California’s Illegal Cannabis Problem

As one of the major landmarks in the fight for legalization, Proposition 64 in California brought with it the hope of eradicating the underground cannabis trade in the state.  Passed in 2016, the initiative was supposed to replace the black market with a new, regulated one that would generate millions of dollars in tax revenues and provide Californians with access to safe, legal pot.

But while recreational cannabis sales did indeed kick off in January of 2018, the results have been disappointing.  

Not only have there been far fewer legal sales than anticipated, California authorities have seized over $1.5 billion worth of illegal marijuana in 2019 alone.

The problem isn’t unique to California.  Canada, with its rollout of legal pot in November 2018, has also failed to make a significant dent in its illicit trade.  However, as the largest cannabis market in the world, the extent of the problem in California is incredibly worrying.

The Scope Of The Problem

Even given the size of the overall market in a state as massive as California, $1.5 billion in illegal cannabis is an astronomical number – and that’s just the value of what’s been seized by authorities so far.

As of right now, the black market in California is so big that it actually eclipses the legal one.  Estimates vary, but there’s good data to suggest that there are three times as many illegal cannabis retailers operating in the state as legal ones.  There’s also data projecting $3.1 billion in legal pot sales verses a whopping $8.7 billion in illegal sales in 2019.

To make matters worse, California saw a reduction in legal sales, from $3 billion in 2017 (medical marijuana) to $2.5 billion in 2018, making them the only legal state so far to see their sales actually tank following legalization.

All of these shocking statistics beg the question – what is California doing wrong?  And is there anything that can be done to turn things around?

High Prices And Taxes

One of the big issues with the prevalence of black market retailers is the fact that they aren’t paying taxes, costing the state a tremendous amount in uncollected revenue.  But a big part of the reason why California is in this predicament to begin with is because of the nature of its tax structure.

The state has some of the highest cannabis taxes in legal jurisdictions.  In addition to state and local retail taxes, there’s also a 15% excise tax and a cultivation tax for growers, totaling up to 45% in some areas.

has some of the highest cannabis taxes in legal jurisdictions

All of this is contributing to a significant price discrepancy between legal and illegal weed, leaving California in a similar predicament as Canada.  Not only are the high prices driving consumers to purchase from illegal sources, but they’re also handicapping legitimate industry.

The Persistence Of The “Grey Market”

When most people think about the illicit marijuana trade, they tend to think of street dealers selling out of dark alleys.  In reality, much of the threat to the legal market is coming from groups of well-organized, unlicensed stores. And unlike the dealers of the past, this grey market cannabis industry operates under the illusion of legitimacy.  These illegal storefronts are typically well-financed, and may appear quite similar to their legal counterparts.

This perceived legitimacy, combined with the fact that law enforcement thus far hasn’t been effective in shutting them down, provides illegal businesses with all of the benefits of an environment in which marijuana is legal without any of the downfall.  By avoiding the regulatory process, they dodge the high tax burden legal retailers face, while purchasing their cannabis from illegal sources and passing the savings down to their customers. This puts businesses willing to play by the rules at a major disadvantage.

The Weedmaps Problem

To make matters worse for legal retailers, there’s also the fact that they’re being lumped in with illicit competitors when customers go to search for them.

One of the worst offenders in this practice has been Weedmaps.  As one of the oldest and largest online services in the industry, the platform allows users to list, review and discuss both medical and recreational providers.

The problem is that, until very recently, Weedmaps didn’t distinguish between legal and non-legal sellers.  As early as last year, legitimate cannabis retailers in California have been extremely vocal about raising the issue, claiming that the platform is creating an unfair playing field, causing legal (taxpaying) companies to compete against what are essentially criminal enterprises (in its defense of the practice, Weedmaps claims that the real issue is with a lack of licensed outlets).

While state regulators have tried and failed to crack down on the company in the past, Weedmaps  (possibly due to mounting negative publicity) announced over the summer that it would implement a ban on advertisements from unlicensed sellers.  

However, the fact that the practice has been so widespread and has been going on for so long shows how deeply entrenched the grey market is in the state of California.  

How Can California Clean Up Its Mess?

The good news in all of this is that the government is well aware of the problem they face, and have already started taking action.  Earlier this summer, California state officials tripled the number of raids on illegal pot shops, with Gov. Gavin Newsom authorizing fines that could reach up to $30,000 for businesses that operate illegally.

Governor Gavin Newsom
Governor Gavin Newsom – Photo Credit: Gage Skidmore

The government is also aware of the problems that the tax situation has caused.  Last month, Newsom signed a new bill that would allow legal companies to take advantage of tax deductions.  The current situation makes it impossible for cannabis companies to deduct expenses on their federal taxes, and up until the signing of this new bill, the situation with state taxes in California has been the same.

But while the state should be commended for recognizing and attempting to rectify the problem, there’s still a lot more that could be done.  This includes further tax breaks for law-abiding companies and demonstrating a commitment to crackdown on illegal vendors who hide in plain sight.