Despite the legalization of cannabis in certain states, the black market is still flourishing.
In California, the state’s Cannabis Advisory Committee estimates as much as 80% of the cannabis market in the Golden State remains illicit. The high taxes have been enough to put hundreds of people out of work, with more cuts predicted in the future.
“While California is expected to generate $3.1 billion in licensed cannabis sales this year, nearly triple that amount — $8.7 billion — is expected to be spent in the illicit cannabis market,” the Bureau of Cannabis Control says.
In Massachusetts, the cannabis research firm BDS Analytics estimates 90% of weed sold is illicit, along with over half of bud sales in Washington.
In Colorado, a multi-year investigation led to 250 homes and businesses being raided, dozens of people arrested, 80,000 marijuana plants seized, and $2.2 million in solid gold, expensive cars, and jewels being taken in by the government. That black market operation was run out of middle-class homes in a suburb of Denver. The District Attorney in that area says the black market is a bigger problem now than ever before.
Southern Oregon is now viewed as a “national center of illegal weed cultivation” with the state’s Liquor and Cannabis Commission estimating there could be as many as 2,000 illegal grow operations. Some of those are from locals, while others are run by people from Bulgaria, Argentina, China, and Mexico.
The exact reasons for why the black market remains so successful vary depending on location, but for the most part it all tracks back to one thing: money.
Businesses looking to enter the cannabis industry have to go through an extensive process to get approval to start. The industry is competitive – for instance, Wikileaf recently reported that in Maine, there are complaints of a potentially illegal licensing lottery that favored big businesses from out-of-state.
Growers have a lengthy permit process and environmental review; dispensaries have to submit building and impact reports before they can get going, and sometimes wind up pouring money out the window on plans that wind up never getting approved.
Every step along the way, legal retailers face higher taxes that pay for product testing and public health and safety measures. Every element of that process drives up prices, and none of it exists for black market weed.
When marijuana is legalized for recreational use, it comes with several different sales and excise taxes at both the state and local level, with the exact taxation amount varying by municipality. There are also taxes along the way for the businesses cultivating, manufacturing, processing, and distributing the product. If the product is driven from one jurisdiction to another, it may face a local “road” tax as well.
In California, those taxes increased even further at the start of 2022. The cultivation tax went up for flowers, leaves, and fresh cannabis per ounce. For instance, dry marijuana leaves were taxed at $2.87 per ounce last year, and are now taxed at $3.00 per ounce.
Many people opposed the tax hike, including now-Attorney General Rob Bonta who spoke out against that tax hike, and has tried in the past to lower taxes on marijuana. He told Marijuana Business Daily in a statement, “This short-sighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive.”
The average price of cannabis in the state is determined by the mark-up rate, the California Department of Tax and Fee Administration says. That Administration says California’s current mark-up for cannabis is 80% – a number that’s adjusted every six months.
Another issue in some states is a struggle with access to legal marijuana. Not all communities allow dispensaries, even when the product is legalized statewide. That means people may have to drive long distances to visit a dispensary outside of their county. Some may choose to venture out-of-state, despite the risk of being charged with a federal crime for bringing marijuana across state lines.
Further, some states’ growers weren’t able to increase their production fast enough to keep up with an already-existing medical marijuana market and the emerging recreational market on top of it.
In Massachusetts, for instance, after dispensaries opened up, customers complained about having to wait in long lines. Once they got to the front, they found marijuana sold in legal dispensaries can be double the cost of equally high-quality weed even before the 20% taxes imposed by state and local authorities.
In Arizona, Wikileaf reported experts are warning about an impending marijuana supply crisis since the state went from technical legalization to implementation of its new programs in a shockingly short amount of time.
If people aren’t able to buy marijuana from legal retailers, they may figure the answer is simple: call up your old dealer.
States Start Acting
California has recently made an effort to crack down on the black market.
Assembly Bill 1138 heightens the penalties for operating outside the legal market.
Anyone caught operating without a license will face civil penalties up to three times the amount the license fee would have been. That applies for each violation, and every day in operation constitutes a separate violation.
Further, AB1139 threatens fines of up to $30,000 for anyone providing assistance to an unlicensed dealer. That also counts as a separate punishment for each violation, with each day the person is found aiding and abetting to be viewed as a separate violation.
There are also new regulations intended to “streamline and simplify” things for cannabis retailers in California and provide consumer protections. Some of them are fairly large adjustments, regulating things like video surveillance and the sale of live cannabis plants, the requirements for cannabis-related events, and the requirements for who must carry copies of product test results. It also makes some rules that had been in place as emergency changes more permanent, such as allowing pre-packaged foods and beverages to be served at cannabis consumption lounges.
Public comment on the new rules is open until April 19th and if enacted, the regulations will go into effect in the Fall.