Cannabis legalization in New York will have ripple effects far beyond those who are dealing directly with the plant. From construction to real estate, and from law to accounting, other industries will increasingly overlap with cannabis companies, and the learning curve will be steep.
This is in part why, last week, the New York State Society of Certified Public Accountants’ Foundation for Accounting Education hosted the New York State Marijuana Regulation and Taxation Act: What CPAs Need to Know Virtual Seminar. (The previous week, as Cannabis Wire reported, similar events were held by the New York State Bar Association and the NYC Hospitality Alliance, focused on their respective segments of the industry.)
New York Gov. Andrew Cuomo signed the legalization bill into law late last month. Once the program is up and running, the state is expected to have one of the biggest and most influential markets in the country, and to generate hundreds of millions of dollars in tax annual tax revenue along with tens of thousands of new jobs. But the path between now and then is expected to be long and winding, as the regulatory framework takes shape and the provisions of the law are stress tested, and, perhaps, even amended.
At this time, according to Melissa Subjeck of Hodgson Russ LLP, the most common licenses that clients ask about are those for cultivation, processing, and distributing. Under New York’s cannabis law, a person cannot own any of these license types along with a retail license, but a person could own these three types of licenses. The geography of the state will certainly play a role in the distribution of license types, with retail likely to be particularly popular in New York City, and cultivation and processing particularly popular in upstate farming regions.
PJ Hines, also of Hodgson Russ, noted the extent to which lawmakers went toward crafting the bill that was ultimately passed to both anticipate and prevent excess market influence, and urged caution in structuring agreements between or among entities.
“You’re not allowed to give gifts to retailers to entice them to buy your cannabis, as a distributor, versus someone else’s. You cannot have agreements with retailers to exclusively offer the product that you distribute,” Hines said. “So, really, they’re preventing any kind of collusion to limit the amount of players in any one sector.”
Within this framework, Hines continued, the challenge for business owners and regulators alike will be balancing the goal of maintaining an equitable market while ensuring its financial viability.
“It’s going to cost a lot of money to comply with these regulations. And when that happens, as we know from a business perspective, you have to get bigger, especially in an industry like this, when margins are very thin. So I think it’s going to be [the Office of Cannabis Management’s] task to strike the appropriate balance between allowing entities to grow big enough to be able to afford these regulations while still being profitable, but also maintaining a place for the little guy.”
Another area to watch, Hines said, is whether regulations further clarify limitations on ownership transfers, because the word “transfer” is not defined in the law. This will play into acquisitions in the industry, as bigger companies aim to take over smaller ones.
Not all adult use laws include a distributor license, but New York, like California, does. And in both states, the state’s alcohol regulations served as a sort of blueprint. One way to think of distributors, said Chris Doyle, also of Hodgson Russ, is as a “middleman” between cannabis cultivators or processors and retailers. These licensees, Doyle said, will see the most complex taxes.
“When the auditors come in, you’re going to have to prove exactly how many milligrams of THC that you sold by product designation. You’re going to have to create these three silos for cannabis flower, concentrated cannabis and cannabis edible products, and then you’re going to have to be able to prove what the THC content was for each of the products sold,” Doyle said.
“I would drown myself in records,” Doyle continued, suggesting that entities keep records beyond the five year requirement, perhaps beyond ten years. “Look, this is going to be a highly-regulated industry,” he added, “I would encourage your clients to overkill on the record keeping.”
Accountants are also fielding questions from employers, as the new cannabis law provides certain workplace protections for adult use consumers, albeit with exceptions. For example, when it comes to the Department of Transportation and other safety-sensitive workers, little changes when it comes to workplace drug testing. Also, employers can take action against employees who are impaired on the job. Though, because cannabis can show up on a drug test well after its effects on a consumer have worn off, employers will have to prove “articulable symptoms,” said Kinsey O’Brien, also of Hodgson Russ.
“Employers should dust off their policy, take a look at it, and make sure there’s nothing in there that would tread on the protections that now exist for off duty, off premises use. And this is something that really, I would recommend be done as soon as possible, because as Melissa mentioned at the outset, even though it will be some time before sale is lawful, use is immediately lawful and these protections go into effect immediately,” O’Brien said.
In the coming months, several key positions will be filled to get the ball rolling on the crafting of regulations that will serve as the framework for the state’s adult use industry. One of those is the executive director of the Office of Cannabis Management, which will be nominated by Gov. Andrew Cuomo and confirmed by the Senate. Will that happen ahead of the session’s end in June?
“I think this is really incredibly unlikely that that’s going to happen,” said Jack O’Donnell of O’Donnell & Associates, adding that he’s heard from Cuomo’s office to expect names in August or September.
The Cannabis Control Board also needs to be appointed, as does an advisory board, though both are unlikely before later this year, as well. O’Donnell emphasized that the process is expected to unfold slowly, especially in the early days, and it’s likely that license applications will not be available until next year.
And, at this time, it looks like the existing medical cannabis licensees in the state will have to wait until then to get going on adult use sales.
“We have heard directly from the governor’s office that that will wait until there is a full adult use program that is up and ongoing,” O’Donnell said. “And we’ve also heard from several legislators who are saying ‘no way’ and they want to get those folks up and running even sooner, and they shouldn’t have to wait for the other folks. But that’s just one of the fights we’ll see coming out of Albany.”