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As New York City grapples with unlicensed cannabis shops appearing throughout the five boroughs, state officials are heightening their efforts to curb the surge. In the face of the escalating issue, state regulators and law enforcement are turning their attention to these unauthorized establishments and ramping up efforts to bolster the city’s legal adult-use marketplace.

Current state of unlicensed shops in NYC

Since New York legalized cannabis for recreational use in March 2021, the city has witnessed a surge in unlicensed vendors selling a variety of products like flower, edibles, and vapes. The allure of the booming market and the potential for significant profits have enticed numerous entrepreneurs to enter the industry without obtaining the necessary licenses. Moreover, the regulatory framework and licensing process have faced challenges in keeping pace with the demand, creating a gap for unlicensed entities to exploit. 

The number of unlicensed shops has continued to grow rapidly. A report by New York City’s Independent Budget Office (IBO) determined an estimated 1,500 unlicensed retailers exist in the city, holding as much as $484 million worth of cannabis products. In many cases, consumers might not be able to tell these unlicensed storefronts apart from licensed dispensaries, as some have gone the extra mile to appear legitimate with branding, signage, and showroom floors. The New York State Office of Cannabis Management (OCM) maintains a list of authorized dispensaries on its website. The OCM also provides a QR code licensed dispensaries can post at the door for customers to scan and verify the establishment’s license.

Meanwhile, New York’s CAURD licensing framework was subject to a lawsuit and court injunction that froze the issuing of additional licenses. That lawsuit has since been settled and the injunction lifted, but the delay didn’t do the legal cannabis market any favors. The state’s Cannabis Control Board (CCB) has attempted to speed things along amid the injunction, adopting a resolution that allows existing medical cannabis dispensaries to get involved in the adult-use market.

Regulators have also moved to allow multi-state operators (MSOs) to enter the New York market as well, much to the chagrin of small businesses and social equity applicants. The latter’s licensing outlook remains uncertain and on pause. Despite these efforts, the rollout of New York’s legal adult-use cannabis market has been sluggish, creating a prime opportunity for these unlicensed shops to take root. 

Recent enforcement actions against unlicensed cannabis shops

The Office of Cannabis Management launched its enforcement efforts in 2022, sending 52 cease and desist letters to unlicensed cannabis businesses warning them to stop selling cannabis without a license. 

In June 2023, the Office of Cannabis Management (OCM) introduced enforcement legislation aimed at imposing penalties on unlicensed cannabis businesses. The legislation criminalizes the sale of cannabis and cannabis products without a proper license, with fines ranging from $10,000 to $20,000 per day, depending on the severity of the violation. Under the new law, the OCM is also authorized to request State court orders to shut down known repeat violators. 

Underscoring the issue’s magnitude, recent inspections in October 2023 alone led to the seizure of approximately $6.2 million worth of cannabis from unlicensed shops. To date, the state has inspected a total of 289 locations and seized nearly $50 million worth of cannabis from unlicensed shops. The city is also going after landlords who allow unlicensed cannabis shops to operate in their buildings, issuing fines of up to $10,000 to those who knowingly lease commercial property for illegal cannabis sales.

Since June, the OCM has held 26 administrative trials and levied $220,000 in fines. Decisions are still pending in 10 other cases, reports Ganjapreneur. Most recently, the OCM, along with Gov. Kathy Hochul and Attorney General Letitia James, announced the closure of Big Chief Smoke Shop in Brooklyn, an unlicensed shop that ignored repeated warnings from the OCM. However, with so many unlicensed shops still operational, the state’s game of Whack-A-Mole continues.

Implications for the cannabis industry 

The surge in unlicensed cannabis shops brings forth economic, safety, and reputational challenges for both licensed dispensaries and New York State. 

Consumer safety concerns 

Possibly the most pressing implication of unlicensed cannabis shops is the growing concern for consumer safety. Products from unregulated establishments often lack proper testing and quality control measures. 

In fact, an industry-led study revealed that 40 percent of products from 20 unlicensed stores in NYC contained harmful contaminants such as E. coli, lead, and salmonella. The absence of oversight raises the risk of harmful substances or inadequate labeling of cannabis products and poses many health risks to unsuspecting consumers. Notably, the OCM requires testing for salmonella and other contaminants.

Economic challenges for licensed dispensaries 

The proliferation of unlicensed cannabis shops in New York poses economic challenges for licensed dispensaries and the city as a whole. The presence of unregulated competitors leads to price undercutting, potentially diverting customers away from legal establishments and ultimately impacting the financial viability of licensed dispensaries. Meanwhile, licensed cannabis dispensaries are required to adhere to testing standards, transportation and storage regulations, tax implications, and security requirements that increase their cost of doing business — all regulations that unlicensed sellers can ignore.

Lost tax revenue for New York City

Further, the legal sale of the estimated $484 million worth of products, taxed at the state’s 13 percent rate, could have resulted in $18.4 million in revenue for the city, according to the IBO report. Under the existing regulatory framework, 40 percent of that revenue would have gone to education, 40 percent to community reinvestment initiatives, and 20 percent to drug treatment and education.

The battle against unlicensed pot shops is ongoing

Despite increased efforts by the state to identify unlicensed shops and impose consequences, regulators have only begun to chip away at the illicit vendors in New York City. Meanwhile, cultivators are left with 300,000 pounds of product that they can’t sell to unlicensed shops. 

As the city establishes and regulates its legal marketplace, staying informed is imperative to the success of your cannabis business. For the latest developments on the unlicensed shop crackdowns and seizures, we encourage readers to follow reputable news sources like NY Cannabis Insider. And, of course, we at CWCBExpo remain committed to keeping you updated on cannabis news through our LinkedIn, Facebook, and Instagram channels.