Lack of track-and-trace system at heart of marijuana ‘inversion’ in New York

An unknown but significant amount of the $1 billion worth of adult-use marijuana sold at licensed stores in New York last year originated from other markets in violation of state and federal laws, operators and regulators agree.

But nobody can say with any confidence just how bad New York’s “inversion” problem has become.

That’s in large part because the state still lacks a functioning track-and-trace oversight system, more than two years after the first regulated adult-use sale.

Operators claim smuggling cannabis from out of state into the legal supply chain, a practice known as inversion, also happens in states with track-and-trace systems such as Colorado, as MJBizDaily has reported.

Inversion is widely acknowledged in New York.

Officials at the state’s Office of Cannabis Management (OCM) and Cannabis Control Board admit the gap in oversight helps encourage unscrupulous operators to smuggle marijuana produced in other markets into the regulated supply chain.

And, on Monday, The New York Times reported that officials are investigating several major cannabis brands, including California-based powerhouse Stiiizy, after receiving complaints that branded products originating from outside regulated supply chains are ending up on shelves in the Empire State.

Lack of track-and-trace system at center of issue

Guesses vary wildly as to how much of the cannabis sold by licensed retailers originates out of state.

And, without the OCM releasing detailed production data, it’s hard to even get a sense of a range.

But what is clear is that the absence of a track-and-trace system in New York is causing problems for licensed cultivators and producers, who say they can’t compete with less-expensive products from other markets.

“The failure to implement a functioning track-and-trace system is a catastrophic betrayal of the state’s farmers,” Joseph Calderone, president of the Cannabis Farmer Alliance (CFA), which represents small farmers upstate, told MJBizDaily.

The CFA is the plaintiff in a November lawsuit filed against the OCM that seeks, among other things, a court order forcing the agency to implement seed-to-sale tracking.

“Without it, there is zero ability to prevent the flood of out-of-state, illegal flower and infused products from ending up on licensed shelves – destroying any notion of a fair or legal market,” Calderone added.

Licensed cannabis businesses in New York are required by law to use an “electronic inventory tracking system” that can transmit supply-chain data to state regulators.

Shortly before the state’s first adult-use sale in late December 2022, the OCM selected software company BioTrack as its track-and-trace vendor.

But since then, several “deadlines” for operators to start sharing data with the state via electronic means have come and gone.

Slow timeline, blown deadlines

New York cannabis operators are allowed to track inventory by a method of their own choosing and have known for years that track-and-trace is supposedly coming.

That’s according to both the state’s legalization law as well as subsequent OCM regulations approved in September 2023.

In November, the OCM announced the “implementation of the seed-to-sale tracking system.”

However, a Jan. 17, 2025, deadline has come and gone for all licensees to “obtain a 3^rd party inventory tracking system that will be capable of integrating” with BioTrack.

As of late March, “the majority of licensees have submitted their chosen seed-to-sale vendor to OCM,” the agency said in its statement to MJBizDaily.

“Testing is underway with system integrators to ensure a smooth rollout,” the statement added.

At the March 20 state Cannabis Control Board meeting, the OCM reported it was still “working to implement a seed-to-sale system.”

The latest estimate for when track-and-trace could start in New York is sometime in 2025, the OCM said in a statement emailed to MJBizDaily.

The agency’s belief is that licensing more cultivation capacity in-state will help solve the inversion problem.

The combination of a functional track-and-trace system in time for the 2025 growing season and additional licensed cultivation canopy will discourage “the current issue that we’re seeing around inversion of out-of-state cannabis into New York,” OCM Acting Executive Director Felicia Reid said at the March 20 meeting.

“This undermines the industry’s integrity, health and safety, and of course, New York’s social and economic equity goals.”

In addition to frustrating licensed operators in the state, the situation is astounding observers in other markets – who told MJBizDaily they’re aghast that such a large and vital regulated sector could go without standard guardrails for so long – and confounding New York-based observers.

“I don’t know if OCM is underfunded or understaffed, or there has been a successful political movement to delay track-and-trace implementation, or BioTrack is the cause of the delayed implementation,” said New York City-based attorney Jeffrey Schultz, a partner at Foley Hoag who represents cannabis businesses.

“But until it’s fixed, the suppliers and retailers will continue to face price-compression issues, unfortunately in part due to the inversion of finished goods, biomass, oil and bulk flower into the regulated industry, which benefits nobody but the wrongdoers and with little to no consequences.”

‘No good explanation’

“There is no good explanation for New York’s failure to implement a ‘track and trace’ system, nearly 2.5 years after adult use sales began,” Hirsh Jain, a California-based consultant, founder of Ananda Strategies and lecturer on cannabis policy at the University of Nevada, Las Vegas’ William S. Boyd School of Law, said via email.

“While other states experiencing delays still highlighted the urgency of adopting a ‘track and trace’ system, that sense of urgency appears to be lacking in New York.”

Regulators say they’re still tinkering with the track-and-trace system.

“Testing is underway with system integrators to ensure a smooth rollout,” an OCM spokesperson told MJBizDaily via email.

“OCM is working toward making the Seed-to-Sale Tracking System fully operational for the 2025 (outdoor growing) season.”

In the meantime, the OCM earlier this year launched a Trade Practices Bureau tasked with investigating allegations of inversion.

Anyone caught engaging in the practice risks “significant penalties,” OCM spokesperson Taylor Randi Lee told MJBizDaily.

And earlier this week, The New York Times reported that OCM investigators were investigating a Long Island processor for potentially using illicit source material in branded product.

Several prominent brands identified in the Times report denied any wrongdoing and claimed the OCM had found the processor to be in compliance.

The OCM did not comment to MJBizDaily about that claim.

Concerns about product origin

New York’s struggles with its regulated cannabis market since adult-use legalization four years ago are well known.

Multiple lawsuits challenged the state’s equity-first rollout, with justice-impacted individuals promised the first retail opportunities.

The litigation led regulators and lawmakers to spend most of their energy and attention on licensing retailers and curbing runaway illicit sales rather than scrutinizing issues along the supply chain.

After a slow start that Gov. Kathy Hochul branded a “disaster” and a leadership shake-up, the state on Dec. 31, 2024, celebrated eclipsing the billion-dollar mark in adult-use sales.

The OCM’s director of policy, John Kagia, acknowledged at the CCB’s December meeting that many producers were still sitting on unsold product, a problem that would be solved in part by “getting (retail) doors open.”

Then-board member Jennifer Gilbert Jenkins, whose departure from the CCB was announced at the agency’s February meeting, challenged that logic.

She identified inversion as the problem – and track-and-trace as a potential solution.

“How are we validating the products in stores are actually coming from New York state?” asked Jenkins, a professor at State University of New York Morrisville.

“Because the rate of inversion in this market is the dirty secret that everybody is talking about, that we’re not bringing up (at meetings), that the amount of product that is coming into our legal authorized dispensaries from out of state is displacing New York product.

“I would love for us to be able to try and track that a little bit better … so that we’re not telling the story that there aren’t enough stores open, or that we have too many farms, because I don’t think that’s a fair picture.

“We need to actually look at whether we’re selling New York product.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.