The legalization of cannabis throughout the United States has had many surprising effects. Here’s one that no one expected – a boost in black market sales. Much to the surprise of officials who have campaigned for legalization, black market sales aren’t only increasing. They’re miles above the sales of legal weed businesses. There many different reasons that sellers choose to stay on the black market, even when cannabis becomes legal in their area.
In some states that have legalized marijuana (including Massachusetts and California), unlicensed dispensaries and sellers outnumber licensed cannabis businesses. Functioning as private clubs, these unlicensed businesses thrive on the fact that law enforcement is still unable to manage black market distributors. While legalization is a goal for many cannabis sellers, countless factors make them want to stay underground.
The Challenges Of Opening A Legit Cannabis Business
It costs money to start a legal business. It’s not easy for would-be legal dispensary owners to get the banking services they need. For most businesses, it’s simple to call a bank and apply for a business loan. When a potential cannabis business owner is in a state where cannabis is legal, and their bank headquarters is in another state, things get tricky. It can be tough (or impossible) to get a loan, make deposits, or pay employees. Health insurance and other benefits for employees can result in a nightmare of paperwork. Rather than sift through rules and regulations, it can be easier for a business to stay underground, paying employees in cash. Even sellers who have licenses to open a legal cannabis business are sometimes hesitant due to banking issues.
When a cannabis business makes the move to go legal, they have to give Uncle Sam a cut of the profits. This burden can be tough to shoulder for a business that’s getting off of the ground. This is especially true for cannabis businesses in areas where illegal sellers offer lower prices, due to their reduced overhead. It’s hard for any business to turn a profit in the first few years, but it’s even harder when the competition has all the goods and a fraction of the expenses. Some legal sellers report illegal sales to law enforcement, but say that action is rarely taken.
Cannabis consumers are smart shoppers, and most are not willing to pay a higher price for a product the could get cheaper somewhere else. In California, up to 45% of the sale price of legal cannabis goes straight to taxes. Buyers can get cannabis of the same quality on the black market for almost half the price. Massachusetts is having similar issues. The state government predicts that it will take at least three more years for licensed sellers to begin to cut into the profits of the black market.
In some states, startup costs alone make it impossible for a cannabis business to be successful from the ground up. In Illinois, the minimum fee to apply for a license in the first year of business operation is $225,000– an impossibility for a low-level distributor who wants to run a small dispensary. Most people who want to start a business don’t have a quarter of a million dollars lying around. Since it’s not easy for most cannabis businesses to apply for and receive business start-up loans, going legal can be impossible. In addition to start-up costs, states also mandate testing. The cost of testing falls on the shoulders of the business. Testing isn’t a bad thing, as consumers need to know what they’re getting. When states require expensive, specific tests, however, it can put a damper on revenue. License renewals, storefront maintenance, and operating costs add up for a young business struggling to get its feet off the ground.
This isn’t to say that illegal businesses are trying to get one up on the government. Many cannabis businesses operating without a license still pay taxes. They aren’t able to turn enough of a profit to operate as legal, but they’re trying to abide by the law. This can result in a tricky situation for not-yet-legal sellers. They may want to report their income, but don’t want to report the details of their business.
An Ongoing Issue
While legalization has exploded in the United States over the past few years, the issue of legit dispensaries vs. black market is not anything new. Medical legalization began in the early 2000s, and so did the black market issue. Some illegal medical marijuana dispensaries were operating publicly, even though they weren’t licensed. Law enforcement couldn’t keep up with who was licensed and who wasn’t. Many legal dispensaries reported illegal sales to law enforcement, but no action was taken. A lack of enforcement led to frustration among businesses attempting to sell legally.
Most sellers with a thriving cannabis business spent years, even decades, evading law enforcement and operating under the radar. After building a successful client base, those same sellers are among the first to achieve legal status. Their financial assets allow them to float through the legalization process. In an interview with The New York Times, Robert Taft Jr., a licensed cannabis business owner in Orange County, CA, said, “We are the taxpayers — no one else should be operating.” Taft has experienced a stark drop in sales over the past few months, which he believes is due to competition from lower-priced black market sellers. Taft went on to say, “This is starting to get ridiculous. It’s almost like the state is setting itself up to lose.”
State governments are becoming overwhelmed. In many states, one of the goals of cannabis legalization was to ease the burden on law enforcement. Legalization has done the opposite in some markets. State governments are spending time and resources to arrest illegal sellers. This negates much of the profit they expected to make from taxing legal sellers.
Some cannabis activists push for the government to regulate weed the same way it regulates alcohol. In an interview with politio.com, Steve Hoffman, of the Massachusetts Cannabis Commission, says, “I don’t think you can, at this point, regulate cannabis the same way you regulate alcohol because of the federal prohibition.” If the federal government legalizes cannabis nationwide, there would be a greater potential for change.
The key word: potential. In October of 2018, Canada legalized cannabis. In the fourth quarter of 2018, more cannabis was sold in the black market than was sold legally. Like in the United States, price plays a key role. Legal cannabis, on average, costs Canadians 40% more than the same amount of weed on the black market.
Why Some Go Rogue
Some sellers and dispensaries are feeling the heat when it comes to competing with the cheaper prices offered on the black market. Frustrated legal dispensaries are finding that even when they report shady sellers, the government doesn’t take action.
In some areas (such as Oregon), legal sellers are cutting costs. They’re selling cannabis at a price below what illegal growers are charging. Rather than lower their prices, illegal growers are taking advantage of the black market that exists in states that have yet to legalize weed. The exportation of cannabis from legal to nonlegal states leaves law enforcement overwhelmed and understaffed. In Oregon alone, growers produce more than three times the cannabis needed to meet the demand of the state’s legal market. The neighboring state of Idaho has seen more than a 600% increase in the seizure of weed since legalization in Oregon. It’s clear that the black market is strong across state borders. States with a large surplus of cannabis crop- California, Oregon, and Colorado, to name a few- tend to have more growers dealing in the black market of states in which cannabis has yet to achieve legal status.
Another issue that pushes businesses to lie low and stay on the black market: government red tape. In Massachusetts, cannabis became legal in 2017. Today, in 2019, some businesses have been waiting over two years for their paperwork to process. Local and state officials in Massachusetts point the finger at one another when asked who regulates cannabis sellers. Many sellers stuck in this perpetual gray area choose to continue to sell to trusted buyers. Sellers live in fear that their business could be shut down at any moment. That fear and anxiety are better than the alternative: shutting down the business and waiting an undetermined amount of time for the government to give the thumbs up.
California allows cities to regulate cannabis on their own. This creates a world of confusion for both buyers and sellers. 80% of California towns do not allow recreational marijuana shops. This opens the door for black market sellers. If cities and towns begin to allow recreational cannabis shops, it will be hard for the legal businesses to compete with the prices and clientele base of the black market sellers. Without enforcement and consequence for selling illegally, there is little incentive for black market dispensaries to file paperwork to become legal.
Some businesses are getting creative in finding ways to get cannabis to their customers without breaking the law. In Michigan, the recreational use of cannabis became legal in November of 2018. The government told sellers it would be at least a year before the details of setting up a legal business would become available to the public. Sellers began gifting cannabis to their market, offering a free cannabis gift with the purchase of a t-shirt or hat, for example. Delivery of cannabis is not currently legal in Michigan, but the state estimates that more than 100 illegal delivery operations are currently thriving.
Skipping licensing is becoming easier than ever, as cannabis is taking new forms and becoming easier to transport. Edibles are concealable and don’t need the care required for a brick of marijuana when shipped. Vape cartridges are easy to conceal, and look like non-cannabis infused cartridges. As pot becomes more and more acceptable, cannabis will be available in a wider variety of forms. The more creative the weed industry gets, the easier it will be for sellers to continue black market operations.
It’s hard to say what’s coming next for the cannabis industry. If governments begin to crack down on illegal sales, it’s possible that black market sellers could choose to file paperwork and become a legitimate business. Another option as more states become legal: following the example set by Oregon when it comes to encouraging sellers to file paperwork for their business. Oregon worked to minimize the amount of effort it took to make a business legal. There are over 600 legal marijuana shops in the state. Cannabis is cheap, high quality, and legal, and there’s no reason for buyers to hit the black market within state lines. If cannabis farmers get the green light to sell across state lines, this could also help to alleviate the issue.
If legalization continues to sweep the United States, the black market competition may begin to fade. If governments ease regulations and requirements for setting up a legal business, even more sellers will choose to move forward with getting a license. At the end of the day, the government has the power to solve the problem – but it needs to give up some of its control to do so.