New York Legalizes Adult-Use Cannabis and Makes Significant Changes to Medical Cannabis Regulation

What to Know

• With the enactment of the Marijuana Regulation and Taxation Act (MRTA) in March 2021, New York is poised to become one of the largest cannabis markets in the country; however, licenses required for adult-use cannabis activity are unlikely to be issued until early 2022.
• Regulatory oversight of medical cannabis will be transferred to the new Office of Cannabis Management, and the Compassionate Care Act will be repealed and replaced by MRTA’s medical provisions six months after the new Cannabis Control Board is appointed.
• MRTA expands options for certified patients and paves the way for Registered Organizations to open additional locations, with a focus on underserved areas and increasing diversity in licensees.
• Municipalities may prohibit retail sales and on-site consumption within their jurisdictions by enacting local ordinances before December 31, 2021, but may not prohibit the other activities authorized by MRTA (e.g., cooperatives, delivery, processing, etc.).
• MRTA generally discourages vertical integration by restricting the number and type of licenses most individuals and entities can hold.

Introduction

While much of the attention on MRTA is focused on its adult-use provisions, the law will significantly alter the state’s existing medical cannabis industry. Upon enactment, MRTA immediately decriminalized the use, purchase, and possession of up to three ounces of cannabis and up to 24 grams of concentrate by adults 21 and older. It also established a general framework for the licensing and taxation of adult-use cannabis businesses and tasked two new regulatory bodies — the Office of Cannabis Management (OCM) governed by a yet-to-be-formed Cannabis Control Board (CCB) — with developing and implementing a comprehensive regulatory regime for the licensure, cultivation, production, distribution, sale, and taxation of all cannabis-related business in the state — i.e., adult-use cannabis, medical cannabis, as well as “cannabinoid hemp.” MRTA also expanded the list of conditions that qualify a patient to use medical cannabis, increased the number of locations that Registered Organizations may operate to eight, and authorizes qualified patients at least 21 years of age to grow cannabis for personal medical use.

While existing medical cannabis and cannabinoid hemp companies may continue to do business under the state’s existing (pre-MRTA) rules, Registered Organizations should begin to plan for significant upcoming regulatory changes and adult-use cannabis business will not be able to operate lawfully until they are licensed by OCM/CCB.

Overview of Adult-Use License Types, Requirements, and Restrictions

MRTA authorizes OCM/CCB to create a number of different license types, which generally correspond to the specifically permitted activities described further below. The law’s licensure framework is intended to encourage ownership by New Yorkers, small businesses, and social equity applicants (and discourage the concentration of licenses being held by large, vertically integrated, multi-state operators), by prohibiting most entities and individuals from holding multiple license types. However, there are some exceptions. For example, MRTA contains a limited exception that allows qualifying entities operating under New York’s existing medical cannabis program (“Registered Organizations”) to obtain multiple licenses, as described below. In addition, MRTA does not require owners of an applicant entity to be residents of New York. In fact, a corporation may apply for a license if a minority of its directors are non-U.S. citizens if each of its principal officers are U.S. citizens or permanent residents. However, OCM/CCB regulations will further clarify applicant eligibility.

Companies hoping to enter New York’s nascent adult-use cannabis industry will need to be patient. Before OCM can even begin to accept applications or issue licenses, a number of time-consuming administrative processes must be completed. For example, CCB (which will be responsible for overseeing OCM’s issuance of licenses) has yet to be formed. And before any licenses can be issued, OCM/CCB must first promulgate regulations to actually implement and operationalize MRTA’s general requirements, which likely will involve time-consuming, multi-step public notice-and-comment rulemaking. If the CCB is established this summer and regulations are adopted by year’s end, OCM/CCB potentially could begin issuing licenses in early 2022. Cities, towns, and villages may prohibit retail sales and on-site consumption of adult-use cannabis by enacting local ordinances no later than December 31, 2021, but may not prohibit the other activities authorized by MRTA.

Application requirements will be set forth in the forthcoming regulations, but at a minimum, officers, directors, and other principals of applicant entities should be prepared to provide: personal and demographic information; corporate structure and investment information; fingerprints for a background check; information about the premises to be licensed, such as the address and proof of the right to use it for the two-year license term; and financial statements. Once issued, the initial licenses will be valid for a two-year term, with an option to renew.

Impacts on Medical Cannabis in NY

In addition to establishing new licenses to allow Registered Organizations to expand into the adult-use market, MRTA significantly impacts New York’s existing medical marijuana industry in the following ways:

1. Oversight of the state’s existing Medical Marijuana Program will be transferred from the Department of Health to the OCM within six months of appointment of the CCB, as part of the consolidation of all cannabis regulation into one agency.
2. Current regulations affecting Registered Organizations will remain in effect until the OCM/CCB adopt new regulations authorized by MRTA. However, six months after the CCB is appointed, the Compassionate Care Act will be repealed from Public Health Law and Article 3 of MRTA will govern medical cannabis in New York.
3. The definition of “practitioner” has been expanded to include anyone who is licensed, registered or certified by New York state to prescribe controlled substances. In addition, the list of conditions for which patients may qualify to use medical cannabis has been expanded to include cancer, HIV/AIDS, ALS, Parkinson’s disease, Alzheimer’s, PTSD, and others.
4. MRTA creates opportunities for an increase in the number of additional Registered Organizations facilities. First, MRTA requires the CCB to register additional Registered Organizations and to promote racial, ethnic, and gender diversity when considering applications for new Registered Organizations. Second, it increases the number of dispensing facilities a Registered Organization may operate to eight, but requires the first two additional sites to be located in underserved or unserved areas.
5. MRTA expands options for certified patients, by allowing those 21 and older to cultivate cannabis for personal medical use, as well as allowing patients to designate up to five individuals as designated caregivers and to designate facilities and facility employees as designated caregiver facilities.

Fees and Taxes

In addition to requiring an application fee, MRTA also allows OCM/CCB to assess an additional biennial fee based upon the on the amount of cannabis to be cultivated, processed, distributed and/or dispensed, or the gross annual receipts for a license period. MRTA also establishes an excise tax on the sale of cannabis by a distributor to a retailer, based on the cannabis product’s THC content and final product type. When the adult-use product is sold at retail to a consumer, the sale is subject to an additional 9% state tax and 4% local tax (which is a statewide “local tax” to be collected by the state on behalf of the municipality where the dispensary is located).

MRTA establishes a 7% excise tax on medical marijuana, which must be paid by the Registered Organization and cannot be passed on to customers.

Social Equity & Criminal Justice Reform

MRTA directs the CCB to prioritize applications by applicants who are from communities disproportionately impacted by cannabis enforcement, or who qualify as a minority- or women-owned business, distressed farmers, or service-disabled veterans (“social and economic equity applicants”). Specific eligibility criteria will be determined by the CCB. Social and economic equity applicants will enjoy several benefits, including: fee waivers or reductions, access to low-interest or interest-free loans, and no-cost counseling services, like small business coaching and financial planning. The state plans to issue 50% of licenses to minority- or woman-owned businesses, distressed farmers, or service-disabled veterans. MRTA also prohibits the sale or transfer of a social equity license for three years after initial licensure, unless the license is sold or transferred to another entity that qualifies for a social equity license and the transfer is approved by the CCB. The law also reforms criminal penalties for cannabis-related violations and authorizes automatic expungement or resentencing of convictions for activity decriminalized by MRTA.

Adult-Use License Types

• Cultivator: Licensees may grow and harvest cannabis for adult use and may also hold one processor license and one distributor license. Licensees may only sell cannabis that they’ve harvested themselves.
• Processor: Processors may buy cannabis from licensed cultivators, process the cannabis (via blending, extracting, infusing, packaging, labeling, branding and otherwise making or preparing cannabis products), and sell cannabis products to licensed distributors. They may also hold one distributor license, allowing them to distribute and sell the cannabis that they process.
• Distributor: Licensees may purchase and sell adult-use cannabis and cannabis-derived products to licensed retailers or licensed on-site consumption sites. Distributor licensees may also hold interests in companies with a cultivator license and a processor license, but in that case they will be limited to distributing cannabis cultivated and processed by those licensees. A distributor may not be a shareholder in, receive a share of profits from, or have similar interests in a cannabis microbusiness, retailer, or on-site consumption licensee, among others.
• Retailer: Retailers may sell and deliver cannabis and cannabis products from a licensed premises. A licensee may be a shareholder in, receive a share of profits from, or have a similar interest in up to three retail dispensary licenses. A retail premises must be zoned for commercial use and located at least 500 feet from any school and 200 feet from any place of worship. Retail applicants must be able to demonstrate that they have the right to use the premises for the duration of the license term (two years for initial licenses).
• On-site Consumption: Licensees may sell cannabis and cannabis-derived products to individuals 21 and over for consumption—including smoking and vaping—within the licensed premises. A licensee may be a shareholder in, receive a share of profits from, or have a similar interest in up to three consumption licenses. The same requirements applicable to a retail premises apply to an on-site consumption premises.
• Microbusiness: The size, scope, and eligibility of cannabis microbusinesses will be determined by the CCB. Licensees may engage in limited cultivation, processing, distribution, delivery, and sale of their own adult-use cannabis and cannabis products (i.e., vertical integration). They may also distribute their products to other retail licensees. A microbusiness may not be a part owner or hold any similar interests in any other license.
• Delivery: Licensees deliver cannabis independent of another licensed activity (as compared to distributors, who deliver and buy/sell, and retailers, who may also deliver to customers). They cannot have more than 25 individuals providing full-time paid delivery services per week under one license. Delivery licensees may not be a part owner or hold any similar interests in more than one delivery license (e.g., one company cannot have multiple delivery licenses that operate in different cities throughout the state).
• Nursery: Licensees may produce, sell, and distribute clones, immature plants, seeds, and other agricultural products used for planting, propagation, and cultivation of cannabis by other licensees.
• Registered Organization Adult-Use Cultivator Processor Distributor Retail Dispensary License: Existing medical Registered Organizations may engage in the listed adult-use activities, but may only engage in adult-use retail sales at three of the Registered Organization’s medical dispensaries. Further, the licensees may only sell their own products. Finally, licensees must maintain their medical cannabis license and continue offering medical cannabis sales at a level to be determined by the CCB.
• Registered Organization Adult-Use Cultivator Processor Distributor License: Similar to the above category, licensees may engage in medical and adult-use cultivator, processor, and distributor activities, but may only distribute their own products.
• Co-operatives: The cooperative license allows vertically integrated operations within a closely owned entity. Permitted activities include acquisition, possession, cultivation, processing, distribution and sale from the licensed premises. Members must be New York residents who democratically control the cooperative on a one vote per member basis. The cooperative must be registered as an LLC, LLP, or other structure authorized by the CCB, and must operate according to the 7 cooperative principles published by the International Cooperative Alliance in 1995. A person can only be a member of one cooperative and cannot be a shareholder or have similar interests in any other license. The CCB will issue additional regulations for cooperatives.

Impacts on Hemp in New York

While many states choose to regulate hemp separately from other types of cannabis, MRTA consolidated the regulation of all cannabis-related activity in the state under the authority of one regulatory authority — CCB/OCM. It remains to be seen whether the CCB/OCM will continue with regulations pertaining to hemp, particularly since the New York Department of Health’s Cannabinoid Hemp Program was launched just last year.