Many New York Stakeholders Skeptical of New Illicit Market Enforcement Push

Operators called for regulators to instead focus on getting the legal market more fully operational.

Following a new push by New York Gov. Kathy Hochul to crack down on unlicensed cannabis sellers across the Empire State last week, few in the legal industry expressed optimism that the policy would have the intended effect, with several predicting that the unregulated market would simply pivot instead of giving up.

New York Gov. Kathy Hochul

Multiple stakeholders called for regulators to instead focus on issuing more business licenses and getting the legal market more fully operational so it can compete effectively with unlicensed smoke shops, bodegas, and delivery services selling marijuana, of which there are at least 1,500 in New York City alone, according to estimates.

“Enforcement does not work. The government lost the war on drugs. So it’s up to us to find progressive, creative solutions, and I don’t think it’s in the new enforcement bill. I think it’s in another way. It’s in letting the market decide,” said New York attorney Paula Collins, who represents some unlicensed cannabis sellers.

Collins wasn’t the only one singing that tune. Others also said it will be harder for the state to walk the fine line of cracking down on unlicensed cannabis shops without creating “Drug War 2.0.”

“It’s going to be hard for any legislation, in terms of enforcement, to be like, we’re going to clamp down on everything, because that would be nearly impossible. I truly believe the only way to fix this is to open the door up immediately to licensing for everyone,” said New York attorney David Feder, who has won a wide array of cannabis business permits for clients, including social equity retailers.

Enforcement Provisions

The new enforcement tools, which were part of the state budget that Hochul signed on May 3, include:

  • Civil fines of up to $20,000 per day for unlicensed sellers.
  • Giving the Office of Cannabis Management and the Department of Tax and Finance new powers to conduct surprise inspections, seize illegal products, and obtain court injunctions against unlicensed sellers.
  • New power for the Department of Tax and Finance to fine cannabis dealers who aren’t paying the proper state taxes.
  • A new tax fraud crime.
  • A provision that reestablishes selling cannabis without a license as a criminal offense.

The New York Office of Cannabis Management declined an interview request about the potential criminal penalties, but other media reported that the focus of the enforcement push will be mainly civil fines and the like instead of throwing unregulated cannabis sellers in prison.

However, a lot of the details around the new enforcement push are unclear, such as whether this will be a major sweep by the New York Police Department or another law enforcement agency to clear out as many of the roughly 1,500 unregulated smoke shops in New York City, or if it’ll be a more incremental approach.

Feder said he’s heard directly from some of the smoke shop operators that, to date, the enforcement has been mainly toothless, which has only emboldened the illicit trade.

“I have spoken to people that are operating these types of businesses, and what was said was, they’ll get raided, get $30,000 worth of product confiscated, they’ll receive a ticket, and then the very next day they’ll restock the shelves with another $30,000 worth of product. And then they’ll fight the ticket,” Feder said, adding that he doesn’t expect that approach to change much, despite what Hochul signed into law.

Another New York cannabis attorney, Lauren Rudick, agreed wholeheartedly and said civil fines have proven in other markets to be an inadequate deterrent.

“Fines, they don’t work. They don’t work up in Canada. You see illicit operators, they pay the fines, they pay their taxes, and they’re happy to stay operating. So this is definitely a competition (issue),” Rudick said. “Those businesses are seeing so much revenue that they don’t care about the money.”

“It does feel very much like a fool’s errand, however you slice it,” Rudick said about the new enforcement push. “I think anyone who wants to sell cannabis in this regulatory environment is going to find a way, and they’re likely to pay whatever the cost of business associated with that. If that means moving online or paying a fine, my sense is the revenues are irresistible to them.”

Even those who do decide to shut down their storefronts may just pivot deeper underground and continue selling weed illegally, added Collins.

“Do I really think this is the end of the smoke shop industry? I think it’s just the beginning,” Collins said.

MSOs Critical of the Effort

The news from the Hochul administration also drew criticism from the state’s 10 “registered organizations,” the multistate operators licensed to sell medical cannabis in New York.

The companies, which comprise the New York Medical Cannabis Industry Association, said in a statement they are “optimistic” that the new enforcement tools “will help minimize the booming illicit market.”

But a sister organization that shares several of the same members, the Coalition for Access to Regulated and Safe Cannabis (CARSC), issued a statement declaring that the new enforcement tools “will do little to meet New York’s goal of establishing a safe, legal, and equitable cannabis market.”

The CARSC – which has sued the state of New York over the recreational cannabis licensing – blasted state regulators for allowing the unregulated market to “proliferate,” and asserted that regulators could have already shut down most or all of them if they had wanted to.

“The answer is for the OCM and (Cannabis Control Board) to implement the (Marihuana Regulation and Taxation Act) as written and issue adult-use licenses to all priority classes – including women, disabled veterans, and members of communities impacted by cannabis prohibition. They should also expand the medical cannabis program to benefit underserved Black and Brown communities, as the law requires,” the CARSC said in a statement. “Then, and only then, will New York’s cannabis marketplace realize the true promise of equity and social justice.”

At least one licensed retailer, Union Square Travel Agency in Manhattan, was happy about the news, however. CEO Paul Yau wrote in an email to Green Market Report that his company “applauds” the new move by Hochul.

“Not only is it in the interest of the state to aggressively pursue shutting down these stores, it creates a more sustainable environment for all stakeholders who are involved in the legal industry to be successful, and it ensures that New York consumers can purchase safe and tested cannabis products,” Yau wrote.

“We continue to be supportive of pathways for legacy to legal to truly make this a fully inclusive industry,” Yau added.

But Collins countered that the new enforcement push is unlikely to eliminate the unregulated market, because it will be easy for those running brick-and-mortar storefronts – which appears to be the main focus of the new enforcement mechanisms – to launch faceless delivery services that reach customers through social media and are much harder for law enforcement to shut down.

“This is a population that, if you say go left, they’re going to go right, and they’ll meet you on the other side. They can pivot, they can morph. They’re like the shape shifters in Star Trek,” Collins said.

“What isn’t factored into this is, we have internet presence. We have TikTok. We have Signal app. You can send out a mass text,” Collins said. “It’s not like the 70’s, where if a business went under, it would take a week or two for word to get out where the boys were setting up again. It’s going to be instantaneous.”

Instead, Collins, Feder and Rudick all said the easier solution would be to focus on getting more licenses available, and on making it easier for legal retailers to compete on price point.

“The state has put themselves in a pickle here, and I don’t think punishing people for taking the bait is the way to fight yourself out of this,” Feder said. “The way to get out of this is to open up the doors already, for everyone to get a license, make the taxes super-low, make the licensing fees super-low, to start with.”

John Schroyer

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