Cannabis has continued to see rises in legal sales and legalization with 22 states and several territories having legalized cannabis sales and three more have it as a ballot question in November. With legalization, comes both tax revenue and markets for the various states that have legalized it. However, even with legal sales, a black market has continued to thrive despite numerous crackdowns.
Cannabis sold illegally is nothing new. It has been a Schedule 1 drug, drugs that include heroin, for over fifty years despite current movements to reclassify it. Even as California worked to decriminalize the drug, the underground market was still there working around the various ordinances with their hidden farms and other shops. As more states legalized or at minimum decriminalized it, the market and buyers just expanded to each state as states set up licensing for each state.
There are many reasons for this headache, chief among them are costs, the demand and lack of federal regulations. Many states that have legalized cannabis have also imposed taxes. Unfortunately, the taxes aren’t just at the state level but also at the county and in some cases the local level. In California for example, cannabis that cost sixty bucks, could easily have 40 percent of that in tax revenue. The black market offers a cheaper alternative to this, as most don’t go through the approvals. Compounding this, the access to capital is severely limited despite the federal government’s steps to reschedule the drugs. Without the startup money, most legal dispensaries can’t operate or get the company off the ground to get started as it might be months before they have a product to sell, based on growth conditions.(1)
Chris Boden of PL Risk has noticed this trend increasing and has offered some insights into the problem. “The cannabis black market poses several challenges to the legal cannabis market. One of the primary negative impacts of the black market is its ability to undercut the prices of legal cannabis products. Due to the lack of overhead costs associated with taxation, compliance, and licensing, black market operators can sell their products at lower prices, making it difficult for legal businesses to compete.”
The other thing driving the black market is the demand. As more states create markets for cannabis, the demand for it grows. With limited number of licenses approved, the supply can’t keep up with demand in most cases. The slow approval process in these states, New York and California especially has left most customers with few regulated options, hence the turn to their black markets in their various states. “This troubling event touches on one of the several underlying reasons as to how cannabis’s more dubious markets are managing to survive despite legalization, as recent data suggests that California produces nearly five times the amount of cannabis as is legally consumed. And the off-state smuggling business that could be created by such a surplus can only be strengthened by the drug’s industrialization.”(2)
Chris has seen what this flood of products has done to the market.
“By offering lower prices, unsafe products, and hindering industry development, the black market undermines the efforts of regulated businesses and poses a risk to consumers. Addressing the black market is essential for the long-term success of the legal cannabis industry.”
Cannabis as a drug has seen increased regulation as more states begin to open up to commercialization. But the market that existed before legalization will continue to flourish as long as the demand is still high, and the governments continue to drag their feet over licensing. With the current federal governments push to reclassify the drug, it might see more changes, but until then, cannabis growers need to follow each states laws.
