The green wave of legalizing adult-use cannabis may be reaching east coast states sooner than expected. In 2019 New York may join its neighboring states in ending cannabis prohibition.
On Jan. 15, in his state of the state address, New York Governor Andrew Cuomo proposed a plan to legalize cannabis for adult-use. In a change of opinion from 2017, Cuomo now believes the benefits of legalization outweigh the costs. Coincidentally, New Jersey Governor, Phil Murphy re-affirmed his commitment to a similar plan in his State of the State address also on Jan. 15.
While cannabis remains an illegal substance under federal law, there is legislation pending before Congress that could resolve much of the current uncertainty that surrounds the cannabis industry in America.
In his State of the State address, Governor Cuomo focused on the new state office his proposal would create, the Office of Cannabis Management (OCM), and on three key areas of benefits for his proposal: (1) economic, (2) social and criminal justice reform, and (3) regulatory control. As an initial matter, the OCM would administer all licensing, production and distribution of cannabis products in the adult-use, industrial and medical cannabis markets. The OCM would also centralize all enforcement and economic development functions including the creation of a program to review and seal past marijuana convictions.
The economic benefit aims at increasing tax revenue by $300 million. Under the proposal, taxes would be imposed at different stages, such as cultivation of cannabis, sale by a wholesaler to a retail dispensary and additional tax collected for the county in which the retail dispensary is located. In addition, the OCM would establish separate licensing programs for cannabis growers, distributors and retailers. Cannabis legalization would also create new union jobs.
Another benefit in Cuomo’s proposal concentrated on social and criminal justice reforms. The proposal promises automatic sealing of certain cannabis related offenses on a person’s criminal record. His plan aims to direct cannabis related tax revenues toward administering a regulated cannabis program, data gathering, monitoring and reporting, public health education and other social reforms. Finally, the plan promises regulatory control of restricting access to anyone under 21 years old, protecting health and safety and granting the option to counties and large cities to “opt out” of the industry, thereby prohibiting retail shops from opening in communities that do not want to participate in the industry.
Importantly, one of the other recent cannabis related legal milestones occurred on the federal level. On Dec. 20, 2018, President Donald Trump signed the Agriculture Improvement Act of 2018 (commonly known as the “Farm Bill”) into law. Notably, the 2018 Farm Bill has federally legalized hemp. The Farm Bill removes hemp from the federal Controlled Substances Act’s (CSA) definition of “marijuana” and from its list of Schedule I drugs. This means that all products made from industrial hemp, including Cannabidiol (CBD) oil, are now legal under the CSA if the product remains under a 0.3 percent THC threshold.
It was previously illegal for raw hemp materials to be sold through interstate commerce in states without the mandated industrial hemp pilot programs created in the 2014 Farm Bill. Such commercial activity will no longer be impeded under the new law. Each state will now be empowered to regulate commercial hemp farming in the same manner that any other agricultural commodity is regulated. Additionally, the 2018 Farm Bill removes any ambiguity surrounding the legal status of hemp-derived CBD oils and extracts, which can be used to provide relief from inflammation, pain, anxiety, psychosis, seizures, spasms, and other conditions without any of the side effects traditionally associated with cannabis.
In addition, there is pending legislation before Congress that would likely resolve most of the current uncertainty that surrounds the cannabis industry particularly regarding the “Cole Memo.” In January 2018, then-Attorney General Jeff Sessions rescinded the “Cole Memo,” a policy which relaxed federal enforcement of marijuana laws, but also created more confusion about the future of cannabis-related banking. As a result, many financial institutions have been cautious to work with the cannabis industry.
On June 7, 2018, Senators Elizabeth Warren (D-Mass.) and Cory Gardner (R-Colo.) proposed the “Strengthening the Tenth Amendment Through Entrusting States Act” (STATES Act). The STATES Act would leave marijuana policy to states by federally permitting states to make and enforce their own laws related to the possession, production and sale of recreational marijuana.
Specifically, the STATES Act would solve three issues underlying current cannabis regulation. First, the STATES Act would solve the discrepancy that exists between state and federal law related to cannabis. Identifying that “46 states have laws permitting or decriminalizing marijuana or marijuana-based products,” the STATES Act would exempt any person acting in compliance with state cannabis laws from a “trafficking” charge under the federal Controlled Substances Act (CSA). In other words, the STATES Act would protect any person in full compliance with the applicable state cannabis laws and regulations from the threat of federal prosecution. Therefore, it would no longer be possible to be acting in compliance with state law, but at the same time, violating federal law.
Second, financial institutions would be legally free to conduct business with the cannabis industry. Currently, marijuana is classified as a “Schedule I” drug under the CSA. As a result, financial institutions risk sanctions if they choose to deal with marijuana businesses or the proceeds thereof. Banks that handle money derived from the cannabis industry can be charged with money laundering, among other crimes. Therefore, cannabis businesses are largely cash enterprises. This causes many issues. For example, because federally chartered banks are not willing to take money from these businesses, many marijuana dispensaries have to resort to keeping large quantities of cash in back offices or storage units. In turn, the businesses become sitting targets for robberies and assaults, causing public safety concerns. Law enforcement and Federal Reserve officials have expressed concern over the crime that has accompanied un-bankable cash.
Under the STATES Act, cannabis transactions compliant with state law would no longer be considered “trafficking” under the CSA. Therefore, cannabis transactions would no longer yield illegal proceeds in states that have legalized or decriminalized cannabis. Financial institutions could then transact with individuals and businesses in the cannabis industry without the fear of money laundering prosecution, civil forfeiture, or other criminal violations that could lead to a charter revocation. Moreover, cannabis businesses would no longer have to worry about being sitting targets with duffle bags full of cash because their money would be in bank accounts.
When it comes to medical or adult-use cannabis legalization, it is evident that most states are shifting in the same direction. What remains to be seen is if federal policy will follow.
Nikolas Komyati is a principal and chair of the cannabis practice group at Bressler, Amery & Ross. Tamar Gongadze and Consuelo Mejer are associates at the firm.