CREMA Provides the Framework for the Regulated Recreational Cannabis Industry in New Jersey, but Disincentivizes Businesses From Seeking to Achieve Certain Legislative Goals

In November 2020, New Jersey voters passed the referendum to add an amendment to the State Constitution for the legalization of recreational cannabis by a resounding margin of 2 to 1. The amendment went into effect as of January 1, 2021; however, implementation and the establishment of the legal recreational cannabis market requires further legislative and regulatory action. As the first step in this process, the State Assembly and Senate each passed the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (“CREMA”).

CREMA is the result of tireless legislative negotiation that began well before the November 2020 vote. The end result includes provisions aimed at public policy and social justice considerations, and at creating a competitive business marketplace. For example, under CREMA, the Legislature takes effort to address the disproportionate negative impacts that cannabis prohibition has had on Black New Jerseyans and other minority communities. With the goal of promoting social equity and redressing the historical impact of unequal application of drug laws on minority communities, CREMA provides priority for license applications to businesses located in “impact zones,” which are defined as municipalities that have a population of 120,000 or more or that rank in the top 40 percent for cannabis-related arrests, and mandates that at least 70 percent of tax revenue on retail sales is appropriated for investments in impact zones. Additionally, CREMA provides opportunities for “microbusinesses” to exist and operate beyond the limited number of licenses that may ultimately be available for larger companies that likely have established themselves in other states with legal recreational cannabis markets. However, the broad and categorical preclusion of licensees and property owners from eligibility for tax and other economic incentives is counterproductive to these important social justice and competitive business goals.

CREMA Section 37 prohibits any person or entity that receives a license to operate a cannabis business from being eligible for any “State or local economic incentive.” Moreover, any property owner, developer, or operator of a property that will be used for the purposes of a licensed cannabis business also is ineligible to benefit from any such incentive. This prohibition is broad and includes certain economic incentives that have been established specifically to benefit many of the same areas that are included under CREMA’s definition of impact zones and to assist small businesses that enhance and promote community benefits, such as job creation and other economic advantages. For instance, the Brownfields and Contaminated Site Remediation Program and the newly created supplement to the Brownfield program, the Brownfields Redevelopment Incentive Program, are set up to compensate developers for remediating and redeveloping vacant and underutilized properties, which are often located in the same overburdened communities that CREMA defines as impact zones. Also, the Main Street Recovery Finance Program provides grants and loans to small businesses that provide certain demonstrable benefits to their communities. Section 37 would preclude otherwise eligible licensees and property owners from taking advantage of these programs. Thus, Section 37 effectively disincentivizes a developer seeking to work with a cannabis business from undertaking a remediation and redevelopment project that would likely provide significant economic benefit to a community, even if the property were located in an impact zone.

It is worth noting that New Jersey is in the awkward position of legalizing cannabis while it is still illegal under the federal Controlled Substances Act (CSA). Additionally, the federal Internal Revenue Code (IRC), Section 280E prevents illegitimate businesses from claiming tax deductions or credits. IRC 280E is specific to businesses that consist of “trafficking in controlled substances” that are listed under schedule I and II of the CSA, which currently includes cannabis.

Notwithstanding those concerns, Section 37 goes beyond IRC constraints and, importantly, does not expressly rely on IRC 280E or cannabis’s continued inclusion as a schedule I controlled substance under the CSA. IRC 280E does not, by its terms, extend to state tax allowances. Furthermore, if cannabis were to be removed from schedule I (and there has been considerable effort on this front that has gained momentum over recent years), Section 37 would continue to prohibit cannabis licensees and property owners where cannabis businesses operate from enjoying all state tax benefits and incentives.

New Jersey is certainly looking at the recreational cannabis market as a tax revenue generator. The Legislature has further provided opportunities for local businesses to find their place in the industry, and for the industry to provide job creation and other economic benefits in the communities in which cannabis-related arrests have wreaked the most havoc over the years. However, Section 37 disincentivizes the industry in a way that is counterproductive to these ends.

Cannabis business owners, hopeful licensees, developers, and property owners looking to become involved with the cannabis industry should not hesitate to contact the author of this article with any questions or for further discussion on this issue.