As part of the recently enacted legislation legalizing adult-use cannabis in each of their states, municipalities in New York and New Jersey may “opt out” from allowing the sale of cannabis within their borders.
New Jersey municipalities had until August 21, 2021, to pass ordinances regarding cannabis businesses, and approximately 400 have banned all cannabis businesses entirely, while more than 40 municipalities have banned dispensaries, but permit other cannabis businesses. By comparison, roughly 100 New Jersey municipalities passed ordinances allowing dispensaries. Under state law, municipalities are prevented from opting out for a period of five years if they did not do so by August 21, 2021.
Meanwhile, New York’s legislation provides municipalities until December 31, 2021, to pass an ordinance regulating the sale of cannabis and many have done so already. In addition to opting out, municipalities have passed ordinances restricting the number of cannabis businesses allowed within their borders, the classes of licenses they will allow, zoning requirements and municipal-level licensing processes. While these opt-outs and other regulations will hinder entrepreneurs seeking to start cannabis businesses, they also present opportunities for those enterprises that are able to obtain licenses and the municipalities that host them.
Generally, the most common reasons given by municipalities for opting out was a fear of cannabis use in public spaces, fear of exposure of children to cannabis and the lack of published regulations at the time of the opt-out (New Jersey only released its regulations on August 19; New York has yet to release its regulations). However, opting out may not assuage any of these concerns. Both New York and New Jersey prevent a municipality from banning possession of cannabis or the transport of cannabis through municipalities. Further, both states’ laws are clear that it is illegal to sell or supply minors with cannabis products. Since a cannabis business would be at risk of losing its license should it provide cannabis to a minor, there is a strong incentive for businesses to strictly enforce the law and not sell cannabis to those under 21.
Finally, the regulations released by the New Jersey Cannabis Regulatory Commission primarily address the requirements for licensure and continued licensure, not how the public utilizes cannabis after it is purchased. It is likely New York’s regulations will serve a similar purpose. Thus, opting out will not prevent cannabis from being used by residents of a town and may not affect the exposure of minors to cannabis.
Opting out will also have financial implications for these municipalities. Both New York and New Jersey allow municipalities to collect tax revenues from cannabis businesses, in addition to various state taxes. In New York, 4% of cannabis retail sales go to the host municipalities, while in New Jersey, municipalities can impose up to a 1% or 2% tax depending on the type of cannabis business. Towns that have elected to opt out may still see widespread use of cannabis on private property within their borders and will receive none of the financial benefits.
For example, in New Jersey, the small cities of Fanwood, Metuchen and Hillside have all opted to ban cannabis businesses despite being entirely surrounded by towns that will permit retail dispensaries. These municipalities will not see any tax revenue, while still facing the potential costs of enforcement of laws regarding the consumption of cannabis on public property.
Meanwhile, the large number of municipalities electing to opt out will make starting a cannabis business more difficult and expensive for entrepreneurs seeking to break into the industry. To complicate matters further for businesses, most municipalities that are permitting cannabis businesses have implemented strict zoning ordinances. These limits greatly reduce the available real estate for entrepreneurs, leading to more competition for locations and potentially higher prices. Further, many municipalities have elected to limit the number of businesses allowed within their borders, incorporate local licensing requirements and implement local licensing fees. Edison, New Jersey, for example, includes licensing fees that in some instances exceed the state’s licensing fees. Municipalities may be able to extract a number of concessions from new cannabis businesses, making the cost of doing business more expensive for entrepreneurs but potentially benefiting the towns in which those businesses are based.
However, municipalities opting out or putting restrictions in place may not be all bad news for those looking to start a business. Both New York’s and New Jersey’s statutes demonstrate a clear preference for granting licenses to businesses owned by women, minorities and disabled veterans, in addition to businesses owned by those adversely affected by the War on Drugs. Likewise, New Jersey’s regulations have made clear that these individuals will have priority when considering licensing applications.
Finally, caps on the amount of cultivation licenses available will not apply to microbusinesses, which are enterprises of 10 or fewer employees, meet certain other limitations on the size of their cultivation facility and number of cannabis plants and are entirely owned by New Jersey residents. Thus, there is still a high likelihood that a large number of cannabis licenses will be awarded to small businesses, and the limit on the number of licenses permitted in a municipality may serve to protect those businesses.
While some licenses are sure to go to multi-state operators, the limit on the number of cultivators or retailers in a specific municipality may prevent those larger companies from moving in across the street from a locally owned company and pricing them out of business. Further, some towns have specifically reserved licenses for microbusinesses, ensuring that businesses operating within their borders will be locally owned and employ from within the town.
Cannabis businesses and consumers may fear that the string of opt-outs and local ordinances will lead to less available cannabis and higher prices. There is reason for hope with regards to these concerns as well.
When Colorado first legalized adult-use cannabis, approximately 70% of municipalities elected not to allow cannabis businesses, and a majority still do not allow for dispensaries. Yet Colorado’s cannabis industry has more than tripled since it started, and average prices have fallen during that time. As municipalities in Colorado saw that adult-use cannabis didn’t devastate neighboring towns, they elected to allow their own local businesses. Now that New Jersey has released its regulations, we may see a wave of municipalities that had previously opted out electing to allow some businesses within their borders.
If New York and New Jersey follow the course plotted by Colorado, many consumers and entrepreneurs may find that they are pleased with the results.
Adam J. Horowitz is an associate in the litigation department at the law firm Cole Schotz in the New York office. He handles an array of matters for businesses of all sizes, in addition to counseling cannabis companies on regulatory and licensing issues.