New York Is Setting Up Legal Marijuana Merchants for Failure

Nearly 20 months after the state legalized recreational use, no licensed pot shops have opened, but the black market is booming.

Nearly 20 months after New York legalized recreational marijuana, consumers still have no legal way to obtain it. If you live in New York City, that may come as a surprise, since there is no shortage of merchants who will happily and openly sell you marijuana. But none of those retailers, who sell weed from storefronts as well as trucks and sidewalk tables, is licensed by the state. Regulators are still improbably promising that legal retailing will begin by the end of the year—i.e., within the next month or so.

Meanwhile, New Yorkers are not yet allowed to grow their own marijuana for recreational use, because legislators decreed that regulations governing home cultivation won't be issued until 18 months after licensed pot shops start opening. That delay was designed to help legal retailers attract customers and displace the black market. But the slow pace of the licensing process has had the opposite effect, inviting illegal dealers to fill the supply gap and dimming the prospects of competing with them.

On Sunday, New York's Office of Cannabis Management (OCM), which had received applications from 903 would-be marijuana merchants, released a list of 36 contenders who had received "provisional conditional adult-use retail dispensary licenses." But the agency said those applicants "shall not begin operations until the completion of a secondary supplemental application to the satisfaction of the Office, including completing a notification to the appropriate municipality where the conditional adult-use retail dispensary will be located."

The OCM also published 282 pages of proposed regulations for the recreational market. Those rules are subject to a 60-day public comment period before they can be finalized, which makes it hard to see how the OCM can hit its target of beginning legal sales by January 1.

"We will continue to work to build an industry that is open to anyone who wants to participate," said Cannabis Control Board Chair Tremaine Wright. Given the state's arduous licensing process and complicated regulations, that seems more like an aspiration than a reality.

By giving unlicensed suppliers a head start, New York is inviting a fiasco similar to what has happened in California, where voters approved recreational legalization in 2016. Six years later, the black market still accounts for between two-thirds and three-quarters of marijuana sales in California, thanks largely to a combination of high taxes, onerous regulations, and local retailing bans.

"The black market strangled California's legal weed industry," says the headline over a recent Politico story. "Now it's coming for New York."

The black market is hardly a new phenomenon, of course. The difference now is that pot dealers have been emboldened by the legalization of recreational use, which created the expectation that consumers would be able to buy marijuana from above-board retailers. By defying that expectation, New York is setting licensees up to fail.

"An industry expected to generate more than 20,000 new jobs and a $4.2 billion market by 2027 could stumble on arrival as it competes with the booming black market," Politico reports. "Already, some legitimate companies that were planning major investments are heading for the hills."

What's the holdup? Bloomberg reporter Amelia Pollard notes that the OCM "has set a high bar for its first round of retail proprietors" and "given itself a mound of paperwork to wade through in the process." The first batch of up to 175 retail licenses is reserved mainly for people with marijuana-related criminal records or their relatives, who also must show that they have experience running a "profitable" legal business in New York. "A lot of documentation is required to prove those credentials," Pollard explains, "along with a non-refundable $2,000 application fee."

Nonprofit organizations, eight of which received provisional approval this week, are also eligible for retail licenses. They must have "a history of serving current or formerly incarcerated individuals"; "have at least one justice involved board member" and "at least five full time employees"; and "have operated a social enterprise that had net assets or profit for at least two years."

Another condition for permission to sell marijuana is "a significant presence in New York State," a test that has contributed to the delay in granting licenses. On November 10, U.S. District Judge Gary L. Sharpe temporarily enjoined the OCM from issuing retail licenses in five areas of the state: the Finger Lakes, central New York, western New York, Mid-Hudson, and Brooklyn. Sharpe was responding to a September 26 lawsuit by Variscite NY One, a company that had hoped to open pot shops in those places. Its license applications were rejected because one of the company's two owners is a Michigan resident who has a marijuana record but failed to demonstrate strong enough ties to New York. That requirement, Variscite argued, violates the "dormant Commerce Clause," which prohibits protectionist interstate trade barriers.

Sharpe concluded that Variscite's claim was likely to succeed, saying New York "did not even attempt" to show that its rule had a nonprotectionist justification. "When directly questioned by the court as to whether the challenged laws and regulations could survive the heightened level of scrutiny during the motion return, defendants offered no cogent response," he wrote. "Defendants have not met their burden of demonstrating that the Cannabis Law and Cannabis Regulations are sufficiently 'narrowly tailored' to serve a legitimate local purpose."

Although it may seem counterintuitive that the dormant Commerce Clause applies to a market in products that remain federally illegal, Sharpe is not alone in reaching that conclusion. The Albany Times Union notes that "federal courts in Maine, California, Michigan, Missouri, and Illinois have all issued preliminary injunctions" against similar marijuana licensing requirements.

Whatever your take on the constitutional question, it's clear that New York's excessively demanding licensing criteria are largely responsible for the fact that the state has yet to see a single legal sale of recreational marijuana. "The goal is to open dispensaries by the end of this year," OCM spokesman Aaron Ghitelman told Pollard. He said "we're still gunning to get the first sales on board" by January 1.

In the meantime, state-licensed growers who made the mistake of taking regulators at their word are stuck with about 300,000 pounds of marijuana, valued at $750 million or so, that they cannot sell. "Though a rampant gray market is already up and running, not one legal recreational dispensary has yet opened in New York," Pollard notes, despite the OCM's "repeated assurances that cannabis stores would be a fixture by the end of this year."

The state's dilly-dallying has forced growers to invest in expensive crop preservation and security measures while they wait for the customers they were promised. "We're spending money with no end in sight until the state gets its act together on retail," a co-owner of a company that grows marijuana in Hudson, New York, told Pollard. "It's an unclear path to market," said the company's CEO. "We've been told again and again that dispensaries will open before the end of the year."

Even if a few legal pot shops manage to open their doors sometime around then, they will have a hard time competing with entrenched suppliers who are not subject to state licensing requirements, regulations, and taxes. As in California, that situation has prompted demands for a new cannabis crackdown—an embarrassing development in a state that supposedly ended its war on weed.

"Since we didn't think this was going to happen," state Sen. Liz Krueger (D–Manhattan), who sponsored New York's legalization bill, told Politico, "we didn't put anything in the bill that gave OCM and the police departments very clear-cut rules of the road to close [illegal dealers] down." We didn't think this was going to happen. What did legislators think would happen when cannabis consumers went looking for the marijuana the state had supposedly legalized?

In August, Politico notes, New York City "confiscated 19 trucks that were illegally selling cannabis." The justification was that they were "selling edibles and other food products without proper city Health Department permits." Politico adds that "some smaller municipalities in other parts of the state have shut down stores," and the OCM "sent cease-and-desist letters to 52 retailers statewide earlier this year."

Officials are reluctant to use sterner measures, which could include criminal prosecution. After all, the main premise of legalization was that it would end the practice of locking people in cages for selling marijuana. The illegal vendors whom would-be licensees see as a threat to their livelihoods are precisely the sort of people whom the "equitable market" envisioned by legislators and regulators is supposed to benefit.

Owen Martinetti, a marijuana entrepreneur who serves on the board of the Cannabis Association of New York, favors stronger civil enforcement. "Everybody seems to be selling cannabis, and until there's enforcement, there's really no concern of a penalty," he told Politico. "If you're not going to play by the rules, there has to be some sort of penalty….If we're going to spend money on a license and pay taxes and invest money and build these businesses, then there has to be a pull. There has to be a reason."

An alternative approach would focus on reducing the obstacles to legally participating in the cannabis industry. The harder the state makes it to obtain a license and comply with regulations, the more durable the black market will prove to be. Taxes are another obvious barrier: New York plans to collect a 13 percent retail tax, on top of excise taxes that vary with THC content and the type of product. If those levies make it hard for licensed retailers to stay in business, Krueger said, she would be "totally open to reevaluating how we tax."