New York is one of the signature cities in the world. The marijuana industry sees it as one of the top global markets. The state government had a strong plan to roll out recreational  and changed in within a few weeks of launch. Chaos ensued and the issuing of licenses basically became a trickle.  But is New York finally getting its marijuana act together?

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The chaos allowed around 2,000 illicit dispensaries to open in the state, with around 2,500 in greater New York City. There were even unlicensed retailers within 3 blocks of NYC’s iconic City Hall. After trying to force landlords to shutter the stores and then begging social media companies to unplatform them, the government had to act. The state legislature passed new laws to crack down on the unsanctioned shops. Previously, the city’s power to step in had been limited and the legal market was bogged down in red tape.

The state is proud they have closed roughly 1,000 illicit stores in the state with over 750 NYC alone. Over 41,000 violations have been issued, totally $65,671,487 in penalties. The city estimates it has already seized a total value of $41,443,792 in products, whose fate remains unclear.

In an added complication, it seems part of the products sold came from the California black market. The closures could benefit the Golden State’s efforts to wrangle their mess. The Empire State has less than 200 retailers so this can be a huge boom for them. The illicit market was very profitable in NYC, with some estimates of $1.5 billion in sales in 2023.

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Andrew Cooper, Chair of hte Cannabis & Psychedelics Practice Group at NY headquartered Falcon Rappaport & Berkman LLP had a comment on it. “There is no doubt that the current initiatives which have been implemented to shut down illicit cannabis operations as part of the newly enacted budget have been an overwhelming success with over 230 illegal cannabis stores padlocked and over 6,000 pounds of illicit product valued at $22 million seized since May 21, 2024. In the 10 weeks since enforcement actions began, regulated cannabis sales are up 72 percent in New York City with retailers collectively reporting $2.6 million in weekly revenue growth over the same period. This puts New York on pace to sell $520M of Cannabis in 2024, with some people suggesting that it could break $700M.”

 “Because the sheriff’s office can now enter and inspect businesses without a court order, it’s able to quickly raid retail stores and seize products. Unfortunately, legal CBD and Hemp stores who, arguably, are not selling illegal weed have been getting caught up in these raids as well.  In many instances, Sheriff’s deputies and NYPD officers, many of whom are wholly unfamiliar with the relevant regulations including the fact that CBD and Hemp can be sold with the appropriate license, still confiscate legal products and arrest shop owners” continued Cooper.

Governor Kathy Hochul and Mayor Eric Adams celebrated the success of the crackdown on Wednesday.

“In the three months since launching ‘Operation Padlock to Protect,’ our administration has delivered major results on a major quality of life and public safety issue,” Adams said. “For too long, illegal shops have contributed to a feeling that anything goes on our streets.”

Is New York finally getting its marijuana act together, the industry is certainly hoping it is.

The Cannabis world is going through another big change with the potential of rescheduling – but what does it really mean?”

The Fresh Toast – The cannabis world is going through another major change, so what is the future of cannabis after rescheduling?

The Drug Enforcement Administration (DEA) is moving for cannabis to be rescheduled. The anticipated rescheduling follows the Department of Health & Human Services’ (HHS) August 2023 recommendation, based on scientific support for the rescheduling from the FDA, that cannabis be rescheduled under Schedule III of the Controlled Substances Act. Cannabis has remained a Schedule I substance since it was originally “temporarily” classified as such by the Controlled Substances Act of 1970. Schedule I drugs are defined as having no currently accepted medical use and a high potential for abuse, with other Schedule I drugs including heroin and LSD (despite cocaine, fentanyl, and other potentially dangerous drugs being in less restrictive drug schedules). The status of cannabis as a Schedule I drug has long been criticized, particularly as more and more U.S. states legalized cannabis for medical and recreational use.

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From a consumer standpoint rescheduling will not actually legalize cannabis. At least not in a way forcing States in which cannabis is currently prohibited to immediately change course as a direct result of rescheduling. Instead, those States are likely to continue cannabis prohibition (though this momentous step may influence further states to legalize). Similarly, states with state-legal cannabis programs will likely not immediately change from a consumer perspective, although further regulation or even a reduction in product pricing due to cannabis no longer being subject to section 280E of the Internal Revenue Code (discussed in detail below) may soon follow.

There is more going on the business side with rescheduling. Falcon Rappaport & Berkman LLP has reviewed the process and outcomes.

Taxes

The most significant consequence of cannabis rescheduling will be the immediate removal of cannabis from the reach of I.R.C. Section 280E, which is arguably the greatest burden on state-legal cannabis operators. Section 280E prohibits cannabis businesses from writing off many business expenses when calculating their net profit, which has resulted in vastly higher taxes as compared to similar non-cannabis businesses. Instead, section 280E only permits a deduction for the Cost of Goods Sold (COGS) for any business trafficking in any controlled substances (i.e., drugs listed on Schedule I or Schedule II). Despite cannabis businesses operating under state-legal programs, they are considered “trafficking” and cannot take ordinary business deductions. Allowing cannabis businesses to deduct all ordinary and necessary business expenses, and not just COGS, will help to even the playing field with nearly every other legal business.

Federal Illegality

As discussed from a consumer standpoint, rescheduling cannabis does not affect the overall federal illegality of cannabis. This means that state-legal cannabis businesses will not automatically be federally legal, as their federal illegality will continue under Schedule III. While Schedule III drugs may be legally prescribed and sold under federal law, the various restrictions (such as requiring FDA approval of any such Schedule III drug and DEA registration of a distributor) mean that your average dispensary, even medical dispensaries, will still be federally non-compliant.  For these same reasons, the reclassification to Schedule III does not mean that marijuana grown pursuant to state programs can be sold in interstate commerce. Marijuana products, even under Schedule III, are only federally legal if they are federally approved and there are only three FDA-approved cannabis-based drugs developed to date (Marinol, Epdiolex, and Syndros).

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Intellectual Property & Cannabis Trademarks

The United States Patent and Trademark Office (USPTO), the agency tasked with examining federal trademark applications, has generally required use of a mark to be lawful under federal law in order to receive federal trademark registration under the U.S. Trademark Act (see Examination Guide 1-19). The federal illegality of cannabis has thus prevented trademark registration in connection with most cannabis products. Unfortunately, cannabis rescheduling will not remedy this issue. Even in Schedule III, cannabis products would have to be federally lawful, with lawful use of a Schedule III drug requiring FDA approval.

Entitlement to Federal Bankruptcy Protection 

Currently, plant-touching cannabis companies are not entitled to federal bankruptcy protection. That is because the U.S. Bankruptcy Code requires that bankruptcy plans are “proposed in good-faith and not by any means forbidden by law.” Since even state-regulated cannabis companies violate the federal Controlled Substances Act (CSA), they are disqualified. Unfortunately, rescheduling to Schedule III of the CSA alone will not likely solve that barrier to bankruptcy. While some have argued otherwise, the fact is that to manufacture, distribute, or dispense a Schedule III Controlled Substance, businesses must be registered with the Drug Enforcement Administration (“DEA”). Any business or person not registered with the DEA is not authorized to manufacture, distribute, or dispense it. Meaning that violations would likely constitute an unlawful act under the CSA. Consequently, an attempt by the non-complying business to commence a voluntary petition seeking federal bankruptcy protection will likely result in a motion to dismiss the case by the U.S. Trustee’s Office.

However, in light of a recent trend among bankruptcy court’s in allowing ‘one-step-removed’ distribution of cannabis-related assets, federal rescheduling may very well result in a more liberalized approach to administering bankruptcy cases so that bankruptcy judges will be more willing to look past the issue of marijuana’s federal illegality.

Status Quo

There are several aspects of the existing cannabis industry which would not be immediately changed by rescheduling cannabis to Schedule III. Ongoing banking issues including the lack of access to standard commercial bank loans and lines of credit would likely persist; difficulties in processing cannabis transactions due to the reality that major credit card companies like Visa, Mastercard and others will likely still not service marijuana businesses; general federal illegality; and the criminalization of cannabis (and continued incarceration of certain offenders) in prohibitive states would remain following rescheduling.

While many had hoped for the de-scheduling of cannabis, the change in stance of the DEA, a longstanding adversary of cannabis reform, is no small feat.

Terran Cooper is a regular contributor to The Fresh Toast.  He is part of Falcon Rappaport & Berkman LLP. This article was developed in part with the help of Andrew Cooper and Matthew Foreman.