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 operating.
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 & Song, PLLC and Gateway Proven Strategies (GPS.Global). You can read his full bio at: MJBusinessAttorneys.com.