New Jersey Adult-Use Legalization Puts Pressure on Neighboring States

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Earlier this month, the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act. This bill would decriminalize cannabis on the federal level and provide retroactive expungement for certain marijuana offenses. The proliferation of pro-cannabis legislation is also present in state legislatures.

Last week, New Jersey approved a historic bill that will establish rules and regulations for legal adult-use cannabis. The Garden State, which was one of five states that approved cannabis ballot measures this November, is now the first state in its region to legalize both medicinal and adult-use cannabis. Experts, including Marijuana Business Daily, project New Jersey’s adult-use market to become the largest on the east coast, generating $850-$950 million in annual retail sales by 2024.

The New Jersey Assembly passed the bill by a vote of 49-24, while the NJ Senate approved the legislation by a margin of 23-17. As is the case in other jurisdictions, much of the division among legislators concerned the perceived strength of the bill’s social equity provisions. However, the bill in its current form features provisions that would give licensing priority to microbusinesses owned by residents as well as applicants from economically disadvantaged communities and those impacted by the war on drugs. Moreover, Gov. Murphy has signaled his intention to target 70% of the tax revenue to communities most harmed by the war on drugs.

New Jersey’s move to launch an adult-use market may catalyze neighboring states to move forward with their recreational programs. While the entire Northeast and Middle Atlantic will likely feel the pressure of New Jersey’s new market, New York and Pennsylvania are the two neighboring states most likely to feel its impact.

In New York, Gov. Andrew Cuomo recently stated that legalizing adult-use cannabis could provide much-needed revenue and help the state recover economically from the COVID-19 pandemic. Nonetheless, the push to legalize adult-use cannabis in New York has been difficult in recent years. The Governor included cannabis legalization in his last two budget proposals, but he was unable to sustain negotiations with the legislature regarding the allocation of cannabis tax revenue. A new legislative push is expected in early 2021. Pennsylvania appears poised for legalization as well. The state’s medicinal cannabis market is widely regarded as a success and is expected to nearly double to $400-$500 million in sales this year and reach $1 billion in sales within three or four years. Time will tell if New Jersey’s legalization plans trigger a domino effect in New York, Pennsylvania, and other states in the region.

Back in New Jersey, the Governor is expected to sign the legislation. Per the terms of the bill, regulations must be developed within 180 days of the bill’s passage or within 45 days of the appointment of all five members of the Cannabis Regulatory Commission (CRC). According to a published statement by the NJ Senate, key provisions of the legislation include:

Licensure

  • The CRC will determine license caps for each class (according to market demand) and are authorized to accept new license applications to meet increasing demand.
  • The establishment of six classes of licensed businesses: cultivator, manufacturer, wholesaler, distributor, retailer, and delivery.
  • The CRC would determine an application points system based on criteria such as an applicant’s operating, environmental, and safety and security plans.
  • Licensed medical marijuana operators currently in operation are permitted to apply for an adult-use license. Cultivation licenses would be capped at 37 for the initial 24 months. (The limit would not apply to licensed microbusinesses, defined as having no more than ten employees and 2,500 square feet of canopy space.)
  • Priority would be given based on “impact zones,” or municipalities negatively impacted by unemployment, poverty, or past marijuana enforcement activity. To the extent possible, the CRC would grant at least 25% of the total licenses to such applicants or those who employ at least 25% of their employees from such zones.

Municipalities and Taxation

  • The bill would make it more difficult for municipalities to prohibit marijuana operations. Municipalities would have 180 days from the bill’s enactment to prohibit adult-use operations, but they would not be able to ban delivery services to consumers in the area. Each municipality would have the option to decide its cap on licenses, and they are also permitted to charge local sales taxes of up to 2%.
  • Adult-use sales would be taxed at 7%. The CRC is permitted to levy a “social equity excise fee” on marijuana cultivators that would fluctuate depending on the average retail price of cannabis. Proceeds from the excise fee and 70% of the state sales tax would go to programs in communities disadvantaged by the prohibition on marijuana.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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