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New York Illegal weed sales hurts tax revenue from legal program

The state “has failed by every measure in its rollout of the adult-use program, and every member of New York’s cannabis community—from growers and processors to justice-involved licensees and medical patients—are paying the price,” said the Rev. Kirsten Foy, a spokesman for the Coalition for Access to Safe and Regulated Cannabis.

Tremaine Wright, chair of the Cannabis Control Board, has no tolerance for whiny weed merchants even if they’re licensed. Black markets don’t move into the light right away, and anyone who invested in a dispensary looking for a quick buck was looking in the wrong place.

“Those people entered into this marketplace knowing exactly what the landscape was,” she told Crain’s.

The burden of being first

New York legalized recreational marijuana the spring of 2021, after it became available a PATH ride away in New Jersey, and lawmakers prioritized seeding the new market with shops owned by individuals punished under severe drug laws. Gov. Andrew Cuomo described legalization as a policy that “rights the wrongs of the past by putting an end to harsh prison sentences, embraces an industry that will grow the Empire State’s economy and prioritizes marginalized communities so those that have suffered the most will be the first to reap the benefits.”

Benefits have been slow to materialize because, with financial conditions tightening, it’s not easy for ex-offenders to raise capital even if they were unjustly convicted. In New York City it costs up to $2 million upfront to open a licensed dispensary, insiders say.

“We took people who were the most economically unable to handle the burden of being first,” Cannabis Control Board member Jennifer Gilbert Jenkins said at a June meeting.

Slowly, the state is starting to close unlicensed shops so the legal ones can get a foothold. The first legal dispensary to open in the city last year, sponsored by the nonprofit Housing Works, generated $12 million in revenue in the first half of the year, accounting for better than a third of all legal sales statewide. But the shop is surrounded by dozens of outlaw operators. One was Varieties on Broadway, at 736 Broadway, until it was shut down June 30.

“It’s a very unfortunate situation,” said attorney Michael Becker, who represents shop owner Husam Assaedi. City records show the landlord is Jeong Hoon Kim, who the New York Post says is a dentist. Lawyers for Kim didn’t return calls.

Over a three-week period in June, the state Office of Cannabis Management issued cease-and-desist orders to 33 shops selling illicit weed and their owners ordered to appear before an administrative law judge to face fines of up to $10,000 a day. But the state is reluctant to throw the book at marijuana offenders and OCM’s 2024 budget includes just $5 million for an additional 37 staff to carry out enforcement.

The wheels of justice turn slowly. A hearing for a Greenwich Village shop called NYC Smokes was postponed for about a month because an attorney said the owner was out of the country. The unlicensed stores recently fined by the Manhattan district attorney were allowed to remain open and owner Rami Alzandani won’t be prosecuted so long as the weed sales stop.

Meanwhile, landlords look the other way because some unlicensed shops pay $30,000 a month in rent or more. After an East Village store at 14 First Ave. was sued by the city for selling illicit weed, it changed its name from Runtz Tobacco to Convenience Tobacco, and a recent visit by a Crain’s reporter showed it’s still selling weed. An attorney for landlord Son Dinh Tran said he was unaware of that.

“We’d rather not have the aggravation,” said the attorney, Julian Kaufman.

Sasha Berger, a 14-year-old Park Slope resident, can no longer visit the cats that live in five bodegas near her former middle school because the stores turned into smoke shops, with a minimum entry age of 21.

“Bodegas are very useful,” said Berger. “These cannabis stores are taking up everything.”

Looks legal

The best-performing unlicensed shops make $15,000 a day in profit after paying rent, said Collins, the West Village attorney, and smaller shops make at least $2,000.

Unlicensed shops have significant competitive advantages over licensed dispensaries. Prices can be lower and they can take credit cards while licensed retailers accept only cash or debit cards. Although black-market weed is of unverifiable origin and could be full of pesticides, underground dealers and distributors have served New Yorkers’ marijuana needs for 50 years, and for most users that’s enough.

“The unregulated market in New York looks and acts a lot like a legal one,” said Amanda Reiman, chief knowledge officer at New Frontier Data. “And when consumers are used to getting products they are satisfied with in the unregulated market, it is tough to get them to switch over.”


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