Legal and Accounting Factors to Rise With New Jersey Cannabis Marketplace

by Kathleen Hoffelder, NJCPA Senior Content Editor – March 3, 2021
Legal and Accounting Factors to Rise With New Jersey Cannabis Marketplace

Governor Murphy signed the New Jersey Cannabis Regulatory Enforcement Assistance and Marketplace Modernization Act (CREAMMA) on Feb. 22, 2021, that legalized adult-use cannabis, decriminalized cannabis possession in small amounts and created a regulated cannabis marketplace that will jumpstart cannabis operations in the state. But ahead of new cannabis business development, many issues need to be considered by both accountants and lawyers, said Lisa Gora, Esq., an attorney in the corporate and health law teams at Wilentz, Goldman & Spitzer, P.A., and Joseph Shapiro, Esq., a partner at Middlebrooks Shapiro, P.C., at an NJCPA webinar last week.

Whether New Jersey business owners are looking to operate an adult-use cannabis dispensary, produce hemp-derived cannabidiol (CBD) products or lease property to a cannabis business, they will need to be aware of important federal and state considerations, said Gora and Shapiro. According to Shapiro, “some of these issues will be less complex once federal legalization comes in … and hopefully there will not be too many years between state legalization and federal legalization.”  

Fifteen states currently have legalized adult-use cannabis, with New Jersey becoming one of the most recent states to adopt this measure. Nearly 50 states have medical marijuana programs, which is usually a precursor to having broader legal acceptance in a state. “The political landscape continues to shift, and people are becoming more comfortable with this subject,” explains Gora, noting that with a unified Democratic Congress, it is now more likely for there to be change at the federal level regarding the legalization of cannabis with the Biden Administration, whose platform is more supportive towards the rescheduling or de-scheduling of cannabis from a Schedule 1 substance. This is reflected in the bill sponsored by Vice President Kamala Harris — the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act — which would remove cannabis from the schedules of the Controlled Substances Act.  

Wider acceptance of cannabis has led to at least 24 cannabis stocks now being listed on the New York Stock Exchange or NASDAQ, added Gora. “With progressive cannabis legislation that has been proposed, the support of the people of the United States and the development of cannabis business enterprises, we shall continue to see development in the cannabis industry, and in getting cannabis legalized on the federal level.”

Practical Operations

Operating a licensed adult-use cannabis business, Shapiro reminds, is markedly different from operating a licensed hemp business. An adult-use cannabis business, while legal under New Jersey state law, is still illegal under federal law. By contrast, operating a licensed hemp business is completely legal under both New Jersey law and federal law. There are many practical implications that arise from this inherent conflict between state and federal law.

As cannabis becomes more and more prevalent in New Jersey, CPAs and attorneys will routinely work together with cannabis businesses to tackle these novel issues. Even in simply obtaining a retail license, said Gora, the business owner is expected to prove in the application that they have the financial wherewithal to operate such a business. Even this relatively simply issue may be complicated since most start-ups in the cannabis industry will have to be “cash based” due to the reluctance of banks to provide traditional financing or to provide banking services for cannabis operations. “This reluctance is due to most banks being federally insured; thus, they are subject to oversight by federal regulators and compliance with federal laws. Therefore, cannabis business will have to wait until appropriate protections are in place for banks, such as seen in the proposed legislation, the Safe Banking Act, or otherwise until banks become more comfortable in dealing with these companies,” said Gora.

New Jersey’s Cannabis Regulatory Commission (CRC) is likely to produce a new round of applications for cannabis licenses within six months of the Feb. 22 legislation, according to Shapiro. “Presumably, there’s been a lot of footwork being done, trying to get ahead of the curve here, but we won’t really know until we see it on paper,” he said. There are currently six main classes of licenses under CREAMMA: Class 1 Cultivator license; Class 2 Manufacturer license; Class 3 Wholesaler license; Class 4 Distributor license; Class 5 Retailer license; and Class 6 Delivery license. It is not currently known how many of each type of license will be given out in this first round.

Product Differences

Various distinctions also exist in the cannabis marketplace between products. For example, under federal law, marijuana, which is cannabis with more than 0.3 percent of tetrahydrocannabinol (THC), is still considered a Schedule 1 drug and is different than hemp, which is also cannabis but contains 0.3 percent or less of THC.

State and federal issues can become complicated when considering operations across state lines. Whereas it is not legal to cross state lines carrying or distributing marijuana, it is completely legal to cross state lines with hemp, said Gora. If a company buys hemp in Oregon, she said, and wants to bring it back to a company in Texas, for example, “they are capable of doing that,” but she advises that the company or person crossing state lines should have source documentation (such as lab certifications) to prove and substantiate that the plant or product being transferred is hemp or a product derived from hemp.

On the federal front, the Drug Enforcement Agency (DEA) can get involved if, in its discretion, it has reason to believe that a cannabis company is transporting marijuana. Even though that company may be operating in compliance with state law, if it violates superseding federal law and/or regulations, that company can still find itself in hot water with the DEA, Gora explained.