The key to understanding cannabis prohibition: an explanation of the legal arguments which the federal government uses to justify permanently prohibiting the medical use of cannabis appears in my article Madmen Rule You.

Wednesday, December 11, 2013

New York State legalization bill: a first look

This morning New York State Senator Liz Krueger appeared for a press conference on the steps of City Hall with an impressive entourage of state elected officials and activists to announce the introduction of a bill (the "Krueger Bill") to legalize cannabis. We were all informed that there is a Assembly Member from Buffalo who is the sponsor of a companion bill in the Assembly. (The handout material from the conference says the Assembly Member is Crystal Peoples-Stokes.) I don't see a companion bill on the Assembly website yet.

The bill is about 90 pages long.  Since I am a commercial litigator, not a criminal defense lawyer, I am going to focus on provisions governing the manufacture and distribution of cannabis products. Following is an initial survey of the provisions I find most noteworthy. I leave it to the criminal defense bar to comment on the significance of the proposed changes to the Penal Law.

I note that New York law still refers to cannabis using the arcane spelling "marihuana." I am going to use the term "cannabis" in my discussion and the term "marihuana" when I quote the bill or use defined terms. 

Full adult legalization

This bill, S. 06005,  is named "The Marihuana Regulation and Taxation Act." The name is the definition: it proposes a tax-and-regulate law as opposed to a  "medical-use-only" law. Generally speaking, a "tax and regulate" law is what is colloquially called "legalization." (Some people say "adult use"; I prefer to say "general use.") What we saw until the November 2012 elections in Colorado and Washington State were state medical-use-only laws, i.e. they provided exceptions to cannabis prohibition for the narrow purposes of medical use only.

As I have previously stated, I consider medical marijuana a loser in New York as indeed it has failed here since 1997. With no offense intended to Assembly Member Richard Gottfried, who has fought the fight to pass a medical use law for 16 years, the reason is that the "medical-use-only" approach is a defensive and apologetic posture. I believe that the Senate Republicans have succeeded  in preventing the medical marijuana law from reaching the full Senate for a vote because defensiveness and apology concede that cannabis prohibition was and continues to be a valid social policy. Instead of reversing the starting premise and stating that cannabis prohibition was always and continues to be totally wrong, proponents of medical-use-only try to appease their opponents by playing up how strict their bills are, as has happened in New York as well as New Jersey. The Senate Republicans extracted one concession after another over the years - and each year continued to prevent the bill from going to a vote. This bill should be their come-uppance: they stifled medical-use-only, so now they get full legalization.

The Krueger Bill provides for full-scale legalization in the style of Colorado and Washington State, i.e. regulation and taxation of cannabis like alcohol. It makes purchase, possession and use of cannabis legal for persons over 21 years of age. It gives primary regulatory authority to the State Liquor Authority ("SLA"); in fact, the bulk of the bill consists of revisions to the Alcoholic Beverages Control Law ("ABCL"), including the creation of an entirely new article. A new Article 18-a of the Tax Law provides for a state-wide excise tax. There are amendments to several other parts of the New York State statutes including  the Public Health Law, the Penal Law (of course),  and the General Business Law, among others.

One distinction between the Krueger Bill and the Gottfried/Savino medical-use-only bill is that the medical use bill would require that both patients (the demand side of the market) and cannabis cultivators, wholesalers and retailers (the supply side of the market)  get licensed by the state. The Krueger Bill requires only the supply side to get licensed by the state.

Four types of licensees

The bill provides for four types of licensees in the supply side of the market (i.e. businesses that handle cannabis), as described in new sections of the ABCL:

- a "marihuana producer"
- a "marihuana processor"
- a "marihuana retailer"
- a "marihuana retailer for on-premises consumption"

These new definitions, to be added to in the ABCL, appear in the Krueger Bill in Section 24:

Marihuana producer 
Defined as a person licensed to produce, process, and sell marihuana and concentrated cannabis at wholesale to marihuana processors, marihuana retailers, or other marihuana producers but not to consumers.
To my eye, this is a commercial grow operation. I note that this type of licensee is not authorized to produce or sell "marihuana-infused products," which are defined as "products that contain marihuana, marihuana extracts, or concentrated cannabis and are intended for human use or consumption, such as, but not limited to, edible products, ointments, and tinctures." Concentrated cannabis is defined as resin, i.e. hash, or other mixture containing two and half percent THC by weight.

Marihuana processor
Defined as a person licensed to purchase marihuana and concentrated cannabis from marihuana producers, to process marihuana, concentrated cannabis and marihuana infused products, package and label marihuana, concentrated cannabis and marijuana infused products for sale in retail outlets, and sell marihuana, concentrated cannabis and marihuana infused products at wholesale to marihuana retailers.
This type of licensee can make marihuana infused products, i.e. other consumer products - food, oils, tinctures, etc.

Marihuana Retailer
Defined as a person licensed  to purchase marihuana, concentrated cannabis, and marihuana-infused products from marihuana producers and marihuana processors and sell marihuana, marihuana infused products, and concentrated cannabis in a retail outlet.
Self-explanatory, I think. I note only that the definition seems to exclude "processing," suggesting that this type of licensee cannot manufacture its products, i.e. no baking the cookies onsite or rolling cigarettes or cigars on premises from the raw herb. Note that the bill prohibits sale of alcoholic beverages on the premises of this type of licensee.

Marihuana Retailer for On-Premises Consumption
Defined as a person licensed to purchase marihuana, concentrated cannabis, and marihuana infused products from marihuana producers, marihuana retailers, and marihuana processors and sell marihuana products for a customer to consume while the customer is within a facility.
I assume that this type of licensee (which I will call "ROPC" for short) is the equivalent of a cannabis bar or lounge i.e. an Amsterdam-style coffee shop. (Think of New York City nightlife with cannabis lounges in addition to alcohol bars and midtown filled with a sea of Starbucks selling cannabis-infused lattes.)  ROPCs can be licensed in a city only after the local legislature has specifically voted to permit them. An applicant for an ROPC license for a site in New York City also requires approval by the community board in which the proposed site is located. [I note that there is also a provision in the bill that allows a local government to opt out of the bill so that the locality is "dry"; I am seeking clarification as to how the opt-out provision integrates with the requirement of an affirmative vote by the local legislature to permit ROPCs.]

I note that in a sense there is a fifth person in the supply side but one who is not licensed: an individual - since the bill permits individual cultivation of up to 6 cannabis plants, no more than 3 of which can be mature. The fact that the Krueger Bill permits individual cultivation is stupendously important because the individual cultivation provision was a casualty in the medical marijuana war: individual grow appeared in earlier versions of the Gottfried/Savino bill but disappeared by 2012. Someone inside the government (Senate Republicans, perhaps?) does not like the idea that individuals can cultivate cannabis themselves. Now the idea is back in a tax-and-regulate bill.

However, I have a feeling that one way or another this provision is not going to survive: either it will be eliminated entirely as a concession to the opposition (which would be a huge mistake), or the cap will be eliminated and some other provision to prevent unlicensed commercial operations from being disguised as individual cultivation will be substituted in.

Ownership issues

I understand that one of the goals in crafting this bill was to follow the model of the "three-tier system" in alcohol regulation, i.e. manufacturers, wholesalers and retailers cannot be integrated. For example, you don't have "Budweiser" bars or stores - Budweiser makes the product but cannot be the one selling directly to the public.

The Krueger Bill specifies that no producer or processor can have a "direct or indirect financial interest in a licensed marihuana retailer or a marihuana retailer license for consumption on the premises." (Krueger Bill Section 30: proposed new ABCL Section 166.) However, the same person can be licensed as both a producer and a processor. (Krueger Bill Section 30: proposed new ABCL Section 172.) It looks like a marihuana retailer cannot own or lease premises in which a producer, processor or another retailer is operating:
No marihuana retail licensee shall be interested, directly or indirectly, in any premises where marihuana products are produced or processed or any other premises where marihuana products are sold at retail, by stock ownership, interlocking directors, mortgage or lien on any personal or real property or by any other means.
In addition, no retailer may make a loan to any person engaged in producing, processing or selling marihuana products. (Krueger Bill Section 31: proposed new ABCL Section 173(15) and (16).)

Special issues as to an ROPC

The provisions governing ROPC's are more extensive than those governing the other licensees. (Krueger Bill Section 31, proposed ABCL Section 174.) Applications are subject to evaluation under numerous factors, including the number, class, and character of other cannabis business licensees in proximity to the proposed location, the effect on vehicular traffic and parking, the existing noise level and potential increase in noise level and the history of cannabis violations and criminal activity at the location. ROPCs can sell cannabis for consumption on the premises in containers or packages containing no more than one gram of cannabis. (I don't see in the bill a limitation as to the strength or amount of concentrated cannabis or marihuana infused products that can be sold.) ROPC's can't have gambling (although sale of lottery tickets and bingo do not constitute "gambling"). (Section 31, proposed ABCL section 174(9).) ROPCs cannot feature various degrees of nudity specified in the bill, so it seems there will be no licensure for strip clubs and topless bars. (Section 31, proposed ABCL sections 174(9)(a).)

Tax

The excise tax will be $50.00 per ounce of cannabis or $50.00 per quarter ounce of concentrated cannabis that is collected at the time a producer transfers cannabis to a processor. It permits sales tax by local governments.

I also draw your attention to the proposed new section 450-a of the Tax Law which appears to be intended to assist industry by making business expenditures deductible against state taxes:
Section 450-a. Ordinary and necessary expenses deductible from net income.
Notwithstanding any federal tax law to the contrary, in computing net income for businesses exempted from criminal penalties under article two hundred twenty and two hundred twenty-one of the penal law and article eleven of the alcoholic beverage control law, there shall be allowed as a deduction from state taxes all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including, but not limited to, reasonable allowance for salaries or other compensation for personal services actually rendered.
The IRS does not permit deduction of business expenses incurred by people who handle cannabis. I read this provision as an attempt to grant some tax relief to industry at the state level.

Local government control

Most interesting to me are the provisions concerning the relationship between the state government and local governments. I have said before that one of the key issues in implementation is the degree to which state law "preempts" local law, i.e. precludes a local government from regulating a particular industry or activity that is already subject to regulation by the state. I expect that one major subject of litigation after enactment will be attempts by local governments to control the cannabis market beyond what the state's regulations permit or restrict.

The bill provides a mechanism by which local governments can remain "dry" jurisdictions: as amended by the bill, ABCL section 141 will allow the citizenry to vote on whether to permit licensing of retailers and ROPCs.

New Section 180 of the ABCL will also require that any person applying for one of the four licenses notify the clerk of the municipality in which the applicant seeks to be licensed by the SLA of its intended application except that in New York City the community board is the local government body that must be notified. The local government may file its opinion for or against the the application with the SLA and such opinion will be part of the record to be considered by the SLA. I assume that the local governments will require that there be a public hearing concerning the application. 

Room for improvement - stakeholder input and preemption

The bill requires that the SLA promulgate rules and regulations to give effect to the law within 240 days of its effective date. (Krueger Bill Section 30, proposed ABCL 170.)

The scope of matters on which the SLA must promulgate regulations is expansive: licensing of the four categories, including forms and application fees, qualifications for licensure, books and records to be maintained by licensees, methods of producing, processing and packaging marihuana products, standards of ingredients, quantity and identity of products produced, processed or sold, security requirements, safety protocols for licensees and their employees, and requirements to prevent diversion.

This initial version of the bill does not require the establishment of working groups of stakeholders to advise the SLA in promulgating rules. The last version of the medical marijuana bill included a provision directing the State Department of Health to appoint committees consisting of certain specified classes of persons to advise the agency; those committees could in turn create subcommittees including persons who are not committee members. I thought that this provision requiring creation of advisory committees was one of the best additions to that bill. It adopted what has been done in Colorado and Washington State and serves as a correction to the evolution of the law in other states in which laws were passed apparently without any attempt to obtain consensus from the stakeholders.

I would expect that if the bill is enacted either it will include a provision directing the creation of advisory committees and forums for public comment on how to implement the law or the SLA will on its own seek guidance from outside persons, particularly professionals in affected areas (law, law enforcement, medicine, public health, addiction treatment, corrections, etc.), local governments and other state agencies, industry professionals and government officials (executive branch or legislators) from jurisdictions in which cannabis has been legalized, and representatives of industries that may be directly affected.

As stated above, the degree to which the law will preempt attempts by local governments to regulate beyond the scope of the state law is likely to be a hot area for litigators and municipal attorneys. It would be helpful if the statute would make a definitive statement as to its intention to preempt or not to preempt local law; otherwise, that question will be one answered by the judiciary. We lawyers will be happy to bill for memoranda of law arguing that issue one way or another but industry types and local governments likely could do without that expense.

More later.

3 comments:

  1. Your summary suggests this is a much more reasonable approach that those taken in WA and CO or proposed in CA. It is less restrictive and less fear-driven.
    I applaud this law and hope it passes.
    However, since this statute and others like it bypasses the need for a separate medical marijuana law, I wonder if this -- and other state legalization needs some specific provisions for medical users and providers.

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  2. I think this comment may go to my advice that the bill create advisory committees. Probably the State Department of Health should be looped into this process. The medical component might be addressed by assigning to DOH the task of preparing guidelines for health care providers, patients, and family caregivers and guardians and/or creating offices within DOH that will evaluate the utility of cannabis as therapy for different populations and conditions, as well as for abuse potential and safety.

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  3. For what looks like a pretty enlightened bill, WHY, WHY, WHY would you choose the slang word "marihuana" that got the legalization movement in so much trouble in the first place?

    Good luck New York.

    Something to consider. I live in Sonoma County, California. As a medicinal cannabis patient I've given much thought to how outright legalization would change or alter my current access to cannabis-based medicines and therapy. I can't think of ONE THING! For example, from just two dispensaries I patronize, I have the choice of around 70 varieties of cannabis. Everything from high-THC to CBD-rich. I have close to that many choices of every kind of edible you can imagine. I have access to a safely manufactured version of Rick Simpson Oil (full extract cannabis oil). Hashish, and concentrates are available as well as topical lotions.

    I can't think of any cannabis-related product or variety that's not available to me, PERIOD! Plus I can cultivate at home!!!!!

    And, that last sentence is what legalization should represent EVERYWHERE. If legalization reduces the types or varieties BUT especially home cultivation at all, IT's BULL!

    The quality of my life DEPENDS on having those multiple choices and opportunities.

    Here's what my medical cabinet contains at all times: half dozen or more different high-THC cannabis varieties. CBD-rich herb, CBD-rich concentrates, CBD-rich tincture, full extract cannabis oil (aka Rick Simpson Oil). For neuropathy, NOTHING beats the CBD-rich medicines.

    People all have different responses to chemical substances. If having 70 choices seems excessive, IT'S NOT. It takes a lot of trial and error for folks to find good fits in the cannabis world. The point I can't stress enough is that my quality of life DEPENDS on having access to ALL types of cannabis-related products.

    Rather than California's MMJ law representing some type of "Wild West" anything goes environment, the truth is that it allows physician's the opportunity to use cannabinoid-therapy based on the endocannabinoid system. If I were king for a day I'd mandate that you simply couldn't mention medicinal cannabis or cannabis legalization if you also didn't mention and/or explain what the endocannabinoid system is and how it works.

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