The regulatory environment for hemp in New York is becoming increasingly challenging. While most licensees are aware of oversight from the Office of Cannabis Management (“OCM”), a more concerning threat has emerged from the New York Department of Tax and Finance (the “Department”). Understanding these enforcement actions is imperative to protecting your business and personal assets.
Unannounced Department Raids
Hemp retailers are now facing inspections from the Department that often mirror or exceed OCM raids. Department agents enter hemp shops without prior notice, wearing police marked bulletproof vests, and seizing products on the spot.
Cannabinoid hemp products are frequently labeled as “illicit cannabis” based solely on packaging and labeling. Certificates of Analysis (“COAs”) are often ignored, and laboratory testing is not conducted. In some cases, Department agents are not even physically present, relying entirely on referrals from OCM. These practices are not based on scientific evaluation and place licensed hemp businesses at significant risk.
Delayed Penalties and Notices of Deficiency
Penalties from the Department can be issued months or even a year later upon an OCM or Department raid. Licensees are frequently caught off guard by Notices of Deficiency, which allow only ninety (90) days to request a tax appeal or conciliation. Missing this deadline can lead to automatic referrals to collections, including issuance of levies, wage garnishment, liens on property, and suspension of driver’s licenses. Once a case is referred to collections and a tax warrant is issued, reopening it is extremely difficult, leaving businesses and their owner(s) with very limited options.
Types of Violations Being Issued
The Department is issuing violations under several sections of the New York Tax Law, most commonly § 496-c(b)(1)-(3) and § 494(a). These violations can have serious financial consequences.
1. Possession of Illicit Cannabis: Under New York Tax Law § 496-c(b)(1)-(3), the Department frequently alleges that seized hemp products qualify as illicit cannabis. Penalties depend on quantity and type:
- Possession of more than five pounds but less than twelve pounds of illicit cannabis can result in a penalty of up to $25,000 for a first violation.
- Possession of more than twelve pounds of illicit cannabis can trigger penalties of up to $75,000 for a first violation, and up to $100,000 for second or subsequent violations within three years.
- Additional penalties apply when possession occurs in a commercial location such as a retail shop, storage facility, or a vehicle used for business, which can add up to $50,000 for a first violation and $100,000 for subsequent violations.
2. Sale or Distribution Without Proper Registration: Under New York Tax Law § 494(a), any distributor or retailer selling adult-use cannabis without the proper tax registration is subject to penalties. While hemp retailers are licensed under the Cannabinoid Hemp Program and pay sales tax, the Department may still allege violations under this provision if it believes the cannabinoid product is adult-use or illicit cannabis.
Even fully licensed hemp retailers with a Certificate of Authority for sales tax are not immune from Department enforcement. These enforcement actions are increasingly systemic and biased rather than based on science, and even fully compliant businesses can face penalties.
Duplicative Violations and Severe Penalties
When the Department issues penalties, they often issue duplicative penalties, targeting both the business and the individual owner(s) for the same alleged violation. Penalties under New York Tax Law § 496-c(b)(1)-(3) can range from tens of thousands to hundreds of thousands of dollars, depending on the quantity and type of cannabis product. Civil penalties are supposed to be preceded by notice and an opportunity for a hearing, but in practice, the Department often bypasses these requirements, raising serious due process concerns. When combined, these penalties can easily reach into the hundreds of thousands of dollars, creating severe financial exposure.
Outdated Addressing and Enforcement Surprises
The Department frequently sends Notices to outdated or incorrect addresses, including old parental homes or residences an individual left years ago. Even in cases where the OCM sealed a property, preventing the business owner from receiving mail, the Department will still send Notices to the sealed address.
It is very difficult to overcome the legal presumption that a Notice is validly delivered, and the Department places the burden entirely on the taxpayer to notify them of any change of address. Many licensees only discover penalties when enforcement escalates, including collections, liens, garnishments, or suspension of driver’s licenses. This practice means businesses and business owners can be penalized without notice, compounding due process concerns.
Practical Steps for Hemp Licensees
To protect your business and personal assets, consider the following actions. Verify and update your contact information with the Department to prevent missed Notices. Keep meticulous records of COAs, purchase orders, and sales documentation. Prepare for unannounced visits from both OCM and the Department. Seek immediate legal counsel if you receive a Notice of Deficiency or are subject to a raid. Educate staff on how to respond if enforcement agents arrive at your premises.
The current enforcement environment is aggressive, scurrilous, and increasingly complex. Vigilance, careful recordkeeping, and proactive legal strategies are fundamental to navigating these overlapping regulatory threats. Penalties from the Department can range into hundreds of thousands of dollars, affecting both your livelihood and personal finances.
Staying informed and prepared is essential to minimizing risk.