Tips for surviving an OCM enforcement hearing

This post was originally published on this site.

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New York Governor Kathy Hochul delivered a powerful message in Brooklyn on June 22, 2023: “… if you sell illegal cannabis in New York, you will be caught and you will be stopped.” Hochul assembled her entourage for a victory lap after a whopping 31 businesses were raided by the Office of Cannabis Management Police between June 7 and June 21, 2023.

There are approximately 11,000 brick-and-mortar unlicensed cannabis shops in New York. I can hardly call the 31 raids of the last three weeks a “crackdown”.

On the scene, the shop owner receives a Notice of Violation and an Order to Cease Unlicensed Activity, which sets a process in motion. The OCM enforcement team, which seems to vary from four to “seemed like 20″ (according to one shop owner), creates inventory lists of the onerous goods, unceremoniously dumping the flower and pre-rolls and anything else that is loose into a garbage bag.

To my knowledge, there is no process for testing the potency of the seized product, which will be significant if the tax department tries to collect the related taxes from the business owner (as is permissible under the newly amended law).

The OCM police slap the actual charging document on the window. Curiously, they put the sign with the large-font message, “ILLICIT CANNABIS SEIZED” on the outside of the shop window. The penalty for tearing down that sign is $5,000, on top of the $10,000 for operating an unlicensed cannabis business. The reasoning for putting the sign on the outside of the window or door, where any passersby could tear it down, as opposed to inside, right next to the violation, is unclear. Also unclear is the process for assessing the $5,000 fine, or determining the business owner’s culpability in it.

The Notice of Violation instructs the employee who is on the scene (not necessarily the business owner) of the date on which a hearing will be held. Hearings in New York State right now are at OCM offices in Albany or New York, or they are conducted virtually. Eventually, there will also be hearings in Buffalo.

The hearings seem, for now, to be conducted around a conference room table. They are technically open to the press and to the public, but to gain access, you need to contact OCM in advance.

The hearings are conducted according to the rules of the New York State Administrative and Procedures Act (SAPA). They are recorded on Webex, which is useful for preserving the transcript of the hearing, as well as for purposes of having witnesses participate remotely. There are no strict rules of evidence, though you can be sure that the OCM attorney will have photographic and documentary evidence to support their case. It is in the interest of the shop owner to submit evidence before the date of the hearing so that it can be queued up in Webex. The judge is an Administrative Law Judge (ALJ), also on payroll with OCM.

Follow the bouncing ball: the inspectors are paid by OCM, the attorney is paid by OCM, the judge is paid by OCM, the hearing takes place on OCM’s calendar and at OCM offices or virtual platform. This is not very different from other regulatory actions, such as DMV hearings or NY City OATH proceedings, but it takes some explaining to clients who are wary of “the system”.

There are some times at which the hearing feels like a trial, and other times when it feels more like a conversation with the judge and the respective parties.

Done right, the hearing takes at least two hours. Again – prepare the client for this. Attorneys are accustomed to long periods of time being cooped up around a conference room table. Clients are not. It might be necessary to call a break for restroom, liquids, and smokes (outside; OCM does not yet have a cannabis smoke lounge in its office suites!).

Also, prepare the clients for this: the case is not resolved on the spot. After the hearing, the OCM attorney and the defense attorney have two-to-three weeks to submit Statements of Fact and Conclusions of Law, via email, to the judge. The judge then has one month to make his finding. The parties then have another month to appeal. After the judge makes his decision final, his recommendation is voted on by the Cannabis Control Board. If the parties are still not happy, they are free to file an Article 78 case in New York State Supreme Court.

The naysayers of the unlicensed shops are positively giddy with all of this.

But not so fast. What is coming out in testimony may affirm the following positions: 1) the people who are running the shops are ordinary people – not “opportunists”; 2) there is tremendous correlation between “legacy” and the brick-and-mortar shop owner; 3) the shop owners don’t want kids on the premises, and they have processes in place to make sure that sales to underage persons do not occur; 4) the shop owners would leap at the chance to have a license and pay their taxes.

Having all of this on the record in the hearing transcript might actually come back to bite them. Give it time.

None of this will be quick. Last week, I presented the calculation for how many unlicensed businesses there are in New York State. Conservatively, it is around 32,000. I was prowling around on Yelp this weekend, and it seems like I may need to raise that figure again. I completely underestimated how many shops there are in some of the itty-bitty-tiny-towns upstate.

What gets the pulse of pols a-pumping are the approximately 11,000 brick-and-mortar smoke shops. Why? I honestly think it’s the aesthetics of the neon signage. The shops that look like sleek, high-end Apple stores seem to be OK for now.

The Governor has allocated $5 million for enforcement. Let’s do the math (I’m a tax attorney – it’s what I do).

If they send only four OCM inspectors, who stay on the scene about two hours, with each officer making a salary of $85,000 a year, or hourly, $40.87 – let’s call it $40 for simple math. Subtotal of 4 x 2 x 40 = $320

The press has been showing the new OG “OCM Enforcement” jackets, modeled on the DEA Agent jackets. OCM also shows up with tablets, cameras, mobile transport, and government cell phones. Remember that at least one OCM cop has to provide testimony in the hearings. Let’s subtotal all of this at $1000 per raid.

Support staff at OCM have to process paperwork and send digital files to the attorney and to the ALJ. Let’s say they spend 10 hours at another $40 an hour. Subtotal $400

Let’s say the OCM Attorney makes a $150,000 salary, which is $75 per hour. Maybe they spend a total of 10 hours on each case, taking into account case prep, gathering and reviewing evidence, writing the statement of findings, the pre-hearing conference, and the hearing. That’s $750.

Let’s double that for the ALJ. $1500

If the ALJ has flights and hotels. $500

320+1000+400+750+1500+500 = $4470.

And that’s for a case that doesn’t require a lot of extra preparation on the part of OCM attorneys or staff.

With a budget of $5 million for enforcement, they can do 1,118 of these. I haven’t even added the cost of appeals and Article 78 cases.

I doubt they will even collect $100,000 of the $10,000 a day fines that are imposed. And the $5,000 penalty for removing the sign? Doubtful.

We are stuck in an antiquated enforcement model that did not work in prior decades, and which is leaving millions in uncollected tax revenue wafting like tendrils of smoke in the air.

With all of the effort of enforcement, hearings, appeals, and accompanying paperwork, the 1,118 cases in the $5 million budget will not even be a ripple against the 11,000 brick-and-mortar shops, and certainly not against the total 32,000+ unlicensed businesses up and down the supply chain.

Consistently, when I ask shop owners, “If you could get a license, would you apply?” the answer is immediately, “Yes!”

The better way – better than the raids and hearings – is to offer a transition license at a premium fee, in exchange for a pathway to full licensure and full exemption for further enforcement action. We could provide markets for the farmers, products for the medical patients, and tax revenues for communities.

Within weeks or months, the shops that are currently unlicensed will be forced to re-balance their product lines and pricing structures, thus leveling the playing field with the licensed shops. If you can’t beat ‘em, bring ‘em into the inner circle of 280E, sales tax, payroll tax, and cannabis tax.

Sidebar: more than one unlicensed shop owner has asked, “Why can’t I just log on and pay my cannabis tax?” Easy there, fella! The state doesn’t want just anybody paying 13% tax. They only want the chosen few to pay their taxes.

Moving on, I realize that a number of people still hold on to the idea that we will be able to close the majority of the unlicensed shops. Recently, I asked someone what he will do if and when enforcement arrives. “Easy. Mushrooms! The whole shop – mushrooms and psychedelics. Everyone is asking for them. It’ll be great! And the Office of Cannabis Management – they will have nothing to say about mushrooms ‘cause it isn’t cannabis!”

Be careful what you ask for. What comes after the raids against the unlicensed cannabis shops might be far more mind-blowing than what is already here.

Enforcement does not work.

The government lost the War on Drugs.