Cannabis Licensing and New York’s Gray Market

As New York State moves forward with legalizing recreational cannabis, there are challenges to cannabis licensing and tax compliance that must be addressed. This post will examine the issues surrounding the pre-licensing phase, the existence of illicit shops and unlicensed operators, and tax compliance, as well as explore potential solutions.

Pre-Licensing Phase: Regulatory Uncertainty

One of the major challenges for potential cannabis entrepreneurs in New York is the lack of regulatory framework and guidelines for cannabis business licenses. The Office of Cannabis Management (OCM) has yet to establish these regulations, leaving potential entrepreneurs uncertain about the application process, fees, and eligibility criteria. This uncertainty hinders entrepreneurs from developing a business plan, securing funding, and building partnerships. To address this issue, the OCM needs to establish a clear and comprehensive regulatory framework that will provide certainty for potential entrepreneurs.

Illicit Shops and Unlicensed Operators: Public Health and Tax Revenue Concerns

Another challenge in New York’s cannabis industry is the existence of over 2,000 illegal cannabis dispensaries in New York City alone. These illicit shops and unlicensed operators undermine the legal cannabis industry, as they do not pay taxes or comply with regulations. They also pose a public health risk, as they may sell untested and potentially harmful products. To combat this issue, the state has proposed legalizing cannabis delivery services, which could convert illicit sellers to licensed businesses. Additionally, the OCM has partnered with the state’s Department of Financial Services to monitor financial transactions related to cannabis sales to identify and penalize unlicensed operators.

Tax Compliance: Challenges and Potential Solutions

Ensuring tax compliance among cannabis businesses is a challenge, as the cash-intensive nature of the industry and the lack of federal banking access makes tracking financial transactions and tax compliance difficult. To address this issue, the state is implementing a tiered tax structure for cannabis products. The tax structure includes a cultivation tax on cannabis cultivators, an excise tax on cannabis wholesalers, and a sales tax on cannabis retailers. The state is projected to generate $350 million in annual tax revenue from cannabis sales. However, to ensure compliance, the state must incentivize compliance and penalize non-compliance.


The legalization of cannabis in New York presents opportunities for entrepreneurs and tax revenue for the state. However, the pre-licensing phase, the existence of illicit shops and unlicensed operators, and tax compliance pose significant challenges. The state’s regulatory agency and law enforcement must work together to create a regulatory framework that incentivizes compliance and penalizes non-compliance to ensure the success of the legal cannabis industry in New York. By doing so, New York can create a safe and thriving cannabis industry that benefits entrepreneurs, consumers, and the state’s economy.

Additional Resource

Get a deep dive on cannabis licensing and compliance with Cannabis Law & Tax Specialist Paula Collins on our latest podcast episode.

Watch it on YouTube or listen to the audio on Apple Podcasts and Spotify.

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