Global Ganja Report

New York City’s Empire Cannabis Clubs has been pushing the proverbial envelope on the possibilities for unlicensed dispensaries that still comply with the law. But raids on two of their Manhattan locations may provide a test case for the viability of this model.

State tax agents backed up by New York City cops arrived at two Manhattan outlets of the Empire Cannabis Clubs on July 11, seizing a large amount of product at one location and making arrests at both. But the arrests were just for “obstruction” of the raids, which were themselves carried out without warrants.

This represents a first move toward legal action against Empire Cannabis Clubs, the most professional and high-profile of the city’s membership-based dispensaries.

Empire Cannabis insists they are operating in conformity with provisions of New York state’s 2021 Marihuana Regulation & Taxation Act (MRTA). This spring, city and state authorities did indeed launch an aggressive crackdown on the Big Apple’s legion unlicensed cannabis outlets. However, despite receiving “cease and desist” letters from the state Office of Cannabis Management (OCM), Empire Cannabis has gone untouched—until now.

Both locations immediately re-opened for business as usual, and Empire Cannabis faces no charges. Empire Cannabis legal counsel Steve Zissou tells Cannabis Now: “There was no scheduling of an administrative hearing. No sticker was placed on the shops explaining that ‘illicit’ sales of cannabis were taking place at the club. No notice of hearing was left.”

Arrests —but for ‘obstruction,’ not cannabis
The enforcement teams arrived just before midday at the Empire Cannabis outlets on Eight Ave. in Chelsea and on Allen St. on the Lower East Side, for what officials described to the New York Times as a “routine inspection.” But neither the agents from the state Department of Taxation & Finance (DTF) nor the NYPD cops backing them up had a warrant at either location, and at both a standoff with management ensued.

Jonathan Elfand, one of Empire’s four co-owners, tells Cannabis Now that agents pushed him out of the way to enter the Chelsea location after he arrived there in response to the commotion, and that he was briefly detained at the scene.

“I said ‘You are not authorized to come in without a warrant,’ but they just pushed past me,” he says. “I was handcuffed for about 30 minutes, but then released without charge.”

Two employees at the Chelsea outlet were similarly detained, and charged with “obstruction.” According to Elfand, some $30,000 worth of product was seized—vape pens, edibles and flower.

His sister and fellow co-owner Lenore Elfand was arrested at the Lower East Side location after saying she would not consent to a warrantless search of the store. She was taken to the local 7th Precinct and also charged with “obstruction.” Jonathan says she was actually taken to the precinct house in an unmarked DTF vehicle, an unorthodox move. She was released that afternoon. A manager at the LES location was similarly charged, although not taken into custody—just ticketed.

However, officers ultimately backed down and did not actually enter the Allen Street store. No property was seized.

Attorney Zissou takes this as implicit acknowledgement that Empire was legally in the clear. He points out that MRTA explicitly states that authorities must get an order issued by a state judge if barred access to a site for an inspection.

The courts will decide
The crackdown on New York’s unlicensed sector has been long foretold. There are currently only 19 licensed adult-use dispensaries operating statewide, of which eight are in New York City. But there are probably upwards of 1,000 unlicensed ones, even after the crackdown that was launched this spring. The big majority of these are in NYC.

In June, Gov. Kathy Hochul signed into law a new measure jacking up the fines for retail outlet violations—$10,000 per day for “illegal” sales, and up to $200,000 if unlicensed cannabis is found in a store’s inventory.

But Empire Cannabis maintains that this does not change the provisions of MRTA under which it has been legally operating. If no profit is made on the cannabis transfer, and the real money is made on club membership fees, it is not a “sale” under New York state law.

Empire asserts that it has been paying state taxes since its flagship Chelsea outlet opened in October 2021, and the state has accepted the payments. It now has six outlets—in addition to the Chelsea and LES locations, one in Manhattan’s Soho, and one each in Brooklyn’s Williamsburg, Greenpoint and Fulton Mall. A seventh is the works for Midtown’s 34th Street, directly across from Macy’s department store.

“We run under the ‘safe harbor’ provision of MRTA,” Jonathan Elfand says. “Everything we’re doing is completely legal. I’m not making any profit here.”

He says he told that to the agents at the Chelsea store. “They said, ‘Even if you’re not profiting, any distribution of product means you’re required to get a license from OCM,’” he relates. “I said, ‘No, I’m not profiting so I’m not doing business, I’m providing an experience for New Yorkers.’”

Elfand elaborates on how this model works: “We do free concerts for members, vendor days when you can meet vendors from all over the country, consumption lounges, with free use for all members. I don’t just charge a membership fee to acquire cannabis. It’s a full experience. You get to acquire cannabis from other members of the club, who provide it on a non-profit basis.”

And Elfand says he isn’t just waiting for the other jackboot to drop—he’s going on the offensive.

“I’m going to court to demand return of my property,” he says. “If they say its contraband, I’ll say its legal under the MRTA. If they bring up the quantity, I’ll point to the MRTA provisions saying that if you have their permission you’re allowed to posses cannabis for someone else. You wanna tell me I’m not allowed to have this much? Yes, I’m allowed to have this much. Here are the contracts, here’s the company statement that we sent to the OCM. You show me where in the MRTA it says I have to have a license.”

He dismisses Hochul’s new provision as irrelevant to his operation. “All the new law does is raise the fines on people who are doing illegal actions,” Elfand exhorts. “I’m not doing illegal actions.”

As for the taxation question, Elfand and Zissou explain that Empire Cannabis has been happily paying sales tax and the other taxes required of general businesses in New York—but not the special excise tax for cannabis instated under MRTA. This is because a “sale” under general state law is not limited to non-compensatory transfers—but the definition of a “sale” under MRTA is.

“I’m not required to pay that tax because I’m not selling it,” Elfand insists. “I’m not getting any compensation. I don’t have to get a license and I don’t have to pay the excise tax because I don’t sell cannabis.”

“I’ve been waiting for this court battle two years,” Elfand happily concludes. “Let’s do it. I’m ready for this. All this is doing is allowing me to get into court and prove exactly what I’ve been telling them from day one.”

The Department of Taxation & Finance did not respond to a request for comment from Cannabis Now by press time.
 

Cross-post to Cannabis Now