Some bad news for those waiting for New York to legalize adult-use cannabis. Legislation aimed at legalizing adult-use cannabis failed on Wednesday (June 19), as state leaders in New York could not agree on certain key components of the proposed Marijuana Regulation and Taxation Act (the “MRTA”).
One of the biggest points of contention in the MRTA was how the state would allocate the projected $300 million in annual tax revenue. In particular, some legislators argued that the funds should be allocated towards communities negatively impacted by the war on drugs, while New York Governor Andrew Cuomo argued that the executive branch – which he leads – should have more control over how that money is spent.
In addition, lawmakers also struggled to reach consensus on whether past cannabis convictions should be expunged and whether cities and counties would be expected to opt in to cannabis sales or, alternately, be able to opt out.
While adult-use maybe be off the table for now, on June 21, 2019, the New York Assembly and Senate approved a bill (A08420) to further decriminalize possession of cannabis and automatically expunge many low-level cannabis convictions.
- The penalty for possessing an ounce of cannabis (possession in the second degree) will be reduced to a $50 fine. Current law imposes a $100 fine, provided that the individual does not have a prior cannabis-related offense within the past three years.
- The limit for cannabis possession in the first degree will be increased from 25 grams to one ounce, and the penalty will be reduced from a misdemeanor to a $200 fine. Currently, first-degree cannabis possession can result in up to 90 days in jail and/or a fine of up to $500.
- Cannabis in “public view” will no longer be a misdemeanor offense.
- Cannabis possession arrests and convictions for amounts decriminalized under the bill will be automatically expunged, and will apply to convictions prior to decriminalization.
A08420 will take effect and become law pending signature by Governor Cuomo.
As California gears up to issue the first set of adult-use cannabis licenses on January 1, 2018, state and local taxes on adult-use cannabis may reach as high as 45% in some parts of the state. According to a recent report by Fitch Ratings, cannabis consumers are expected to pay a sales tax ranging from 22.25% to 24.25%, which includes an excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%. Local cannabis businesses will have to pay taxes ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of cannabis plants, and farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves.
These rates are considerably more than in other states that have already legalized adult-use cannabis. Colorado and Nevada, for example, each have a tax rate of 36%. Oregon comes in at 20% and Alaska has a rate of up to 20%. Massachusetts, which legalized adult-use cannabis, and should begin retail cannabis sales in July 2018, is expected to have a tax rate of 24%. Maine has not established a tax rate yet. Washington is the only other state with higher taxes, at an effective tax rate of approximately 50%.
The legitimate cannabis industry in California has a projected value of $7 billion with the potential to collect $1 billion per year in tax revenue. However, industry leaders in California believe that a higher effective tax rates on consumers, retailers and growers could potentially divert sales to the already well-established cannabis black market. For example, the black market price for an eighth of an ounce of cannabis is approximately $20, as opposed to approximately $50 at a licensed dispensary. High taxes, coupled with a cheaper source of product, could ultimately hamper California’s efforts to legitimize the cannabis industry. However, since legal cannabis is subject to stringent quality assurance testing which will be overseen by the California Bureau of Cannabis Control, consumers may be willing to pay a premium to ensure that they are getting a better, safer product than they would on the black market.