The illegal cannabis market continues to thrive in the United States despite the hope that legalization would reduce black market sales. In some states, like California, the problem is significantly bigger than others.
In its 2019 draft annual report, the Cannabis Advisory Committee warned California legislators and Governor Gavin Newsom that a combination of high taxes, onerous regulations, and local bans allow the cannabis black market to dominate “as much as 80% of the cannabis market in California.”
What does 80% of California’s cannabis market mean? Here is some data from the Cannabis Advisory Committee’s report to provide perspective:
- Illegal sales are three times higher than legal sales: In 2019, legal cannabis sales in California were expected to reach $3.1 billion compared to $8.7 billion in illegal sales.
- Tax revenue is about one-third of what the state expected: $1 billion in annual tax revenue from cannabis was projected with the passing of Proposition 64 that legalized adult-use cannabis, but the fiscal year ended June 2019 recorded just $288 million in taxes collected. The estimated tax collection for the coming fiscal year is just $359 million.
In other words, despite the fact that legal cannabis products should be safer and higher quality than illegal products, a large number of consumers in California and across the United States still choose to buy from the black market than through licensed businesses.
Many cannabis industry advocates cite taxes, local regulations, licensing delays (and caps), a lack of law enforcement, and strict state regulations as some of the primary reasons that illegal cannabis sales continue to thrive. Let’s take a closer look at each.
When states and local municipalities add burdensome taxes to businesses across the supply chain and to consumers, the result is a trickle-down effect that ends with higher prices for consumers. In California, state and local taxes can add as much as 45% to the price of cannabis products.
For many consumers, particularly those who have prior experience buying cannabis from illegal sellers, the price difference is too big to ignore. Rather than paying excessively more to shop at legal dispensaries and retailers, consumers choose to buy from the black market.
The high tax problem is hurting the legal market in California as it has done in the past in other states, like Washington. In fact, the problem is expected to get even worse in California in 2020 with the addition of new cultivation taxes that went into effect on January 1, 2020.
2. Local Regulations
When local municipalities ban cannabis businesses, it’s more difficult for consumers to purchase cannabis products. As a result, it’s easier for consumers to buy from illegal sellers. Why travel to buy when a consumer can buy more conveniently and spend less money through the black market?
This is a big problem in California. The California Cannabis Industry Association estimates fewer than 20% of California’s cities allow licensed retailers to sell cannabis for adult use. In Los Angeles County, more than 93% of cities ban retail sales.
3. Licensing Delays and Caps
Many states’ cannabis laws limit the number of business licenses that can be issued. If there aren’t enough licenses to service customers conveniently, many will turn to the black market. In addition, many states haven’t issued licenses in a timely manner. Therefore, consumer demand isn’t met and illegal sales continue to thrive.
Licensing delays have certainly been a problem in California where approximately only 800 of the expected 6,000 licenses were open and selling to consumers in 2019. Considering the size and population of California, it’s clear there is a huge gap that needs to be filled.
4. Lack of Law Enforcement
Many industry professionals argue that a lack of law enforcement is at least partially to blame for thriving illegal cannabis sales throughout the country. As long as there is little risk of getting caught and little threat in terms of penalties if a criminal is caught, then the black market will continue to grow. So far, legal deterrents haven’t gotten the job done.
Law enforcement in California started to make some changes in 2019 that could chip away at the black market. In December 2019, the Bureau of Cannabis Control joined local law enforcement to serve 24 search warrants on unlicensed cannabis shops in Los Angeles. In addition, they arrested staff and seized nearly $9 million in cannabis products, 10,000 illegal vape pens, and $130,000 in cash.
In November, 2019, the Bureau of Cannabis Control sent more than 400 letters to property owners alerting them that their tenants were engaged in the illegal cannabis market. Earlier in the year, Governor Newsom deployed hundreds of National Guard troops to combat illegal cannabis growers.
Other types of illegal cannabis activities that need to be addressed fully are counterfeit products and advertising scams. For example, counterfeiters actively sell fake cannabis products at illegal shops and online, and black market sellers know how to get around advertising laws to show their ads across the web, including on sites like Weedmaps. While Weedmaps has taken some steps to reduce unlicensed cannabis ads, there is still work to be done to remove these ads entirely and redirect sales to the legal market.
5. State Regulations
State regulations can make it extremely difficult for businesses to operate in the legal cannabis industry. From high application and licensing fees and exorbitant taxes to massive capital outlays and overly-burdensome compliance requirements (including testing, tracking, and more), being part of the legal cannabis industry can be excessively expensive and challenging. As a result, many people choose to continue operating in the black market.
It’s estimated that about 75% of all known cannabis sales in California are made by unlicensed sellers to consumers. In addition, huge illegal grow operations are hidden across the state, and unlicensed retail shops are more common in some areas than legal shops. In many areas, when an illegal shop is closed, a new one opens almost immediately.
Until state regulations change making it as easy and profitable to work in (and buy from) the legal market as it is to work in the illegal market, 75% of sales will probably continue to take place between unlicensed sellers and consumers.
Key Takeaways about the Cannabis Black Market Hurting Legal Sales
The idea that legalizing cannabis could end the black market (or at least hurt it) is a good one, but in many states, cannabis programs aren’t set up to effectively do so. Until taxes (and prices) are lowered, regulations are eased, and accessibility improves for consumers, the black market for cannabis will continue to thrive.
Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.