Update on the cannabis industry

May 22, 2024

Reclassifying Cannabis

We’ve been trucking along these last few months, but things have been slowly changing in our industry. We are seeing more dispensaries, more licenses being approved, and more money coming into the state. Things are still moving a little slowly, but we are seeing some positive changes on the horizon.

At the end of April, the DEA recommended easing restrictions surrounding cannabis. The proposal would recognize cannabis’s medical use and acknowledge that it has less potential for abuse, like some of the more dangerous drugs. The move would reclassify cannabis from a Schedule 1 drug, where it has stayed for over a half-century, to a Schedule 3 drug. This will not end criminalization or legalize it outright but will shift how the government views safety and use for medical purposes. Some are hopeful that this could also lead to the softening of other laws and regulations regarding use and possession, including sentencing guidelines and banking.

Schedule 1 drugs include highly addictive substances like heroin, LSD, and ecstasy, and carry the harshest punishments for any drugs. It is extremely difficult to get approval to conduct authorized studies, which is important to see how substances may be beneficial when regulated. Cannabis has been in this classification for far too long. Schedule 3 drugs include Tylenol with codeine, ketamine, and anabolic steroids. They are still controlled substances but can be prescribed by a physician. This would also allow for more human testing and various rules for medical uses, but they still carry federal punishment for trafficking without permission.

What does that mean for cannabis?

Although the DEA has made its recommendations, the proposal still has to be reviewed and approved by the White House Office of Management, which can take months to wind through all the regulatory hurdles. Once the OMB signs off, the DEA will then take public comment. After the comment period, it is then reviewed by an administrative judge, and then the agency publishes the final ruling.

While this means good things for research, the proposal will do little to ease the lack of loans, checking accounts, and banking services for the industry. Every aspect of the industry has been affected by the issues surrounding banking. Since most banks are federally backed and cannabis is not federally legal, so most will not even consider doing business with us. The majority of the remaining financial institutions don’t want to work with the industry for fear it could expose them to legal trouble. The few that have decided to work with the industry have fees so exorbitant that it is nearly impossible to justify the service. This leaves growers in a conundrum where they are shut out of everyday financial services like obtaining credit and opening bank accounts. Even payroll companies have dropped cultivators once they realized what the business was. A 2023 Congressional Research Service report said only 675 financial institutions in the country are currently doing business with cannabis companies. That number is a fraction of a fraction of institutions available. To combat this, the industry has instead been looking into the SAFE Banking Act. The SAFE Banking Act protects federally regulated financial institutions to serve state-sanctioned cannabis businesses and would be a lifeline for cultivators. Unfortunately, while it has repeatedly passed the House, it has continued to stall in the Senate. This is going to lead to a murky, gray area for a while.

One benefit of reclassifying cannabis to a Schedule 3 drug would change the federal tax code, which would hopefully benefit the cultivators. Schedule 1 drug companies cannot deduct rent, payroll, or various other expenses that many other businesses can, and come with a tax rate of up to 70%. These rules are removed for Schedule 3 drugs and the deduction rate doesn’t apply. This would allow for a substantial change in taxes and banking for cannabis companies. It could also mean more cannabis promotion and advertising if the costs can be deducted. Right now, cannabis dispensaries and companies cannot advertise anywhere unless 90% of the viewing audience is over 21. This means no print, TV, or radio ads and constant flagging and shadow banning of social media accounts.

While many are excited about these long-awaited changes, just as many are skeptical of the choice. Some have said the change “reeks of politics” and would be “perpetuating the existing divide between state and federal cannabis policies”. They would rather see an all-clear given to state licensees, have cannabis completely removed from the controlled substance list, and regulate it more aligned with alcohol and tobacco. Many are fearful that this would give too much power to the FDA over medical cannabis and that Big Pharma is moving in and pushing out the smaller farms. Big Pharma spent over 2 BILLION dollars in 2023 alone on lobbying. They have the money to influence legislation that benefits them and hurts small farmers. Many feel Big Pharma is behind the proposal as reclassifying it makes it much more difficult to EVER declassify it completely. If they change cannabis from Schedule 1 to Schedule 3, the probability of it being declassified one day is extremely low. If it ever is declassified, the FDA would not have control over it. This sneaky route allows them to keep control while giving the illusion they are doing something beneficial. The vague and tricky wording, along with constant changes of regulations has been New York’s MO from the beginning and is nothing new to the cultivators in New York State. When cannabis was legalized, we were told we had a three-year window to make our footing before Big Pharma and corporate cannabis came into play. We were given one year before they let the deep pockets that blow any of us out the water in. We keep this thought in the back of our heads, but don’t let it deter us. We will continue to bring you the best quality cannabis that even the biggest companies can’t rival. We know who we are and what we do and no one can take that away from us.

Time for a revamp

Governor Hochul has called for a full overhaul of the Office of Cannabis Management after an embarrassingly botched rollout. Her first step was ordering the Executive Director of the OCM to be removed and calling for the top leaders of the OCM to be shifted. This hasn’t come without issue, as many are now calling it a racial attack, as the Executive Director is a black man.

The leaders of the department have been treating the state licensing agency like a “mission-driven startup, rather than a government office.” Complaints range from constant shifts in licensing rules to poor transparency to applicants and licensees, all of which have stalled the legal market and allowed illegal stores to flourish. To speak of the lack of transparency, an investigation revealed that the agency “did not intend to review all retail license applications it received, while accepting all non-refundable application fees, and requiring many applicants to execute leases or purchase property” before licenses are granted. This is creating an unstable environment of distrust between applicants and the OCM.

To start, Hochul wants to fix the internal licensing process, clear up the backlog of applications they currently have with a plan to complete those and all new licenses within 90 days and establish an enforcement task to shutter illegal businesses. With only 122 legal shops in the state and thousands of illegal ones, they have their work cut out for them. Although our store numbers are low, it is important to note the state brought in $33.4 million in cannabis tax in 2023. That is just a small fraction of places like California, which brought in over $500 million in cannabis tax dollars.

Where it started

This all comes after an investigation into the OCM after an incriminating conversation between a processor and Damian Fagon, the Chief Equity Officer for OCM, was leaked. During the conversation, the OCM’s CEO stated the OCM was aware of large out-of-state brands openly skirting regulations or illegally importing cannabis from other states. Fagon knew the processor in the conversation was the whistleblower and coincidentally, the processor received a surprise inspection and subsequent stop-work order shortly after their conversation. The processor in question is stating this was a blatant retaliation from Fagon for sharing their conversation publicly. The processor was using R134a, a popular chemical for the extraction process of cannabis. It is deemed safe by the FDA and European Union and is used in several other states in their processing, but it is not approved by the OCM. The OCM has stated they will lift the stop-work order when they deem it safe to use.

Another hurdle in the near distance is a new lawsuit that is underway. 463 licenses that were approved this year are in jeopardy of being invalidated. Allegations are that authorities overlooked a step in their licensing process. A storefront is to be secured before the application approval, but many were approved without it.

While this all may seem to be a spiraling disaster, we can see things slowly starting to come around, at least on our end. Even though the numbers are low, storefronts are opening up and we are reaching a wider audience. We are nowhere near where we thought we’d be at this point, but we aren’t going anywhere. We’re hanging on for this crazy ride right to the end. We hope you hang on with us!