijuana, say AB FinWright’s Simon Menkes, Abraham Finberg, and Rachel Wright, who look at New York’s vision for licensing recreational cannabis.
What H.G. Wells, author of “The Time Machine,” wrote about New York City applies to the state and its vision for licensing recreational cannabis: “To tell the story of New York would be to write a social history of the world.”
The Great Experiment
New York is embarking on a great social undertaking. In awarding its recreational cannabis licenses, the state is attempting to right generations of wrongs caused by the war on marijuana.
According to the Marijuana Regulation and Tax Act, as added in 2021, some of the state’s goals are to make substantial investments in the African-American and Latinx communities that have been disproportionately affected by cannabis criminalization, reduce the illicit market for cannabis and illegal drugs, end the racially disparate impact of existing cannabis laws, and strengthen New York’s agriculture sector.
50% of All Licenses Will Be Social Equity
The state’s goal is to award 50% of adult-use cannabis licenses to social and economic equity applicants. As recently reported, these licenses will be the first issued.
No one knows yet how many recreational licenses will be issued. Only 38 medicinal licenses—serving 140,000 patients in 2021 with sales of about $300 million—have been granted. Everyone expects the number of recreational licenses to be significantly higher.
The First 100 to 200 Licenses
Chris Alexander, executive director of the state’s Office of Cannabis Management, expects 100 to 200 licenses to go first to people convicted of a marijuana-related offense before the drug was legalized or to those who have a parent, guardian, child, spouse, or dependent with a marijuana conviction. Alexander’s office will also evaluate applicants on their business plans and experience in retail.
What’s the Timeline?
Tremaine Wright, chair of New York’s newly formed Cannabis Control Board (CCB), which will be overseeing the licensing process, said, “We are setting up a system soup-to-nuts … [final] regulations for the state’s marijuana startups will be issued by the Cannabis Control Board this winter [2022] or early spring [2023]… recreational dispensaries should be licensed to operate by summer 2023.”
Whom Is New York Looking For?
New York has defined social equity applicants as being:
- individuals from communities disproportionately impacted by the enforcement of cannabis prohibition;
- minority-owned businesses;
- women-owned businesses;
- distressed farmers; and
- service-disabled veterans.
Extra priority will be given to an applicant who:
- is a member of a community disproportionately impacted by the enforcement of cannabis prohibition;
- has an income lower than 80% of the median income of the county in which the applicant resides; and
- was either convicted of a marijuana-related offense prior to the effective date of the N.Y. Cannabis Law, or had a parent, guardian, child, spouse, or dependent, or was a dependent, of an individual who was convicted of a marijuana-related offense prior to the effective date of the N.Y. Cannabis Law.
Types of Licenses
There will be nine types of licenses: retail dispensary, on-site consumption, delivery, cultivator, nursery, processor, distributor, adult-use cooperative, and microbusiness.
Social Equity Licenses Come With Strings Attached
Social equity licenses cannot be transferred or sold within the first three years of issue. Exceptions must first be approved in writing by the CCB.
CCB Priorities
Delivery companies will likely be capped at 25 employees to prevent large firms from entering the market. “We’re trying to focus on not creating a space where monopolies can take over and kill all our small businesses,” Wright said.
License Application Costs
The cost for a recreational cannabis license hasn’t been decided. Applicants for medicinal licenses paid a non-refundable application fee of $10,000 and a registration fee in the amount of $200,000, refunded if the license wasn’t granted. A recreational license will likely cost more but fees may be waived for social equity applicants.
Funding Assistance for License Applicants
Gov. Kathy Hochul recently pledged $200 million to support social equity applicants in building adult-use cannabis businesses. Around $50 million will be raised from medical cannabis businesses in NY while $150 million will be raised from private investors.
Those loans may not be available for the first round of licensing because the money to fund them will largely come from tax revenue generated by the industry. “[The Office of Cannabis Management] is not going to be able to right all the wrongs of the financial services industry,” Wright said.
Requirements for Those Who Invest With Social Equity Applicants
Anyone investing with a social equity applicant must keep in mind the state’s requirements:
- Any entity applying for a New York cannabis license will need to be owned at least 51% by a social equity class applicant.
- Ownership must be “real, substantial, and continuing.”
- The social equity applicant must have and exercise the authority to control independently the day-to-day business decisions of the enterprise.
- The individual or entity seeking the license must be authorized to do business in the state and be independently owned and operated.
- The individual or entity must be a small business.
Business Experience and Labor Union Representation Needed
The state wants applicants to demonstrate previous successful business experience and is seeking applicants who have an agreement with “a bona-fide labor organization that is actively engaged in representing or attempting to represent the applicant’s employees.”
New York’s Thoughtful Approach
The state’s leaders have moved carefully into the recreational cannabis market. They’ve noted pitfalls that have arisen in other states like California, where small cannabis operators have been squeezed out, and a large illicit market has grown to dwarf the tax-paying legal sector.
By offering initial recreational licenses to small, social equity applicants, and by requiring they have solid business experience, New York is hoping its businesses will flourish and build strong roots before sophisticated, multi-state cannabis operators enter the fray.
Additional Keys to a Successful Application
Beyond fulfilling the ingredients of the social equity applicant “recipe” outlined above, the key to a successful application may come down to the perception it gives the Cannabis Control Board of the applicant’s commitment to the state’s mission. The applicant needs to demonstrate that they will “contribute to communities and people disproportionately harmed by enforcement of cannabis laws…and report these contributions to the board.”
The New York law also asks for documentation of the racial, ethnic, and gender diversity of the applicant’s employees and owners and suggests each applicant consult with the CCB’s chief equity officer and executive director “to create a social responsibility framework agreement that fosters racial, ethnic, and gender diversity in their workplace.”
In Summary
New York is serious about using the legalization of cannabis to right some of the social wrongs of the past. A well-crafted application that emphasizes these values may be the deciding factor on whether an applicant is rewarded with one of the state’s “golden tickets.” New York will be the second-largest recreational cannabis market behind California. Initial access to such a valuable marketplace is worth creating not only a well-crafted application, but also a well-crafted management team and business plan.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Simon Menkes, CPA, supports AB FinWright’s clients and advisers through accounting and advisory services, and through writing professional articles that are both approachable and informative.
Abraham Finberg MBA, CPA, a managing partner at AB FinWright, has been a leader in the cannabis sphere since 2009, counseling clients in all phases of business advisory and tax, from start-up through M&A and IPO.
Rachel Wright, MST, CPA, also a managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multi-national entities, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal, and international statutes of taxation.
