In late April 2023, shortly after the opening of the first cannabis dispensary in the Capital Region, the Albany Business Review hosted a discussion with industry leaders on what the future holds for adult-use cannabis in New York State.
What is the status of New York’s cannabis adult-use regulations and the timeline going forward?
MARK WAGNER: The last Cannabis Control Board meeting advised that revised regulations, as well as the Social Equity Plan, which is a big piece of the Marijuana Regulation and Taxation Act (MRTA), would be published on May 11. That will commence a 45-day comment period, at which point the Office of Cannabis Management and Cannabis Control Board and their staff will review the comments and hopefully publish a final set of regulations. The application portal will open 30 days after that, and we can get applications in. In an ideal world, we’re looking at applications in late August or early September, and licenses being issued at the end of the year.
What are the biggest startup challenges that you’re hearing about from the industry?
EMILY WHALEN: Money and real estate are two of the biggest. Banking access is a challenge because of the federal restrictions on cannabis, and also a fear component that some banks have. Even smaller local banks are saying to themselves, “Okay, is this something that we want to be involved in? Is it okay?” That conflict between federal and state regulation causes a little bit of hesitancy, which is certainly understandable.
There’s also the element of investing that goes along with these companies, which is challenging because there are pending regulations about how some of those investments are supposed to work. Getting too far ahead of oneself with investments before knowing what the final rules are can certainly be daunting.
On the real estate side, you have those same hesitancies from landlords. Do they want to be renting to a cannabis business? And then overlay, on top of that, these restrictions that exist about having to be a certain distance from schools, houses of worship, community facilities, and other potential retailers. This has everybody start from a disadvantage of, “I’ve got to overcome all of these rules and hurdles first – and then find a willing participant in this industry.”
What types of corporate structures have you seen work? And what are some of the common concerns or questions that arise from clients?
MATTHEW VANDERBECK: A number of questions have been coming, partly due to the nature of how the licenses are being awarded. There are cultivators who are in situations where they have existing hemp farm businesses and are transitioning to the THC business and are incurring a number of costs at the prospect of generating income and revenue as a THC-licensed business going forward in 2023.
In most cases, these farmers have been in a pretty simple structure, whether it be an LLC, a single member LLC or an individual business that’s been preparing a Schedule F on their tax return. Others have had multiple partners. They have questions around structuring and how to separate the former business that was not subject to 280E requirements, with the new business that will be subject to 280E in 2023.
There are also questions around, “Okay, what do I do with my existing business?” as well as making sure they properly evaluate and protect their real estate assets and understanding the interplay of those assets with the new, licensed business.
In some cases, those businesses are remaining LLCs. In other situations, we’re recommending they consider converting to a C corporation. It depends on each individual circumstance and the investors involved, but we are seeing a lot of structures that include a C corporation in the cannabis industry.
It’s really just taking a fresh look at the objectives and ensuring your attorney and CPA are reviewing everything to ensure you’re evaluating all the tax consequences based on your choices.
What can potential applicants do now, while regulations are pending, to prepare for the application process?
WAGNER: Get your corporate entity in order, whether it’s a LLC or a corporation. We’ve recommended that they do New York entities because the MRTA’s pushing to have New York small businesses and individuals participate in this industry. Second is getting your equity cap table squared away. Who’s going to be involved in the business? And how are you getting your funds? Third is talking to the municipalities where you’re looking to set up shop. Most of these businesses are brick-and-mortar storefronts, warehouses, greenhouses, and so forth. We want to get the municipality on board and then identify a potential property. Then it’s time to get your professional team in line.
What is New York’s tax structure? And how does it compare to other states?
WHALEN: We tried here in New York to establish a tax structure that would be competitive with surrounding states like Massachusetts and New Jersey. It remains to be seen if that will work, but we try to cap out at a little bit lower than those surrounding states to incentivize people to buy New York cannabis.
We have three taxes. There’s a distributor tax, which is based on the milligrams of THC in each product. The tax accrues when the cannabis is sold from a distributor to a retailer, but the distributor pays it to the state. If they’re the same entity, because you can be, in some limited circumstances, the distributor and the retailer, then the tax supply accrues at the time of the retail sale.
There’s also an excise tax on the sale of products by a retailer to a consumer, which is 9% of the price of the product. And then, there’s a local excise tax at 4%, also on the consumer, and that’s the part of the tax that’s going to go to the local municipalities, city, village and county.
VANDERBECK: There have been senate bills and assembly bills that very recently moved forward to try to get the potency tax eliminated, and then increase the 9% excise tax on the retail sale to 16%. With the 16% plus the 4% local tax, you end up at 20% tax.
In Massachusetts, they do not have a potency tax, but their taxes are very similar. They add up to about 20% but are slightly different. There’s a 6.25% sales tax, a 10.75% excise tax on retail transactions and up to 3% of local tax. It looks like they’re trying to make things pretty consistent, given the fact that we’re neighboring states.
The other thing to remember is that if you’re selling non-THC sales in New York, you’re still subject to the typical sales tax. That means the customers, clients or license holders will have to make sure they’re filing normal sales tax requirements – as they would have in any other business. They need to ensure they’re filing these excise tax returns, which are done quarterly. And even if there are no sales, they’re required to file them. It’s form MT-222, which is for adult-use cannabis products tax, which you can file through their website.
WHALEN: The proposal to repeal the potency tax has met with some pushback from the leadership in the legislature because it would get rid of that potency tax that the distributor is paying and that could ultimately be passed on to the consumer. What we’re seeing, politically, is, “Okay, we’re the only state that has proposed this potency tax. Why are we doing this?”
But then you have people coming from the other side saying, “But now we’re passing it on to the consumers. We’re making the product a little bit more expensive.” It’ll be interesting to see how the legislature deals with that. There is also a proposal on the medical cannabis side to repeal the excise tax for patients. That would have more of a direct impact on consumers in New York because that’s going to affect them in their wallets when they’re paying for their product.
Let’s say you do not want to pursue a license. Are there other opportunities to participate in the cannabis industry?
WAGNER: Absolutely. These license holders are going to need support services. They’re going to need employees and security. They’re going to need payroll services. They’re going to need banking services. They’re going to need cleaning services. For example, as a cultivator or processor in an indoor facility, you need to wear Tyvek suits. People have to supply those in order for those license holders to operate their businesses. There are a lot of ancillary support services that can support the cannabis industry in New York to grow as we intend it to grow. And you don’t have to touch a plant.
How important is it early on to model out cash flow aligning with the business plan?
VANDERBECK: It should be a priority. Whenever I look at a business opportunity or talk with clients, one of the first questions I ask is, “Well, how are you going to make money? How will you ensure you have the appropriate cash flow to make this business successful?” There’s such a focus on the investment that has to take place in the beginning, to get things up and running that they lose sight of the cash flow needed to operate the business because you’re not necessarily going to make money right away.
If you don’t factor in cash flow, you could easily be in a position where you think you’re making money, and then when it comes time to pay your taxes, you don’t have the funds to pay them. You also have investor expectations, depending on underlying agreements, and the return on equity and whatever the expectations are for those who’ve contributed to the business. You need to make sure you’re satisfying them.
Lastly, sometimes people are more optimistic than reality. They need to have scenarios and understand that the price of cannabis is volatile and could be subject to change. It’s a good opportunity to understand the risks as well.
WAGNER: Mostly, it’s about educating potential applicants as to what it’s going to cost to operate these things. When this initially passed, I fielded a ton of calls, “Oh, we want to do this license, we want to do this, we want to do that.” But they have no idea what it’s going to take, from a financial standpoint, to actually operate one of these licenses. And so, when you do model the cash flow, they see, “Oh, I have to pay an extreme amount of insurance. I have to pay a bank X amount of money to maintain my deposit relationship.” These are things that you would not normally have to incur with a normal business.
WHALEN: People don’t always realize the ongoing costs of the business: insurance costs, wage issues, the minimum wage going up and other things they haven’t necessarily planned for. When you hear there’s this opportunity and it could be really lucrative, everybody gets very excited. But I’m not sure they’ve thought through to five years from now or even a year from now.
What are some of the key differences between the cannabis business and traditional agriculture or retail business?
VANDERBECK: Bookkeeping, in particular, is a challenge in trying to find the right resources and people who have capabilities in the region. You have certain businesses that are transitioning from an existing business or people that are starting new businesses, and you need to have the right systems in place to ensure that you can track everything efficiently. It’s also important to make sure the systems are designed in a way that allows you to provide the information on the output side.
One of the differences between a traditional business and a cannabis business is the extra layer of cannabis monitoring that needs to be complied with. You will need to have someone take a full, integrated look at everything that you have and make sure it’s designed as efficiently as possible.
What is the social equity piece of the equation? How is it working? And do you think it will achieve its intended objective?
WHALEN: New York’s social equity piece is one of the most aggressive in the country in making sure that communities and individuals historically targeted by the war on drugs and disproportionately impacted have a premier role in the legal cannabis industry. There’s a mandate within the MRTA that over 50% of the applicants across the board should fall into that category. We now have CAURD licenses, which are Conditional Adult Use Retail Dispensaries, in New York’s retail space. Those operators either have to be someone who has been involved with marijuana in the past, or a nonprofit with a particular mission that helps people who have been in those positions in the past or people transitioning out of prison.
The goals of the program are great. There are a bunch of challenges – and it’s an issue all over the state – but we hear about it a lot in New York City where we have a number of people living in public housing who fall into the social equity category, but now, by virtue of where they live, may be precluded from growing or using cannabis – something they’re supposed to be able to do legally and have benefits on the business side of things. They’re in this world where it’s a very, very gray area. The Office of Cannabis Management is doing a series of conversations in New York City and other parts of the state to talk specifically about those public housing issues.
You also have the issue of the legacy market, with ‘legacy’ being those who have been involved with the cannabis industry throughout the prohibition, and to whom the state is now saying, “Come into the light. Come and operate some of these legal operations.” But they’re saying, “Well, wait a second, I’ve been in trouble for all of these years” or “I’ve been called the bad guy. Why, now, should what I’ve been doing and the businesses that I’ve grown and the customer base I’ve grown for all this time be handed over to the state?” How do we bring the legacy market online? is an outstanding question.
WAGNER: To give people who have been disproportionately impacted by the prosecution of marijuana a second opportunity and be successful individuals in this cannabis industry is a great goal. One issue is transparency. The Conditional Adult-Use Retail Dispensary (CAURD) program, the parameters around which involved the Dormitory Authority of the State of New York (DASNY) leasing spaces and the state providing the fit-up for those dispensaries, didn’t happen. They actually had to amend the program because DASNY couldn’t lease the spaces. It wasn’t put up front to the public that they were having trouble doing these things until they amended the program, saying, “You can use your own space to set up your dispensary.”
Funding is also a big issue. Many of these social equity applicants don’t have the funds to secure a license, let alone operate one of these businesses. So, where are the funds going to come from? May 11 is going to be a highly anticipated date because that’s when the Social Equity Plan is going to be published and we can see how this is all going to work. I applaud New York for making it a priority to include these individuals, but it’s yet to be seen how this is going to be all implemented.
Would federal legalization or decriminalization help or hurt the industry in New York?
WHALEN: The answer is both. It would help based on some of those things I mentioned earlier – the hesitancies from landlords, the banking restrictions and some of the rules that we have about interstate transport. All of that would go away and add a lot of benefits to the industry in New York state. You could grow weed in other places that have more year-round growing seasons or availability and transport it here for sales to create a more competitive business in the cannabis market.
At the same time, it could hurt New York because you’re bringing in other people who are now going to be bigger competitors and perhaps bring in better cannabis and keep people from buying homegrown New York weed. That will hurt the farmers first. Prices also would have to go up, to pay for products that are coming from other places. But I do think it would help in the way that this overlay of, “Well, we can’t do that yet because of federal restrictions,” or “That’s not allowed because of the federal restrictions” would give us more negotiating power and bring enough change to help the industry.
From a banking standpoint, what should I be doing now as a licensed vs. a non-licensed cannabis business? In other words, whether I’m touching plant or not?
VANDERBECK: If you’re a license holder I would suggest speaking with your bank to gauge their appetite for banking you as a customer. In addition, I would reach out to your professional contacts to lead you into other banking opportunities that are cannabis-friendly.
You need to be clear with your bank about what type of business activity you’re carrying out. It is required for the bank to know their customer and to file certain Bank Secrecy Act filings.
If you’re a non-license holder or indirectly related to the cannabis business, I recommend communicating that with your bank. Because the bank has to decide whether or not you are considered ancillary to the cannabis activity, that is the activity that they need to be concerned with from a banking perspective. Banks and credit unions are becoming more open-minded in working with their customers, and it’s important to put as much as possible on the table and communicate.
What are the biggest issues you see with the cannabis industry right now?
WAGNER: It’s an organic industry right now. Nothing is really set in stone. We’re at varying degrees of operation. We have conditional licenses issued, 279 conditional cultivators, 39 conditional processors, and, I believe, six operational CAURD dispensaries. There’s significant supply chain issues. We have all this supply, but really nowhere to put it. We also have a bottleneck with the testing right now. The Office of Cannabis Management keeps going back and forth on how they want things tested, which is causing problems with the processors and conditional cultivators and how they can get saleable product to dispensaries. And then we have the full-license potential applicants coming online in the near future. How does that impact the current license holders?
And to add yet another layer to that, you have all the municipalities. There are very few municipalities that have adopted zoning regulations surrounding cannabis-related entities. The city of Albany is one of them that has, but not many others have. That means they’re not going to be prepared when these license holders are coming to them with requests of support letters, trying to get approvals for their sites. There will be significant bottlenecking, because of the varying stages of where we’re at and the lack of concrete direction we have at this time.
With the legalization of cannabis, what should business owners be preparing themselves for, in regard to drug testing rules, which might be coming down the pike?
WHALEN: We’re in an interesting predicament with this because we have had medical use in place for a while. There have already been some sensitivities about drug testing that came into play once we had the Compassionate Care Act enacted in New York State. And now that we have this recreational side of things, we have to look at it a slightly different way. The New York State Department of Labor has done a pretty good job of trying to push out information to employers about what this means for them. An employer can’t discriminate against an employee for cannabis use outside of work, but you can come up with some rules and guidelines about cannabis use and the job itself.
What is IRS Form 8300? And why might it be relevant to me?
VANDERBECK: IRS Form 8300 is a form relevant to the cannabis space because cannabis businesses deal in a lot of cash. If you make a deposit over $10,000, the bank usually needs to understand certain things and report them as part of their reporting as a banking institution. For a cannabis company and other companies who also deal in cash, it accumulates information about money that’s being collected greater than $10,000 within a 24-hour period. There are certain rules that apply to that, along with a requirement to file this form and time requirements.
Not everyone is aware of this requirement, and there are significant penalties if you’re intentionally not reporting or if you have a willful disregard. The suggestion is to make sure that you’re aware of the form, the requirements, and again, as part of your procedures and training, that this is covered as part of your procedures whereby if something is missed, at least you can fall back to the fact that you have policies and procedures in place and you’re doing your best efforts to comply.
How can the Capital Region benefit from the cannabis industry?
WAGNER: There a lot of ways that the Capital Region can benefit from this industry, but the most important is we are a strategic location because the cannabis cannot cross state lines. We are essentially the center point of the state from New York City to the North Country to Buffalo. The product has to pass through Albany at some point in time if it’s going from Buffalo to New York City. So, we could potentially be a distribution hub for this industry. For me, that’s the most prominent way the Capital Region can benefit from the cannabis industry.
VANDERBECK: From a business development standpoint, being a new industry is far-reaching as to whom it touches. It’s something new and an opportunity to get people involved. The Capital Region is a pretty stable area, and things don’t change very often too quickly. Cannabis is something that brings excitement, job opportunities, business investments, and hopefully, more economic development.
Our experts
Matthew VanDerbeck, UHY. Matthew VanDerbeck has more than 25 years of experience in accounting and auditing, with extensive experience in privately held and public for-profit businesses. Matt is a leader in the firm’s upstate auditing practice with a focus on the Hudson Valley Region. He is serving as one of the leading partners for UHY’s cannabis practice in New York, with extensive experience advising businesses on achieving and maintaining their accounting and tax compliance with state and federal regulations. Matt has been a speaker on issues relating to the cannabis industry including banking regulations. Matt is also a member of the New York State Society of CPAs’ banking and cannabis committees.
Mark J. Wagner, Jr., The Wagoner Firm. Mark is a Principal at The Wagoner Firm PLLC located in Albany, New York. Mark focuses his practice on corporate transactions and compliance, commercial litigation, and real estate, including purchases and sales, commercial leasing and financing. Mark has been an integral part of the development of the Firm’s cannabis practice, assisting its clients through the ever-changing federal, state and local cannabis regulatory schemes.
Emily Whalen, Brown & Weinraub. Emily Whalen joined Brown & Weinraub after several years of work representing and advocating for a broad range of clients before the legislative and executive branches of New York State government. Ms. Whalen’s reputation for highly effective lobbying and wise counsel has been developed through her work with hospital systems, corporations, not-for-profit organizations, and professional associations, with a particular focus on health care, professional licensing, and cannabis. She has advised clients on procurements and helped secure economic development funding for projects, as well.
Emily previously served as associate counsel in the New York State Senate Majority Counsel’s office where she advised the Senate Majority Leader and members of the Majority Conference on Insurance and Banking issues. In this role she also negotiated legislative and budget priorities with the New York Assembly and Governor’s Office.
H/T: www.bizjournals.com
You can view the whole article at this link Table of Experts: Cannabis
