Cannabusiness Advisory

New York Grappling With Illicit Market As it Slowly Rolls Out Adult Use Retail Market

July 18, 2023


Since the New York State Assembly passed the Marihuana Regulation and Taxation Act on March 30, 2021, legalizing adult-use cannabis in New York, there has been growing buzz and excitement about the rollout of New York’s cannabis program. New York has long been considered by many to be the largest cannabis market in the world, notwithstanding the fact that the first legal adult-use sale occurred in December of 2022.

While there has been – and continues to be – excitement abounds regarding the rollout of its adult-use program, the reality is that to date, only 15 Conditional Adult Use Retail Dispensaries (CAURD) are operational throughout the State, with an additional four Temporary Delivery Only Locations that are currently operational.

With over 200 licensed conditional cultivators in the State, the limited availability of CAURD retailers available to purchase wholesale cannabis has caused strain on many cultivators’ ability to stay in business, as incurred expenses to produce product – with no one to sell to.

The lack of CAURD retailers has also created the conditions to proliferate New York’s illicit market, both in the shadows of delivery services that have been operating for decades – and out in the open through unlicensed “smoke shops” brazenly selling cannabis products throughout the state, without a license to do so.

Immediately following legalization, and increasingly as New York City faced delays rolling out its adult-use program, opportunistic smoke shops began popping up throughout the city and elsewhere in the state, openly advertising cannabis for sale – without any license.

Like every other state, the stiffest competition for licensed cannabis businesses is the illicit cannabis market. In New York, competing with the illicit market is proving even more challenging than many expected. According to a statement by City Councilor Gail Stewart, as of February 2023, at least 1,400 illegal cannabis businesses were operating in New York City alone. Similar businesses have been increasing elsewhere in the state as well.

On June 8, 2023, Governor Hochul announced the launch of an interagency initiative to cease the sale of untested cannabis from unlicensed storefronts and trucks, allowing for enhanced enforcement of unlicensed cannabis businesses and enabling OCM – the Office of Cannabis Management (New York’s regulatory agency charged with issuing cannabis licenses in New York and developing regulations in furtherance of such purpose) to assess civil penalties against unlicensed cannabis businesses, with fines of up to $20,000 a day for the most egregious conduct, further making it a crime to sell cannabis and cannabis products without a license. The legislation also delegated authority to the Department of Taxation and Finance (DTF) to conduct regulatory inspections of businesses selling cannabis to determine if appropriate taxes have been paid and levy civil penalties in cases where appropriate taxes have not been paid, and establishes a new tax fraud crime for businesses that willfully fail to collect or remit required cannabis taxes, or knowingly possess for sale any cannabis on which tax was required to be paid but was not.

The regulators and enforcement officers got right to work, raiding seven smoke shops throughout the City, per the New York Post, with OCM also conducting raids recently in Rochester and Ithaca. Last week, the NYPD raided the Empire Cannabis Club’s Chelsea and Lower East Side locations. However, according to Bloomberg, Empire Cannabis Club was back up and running within a day of the raid. This illustrates the challenges regulators have faced – and will continue to face – in regulating and limiting the illicit market.

Time will tell whether New York can successfully curb the illicit smoke shops operating throughout the state. The regulators are certainly trying.

This is to say nothing of any efforts to curb cannabis delivery services that have been operating in New York for decades and continue to do so.

Ultimately, though, there is widespread agreement that New York needs more licensed retailers – both to purchase the product being grown throughout the state – and to make such product safely available to the consumers that are finding themselves at times confused as to whether retail shops are licensed CAURD facilities or unlicensed smoke shops.

There is, however, optimism that the CAURD program will improve as new licensed dispensaries continue opening throughout the state.

All of this is to say that while New York faces challenges in the road ahead, there continues to be tremendous opportunity in the state of nearly 20 million residents.

We at Burns and Levinson are here to help these businesses, entrepreneurs, and their investors navigate this complex landscape as it unfolds in real-time.

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