Time for Action in NY Cannabis

The calm after the storm of the CAURD application deadline in New York cannabis caused many of us to miss the article on October 17, 2022 from Benzinga.com regarding the chill that is sweeping through the New York cannabis market. (See:https://www.benzinga.com/analyst-ratings/analyst-color/22/10/29291332/another-marijuana-firm-dumps-a-ny-cannabis-deal-analyst-reveals-future-acquisition- )

The generally-held view is that multi-state operators (MSOs) in cannabis make millions while closely-held, small cap operators struggle to pay their taxes and meet payroll. Scroll further down to see that such lofty beliefs may be inaccurate. I propose that the model that has worked for decades comes to us from the street vendors and small unlicensed dispensaries: pay the bills in cash, and take in the revenues in cash. Long-time cannabis advocate Steve DeAngelo has called for us to abandon corporate cannabis, and instead embrace the time-honored craft and artisanal business model. (See: https://www.ganjapreneur.com/steve-deangelo-op-ed-calls-for-the-return-of-small-cannabis-businesses/ )

It’s not that I am a hippy-dippy, corporate-hating liberal. I don't even have a hat that is a cool as DeAngelo's. It’s just that the writing is on the wall for corporate cannabis, and New York needs to act fast to make sure that its cannabis market doesn’t die on the vine before it has actually been fully realized.?

Cash flow, equity, and taxes. The MSOs run a game that is not unlike holding political office: immediately upon completion of a capital raise, they must commence activity to secure the next capital raise. A peek behind the curtain reveals that the actual cash available is dwindling. (See https://seekingalpha.com/article/4514775-cash-crises-loom-at-cannabis-mso-companies )?

As if the news about cash flow isn't alarming enough, let’s look at stock prices, for those hulking entities that are publicly traded. Well, this news also isn’t good. (See: https://talkmarkets.com/content/stocks--equities/major-american-mso-cannabis-stocks-continue-to-sink?post=368255 )

As for taxes, we can look to the great State of California for examples of how government taxation can cripple the cannabis industry. Here are a few remarks: The “California cannabis system is nationwide mockery” and a “public policy lesson in what not to do.” And this: The “opportunity to create a robust legal market has been squandered as a result of excessive taxation. And this: “Cultivation tax undermines the viability and sustainability of California’s cannabis industry, being the only agricultural product in the world that is taxed at the farm” (See the December 2020 Letter to Gov. Gavin Newsom, Speaker pro Tempore Toni Atkins, and Speaker Anthony Rendon from a significant number of cultivators, manufacturers, distributors, testing labs, retailers, consumers, and nonprofit leaders.) True, the California legislators have now taken steps to right the ship, but only time will tell whether these interventions are enough. Did they wait too long? Maybe. Do we want this kind of rhetoric turned eastward to describe the cannabis market in The Empire State? Heck no!

The picture gets more bleak when we look at taxes owed by MSOs to the IRS. A recent GreenMarket Report revealed that if cannabis MSOs paid their outstanding federal tax bills, they would have an estimated 10 months of cash to operate. (See https://www.greenmarketreport.com/10-multistate-cannabis-companies-owe-half-a-billion-in-federal-taxes/#:~:text=All%20told%2C%20multistate%20operators%20%28MSOs%29%20Acreage%20Holdings%2C%20Ascend,%24507%2C193%2C000%2C%20according%20to%20their%20second%20quarter%20financial%20reports .)

Honestly, would you feel comfortable investing in an industry that, in general, had not paid its federal taxes that were due, and if they did they would be out of business in 10 months? I think most people would not.?

So, it’s not that I am disenchanted with the MSOs because corporate cannabis reeks of caucasian tech bro privilege. It’s that the math behind corporate cannabis is simply not working, and very few people are willing to call it out.?

How can New York take action now? I propose that New York regulators or other government officials act fast to capture the revenues from the exponentially-growing unlicensed market. Doing so will legitimize the business owners, and will enrich the coffers of the state.?

First, the State of New York should issue 10-day permits to anybody and everybody who is selling weed. Follow your nose. You will find them in just about every urban center in the state, and in quite a few suburban and rural areas as well.?

The 10-day permit gives enough time for someone to log in to the sales tax portal and set up an account. Maybe the state or the local municipalities will want to set up a separate cannabis sales tax portal? If so, please get on that. The 10-day temporary permit will also give enough time to set up an account for payroll taxes.? (Remember: it’s not just about the federal and state taxes!)

Second, upon completion of the registration for taxes, the weed dealer (either a street vendor or one of the numerous smoke shops that have sprung up since March of 2021), can receive a 1-year temporary permit to sell. Pay your taxes, file your returns, follow a few very basic rules for one year.?

Finally, after one year of compliance, the business owner should be issued a permanent license, to be renewed every two years by paying a fee and showing continued compliance.?

Of course there are other issues that need to be resolved. Banking is one. How are you going to get cannabis taxes paid if people can’t log in online because they don’t have a business bank account? Testing is another hot button. But is it really? People have smoked cannabis for centuries and have not had the issues that FDA-inspected meat and vegetables have had with e coli, listeria, and cholera. Perhaps “testing” is another one of those roadblocks held up by naysayers, right next to the proverbial gateway to other, harder drugs.?

Why do we need to take action now? Answer: because there is an enormous opportunity cost if we do not license the smaller, so-called legacy business owners now. Here’s why I say that: under the current frameworks, we will simply leave –? unlicensed and untaxed –? the smoke shops, convenience stores, and street vendors. When the licensed shops open and are required to add on charges to recoup costs for the cultivation tax as well as sales tax, the consumer, who now has been convinced that cannabis is normal (thanks in large part to the Cannabis Conversations ads on television and in the subways that have run for several months now), will simply price-shop and get their weed from the little convenience store in the neighborhood, or from the guy in the park, who the state chose not to license and tax.?

How does a politician or even a concerned citizen justify losing significant sums of tax revenue forever??

Anecdotally I will share that I have spent a great deal of time speaking with legacy operators, and each and every one would leap at the chance to pay taxes and go legit. Mark my words, if we don’t, we might as well start writing the rules now for how the MSOs will exit the industry in New York and deactivate their cannabis licenses. It will simply be a matter of time before the problems of the California cannabis market migrate to New York.?