Areas that have approved the sale of cannabis still deal with a “gray
market” where legal and illegal marijuana markets coexist. It is
a scenario that frustrates legal cannabis businesses and law enforcement
alike. The surge in cannabis policy reform across the country and world
may have caused many to anticipate a heavy blow to illegal operators,
and black-market activity did experience an initial decline. However,
illegal growth and sale of marijuana prospers today in spite of, and sometimes
because of, legalization.
In January 2019, the City of Toronto voted in favor of allowing brick and
mortar marijuana stores to exist within the city limits, which was swiftly
followed by an announcement that Ontario would only allow 25 stores to
operate throughout the province. Ontario’s Alcohol and Gambling
Commission selected the recipients of licenses through a lottery system,
and only a handful have been distributed. The cap on the number of stores
and the slow process of licensing and opening facilities has resulted
in long lines, high prices, and a reliance on the black market for marijuana.
This includes storefronts that sell cannabis despite lacking the proper
licenses. Illegal cannabis stores in Toronto avoid shut-downs by taking
advantage of gaps in legislation. Some illegal stores lean on the fact
that Toronto law enforcement may not have the resources to launch an investigation
and obtain a warrant to enter the premises, although mayor Mark Sarga
has recently pledged to crack down on the illegal operations. Until the
province distributes more legal licenses and as long as the demand for
illegal cannabis remains, illegal stores have little incentive to stop
Despite the lack of large-scale federal reform in the United States, individual
states that have legalized cannabis face a similar “gray market”
problem. While places like Colorado, unlike Ontario, have an abundance
of legal dispensaries, illegal grow operations continue to exist. In May
of this year, authorities conducted what they describe as the largest
collective marijuana bust in Colorado’s history, seizing over 80,000
plants and making 42 arrests. The illegal game in Colorado primarily involves
the transport of marijuana out of state to areas where it is still illegal.
Law enforcement has found Colorado-grown plants in 34 other states. The
transport of marijuana from areas where it is cultivated like Oregon or
Northern California is not an issue that arose after legalization, but
experts believe that legalization and normalization has allowed the growth
and export of plants to areas where cannabis is still illegal to flourish.
State restrictions on who can obtain a cannabis business license or work
as an employee for a cannabis company has kept some from entering the
legal marketplace. Instead of allowing current participants in the illegal
market to convert their operations into a legal business, these license
restrictions are forcing them to continue to grow and sell marijuana criminally.
In Colorado, licenses are denied to people subject to or discharged from
felony convictions in the last five years and controlled substance felony
convictions in the last ten years. Owners, managers, and employees of
marijuana businesses all need to be licensed. In California, licenses
can be denied to people with convictions substantially related to the
qualifications, functions, or duties of the business.
Some states that allow the legal sale of cannabis have made the legitimate
route for marijuana sellers undesirable by taxing their businesses to
the point of being uncompetitive. This inevitably raises the cost of the
product and is forcing retailers and consumers to the black market. In
California, the state imposes a 15% excise tax, a local government tax
that varies depending on the area, a state tax on cultivation, and the
regular sales tax. As a result, Californians are paying up to 45% in taxes
on cannabis purchases compared to the usual 6% state sales tax. In 2018,
California’s legal cannabis sales totaled $2.5 billion, a $500 million
reduction from 2017. Meanwhile, the state’s illegal market is estimated
to be twice the size of its legitimate one. The overbearing tax policies
have caused the legal market to stagnate and made the illicit one much
more financially appealing.
While legalization has not eliminated the black market, the common thread
keeping illegal operations alive is a constant demand for the product,
tax policies that hamstring cannabis companies, and legal restrictions
on who can buy and sell it.
The black market is here to stay at least for the foreseeable future.
Charles Feldmann is a Founding Partner and Head of International Cannabis
at the law firm Feldmann Nagel Cantafio, PLLC and Gateway Proven Strategies
(GPS.Global). You can read his full bio at: MJBusinessAttorneys.com.