State budget deal toughens penalties for illegal cannabis shops (2024)

Gov. Kathy Hochul is using the state budget to crack down on unlicensed cannabis shops in the state and to streamline a controversial cannabis tax.

The budget outlines a new strategy to combat illegal cannabis stores by making it easier for local authorities to close them down amid the flawed rollout of the state’s legal cannabis market.

It also would authorize the state Office of Cannabis Management to padlock unlicensed businesses for a full year and would establish fines for landlords who knowingly rent to unlicensed cannabis retailers.

The budget also makes changes to the way legal cannabis is taxed. Taxes on cannabis will move to a flat percentage rate instead of a system based on the product’s potency, which had created confusion for cannabis businesses and regulators.

“We’re gonna be able to padlock these illicit shops. All we have to do is verify that you’re selling products that are not tested or labeled in accordance with our laws,” Hochul said at a news conference Friday. “Once we do that, the padlock goes on.”

The new rules go further than the current system of fining unlicensed business owners, which has not been effective, she said.

“We hit these shops with a fine, hearings and appeals. They drag on,” Hochul said. “Guess what? During that process, they stay open and haul in more and more cash and everybody knows it. And right now, these fines, it is a small cost of doing business in their minds.”

Local municipalities would be given power to create their own laws to padlock unlicensed shops. That would empower local officials and law enforcement who have felt powerless in the fight against unlicensed shops in their communities, the governor said.

“They have been begging for this. Local law enforcement has been begging for relief,” she said. “They have had their hands tied.”

Enlisting local municipalities adds manpower to a problem that has proven too big for the Office of Cannabis Management and the Department of Taxation and Finance to handle on their own, she said.

“See what we’re doing here? Bringing in a lot of people to say the gig is up,” Hochul said. “We’ll have exponentially more people investigating and eventually helping shutter these illegal stores.”

The new rules would also go after bodegas and other stores that have added cannabis sales to their repertoire by taking away their liquor, tobacco and lottery licenses. If they continue to sell cannabis unlawfully, their doors can be padlocked as well.

Landlords would be able to more easily evict stores that sell cannabis without a license, and could be penalized if they fail to address shops that violate cannabis laws.

“We’re going after the landlords who knowingly give cover to illicit cannabis operators,” Hochul said.

The controversial potency tax is being addressed in the budget as well.

Before, the potency tax was calculated based on a cannabis product’s THC content, and had a rate that would change depending on whether the cannabis was in edible, concentrated or flower form.

Not only was it complicated, critics said, it raised the effective tax rate so high that it made it impossible for licensed farmers and sellers to compete with the black market.

And since the tax rate was tied to the product instead of the price, it wouldn’t fluctuate with market changes. That means that if market conditions forced cannabis prices down, the taxes would stay at their higher rate – making them an even higher percentage of the product’s price.

Now, the budget has been rewritten so that a flat 9% tax would be imposed on adult-use cannabis products instead.

There’s a pressing need to shut down illegal operators for the state’s legal market to survive, according to a coalition of cannabis leaders that includes the Cannabis Farmers Alliance and the New York Cannabis Retail Association. That group put enforcement toward the top of its list of priorities for 2024.

“These illegal stores don’t pay taxes, don’t abide by union labor rules, don’t sell safe products and make the establishment of a legal cannabis retail market next to impossible,” the group said in a statement.

Joe Rossi, Cannabis Practice Group Leader for Park Strategies, a New York consultancy and lobbying firm, noted that Hochul called the state’s rollout of the legal cannabis market a “disaster” in a conversation with The Buffalo News’ editorial board in January.

“Gov. Hochul deserves big credit for changes to the New York cannabis program with these enforcement measures and repealing the potency tax,” he said. “But there is a long way to go to turn around this disaster.”