Marijuana black market undercuts legitimate business

A man smokes marijuana during a hip-hop performance at the Bushwick Collective’s 11th annual block party on June 4, 2022 in Brooklyn, New York.

Alex Kent | AFP | Getty Images

Booming, unregulated marijuana businesses across the U.S. are undercutting a legal market awaiting banking and tax reforms.

While that’s a problem in states like Colorado, Michigan and Washington, it’s an even bigger problem in New York. Amanda Reiman, a researcher at cannabis intelligence firm New Frontier Data, said unlicensed businesses “take up a significant share of the addressable market.” None of New York’s 36 newly licensed dispensaries have opened yet.

New York’s licensing program lags years behind the state’s complex black market. New York issued its first set of dispensary licenses last month, but recreational marijuana has been legal in the state for nearly two years.

“These stores are masquerading as safe, legal entities,” said Trevet Knowles, press officer for the New York State Office of Marijuana Management, “but currently there are no licensed sales in New York State.”

The problem is especially thorny in New York City, Knowles said. Weed can be purchased from brick-and-mortar storefronts, trucks, pop-up stores, grocery stores and even delivery services that ship directly to consumers. His office has sent cease and desist letters to some unlicensed operators in the state, but some trade groups say there may be tens of thousands of illegal businesses in the city alone.

“It’s almost like a game of whack-a-mole,” New Frontier Data’s Reiman said. “If one falls, the other pops up.”

Lehman said her firm does not track the many illegal businesses that have taken root across the country, but she estimates the national market is worth about $60 billion. Industries regulated by law are only half the picture, she said.

“When you have a pharmacy and a distribution system that pretty much mimics a regulated market, it’s really hard to get people to move over,” Lehman said.

An unregulated market also poses serious health risks to consumers, she said. A November study commissioned by the New York Medical Marijuana Industry Association found that after reviewing cannabis products in 20 illicit stores in New York City, about 40 percent contained harmful contaminants such as E. coli, lead and salmonella.

In addition to the cease-and-desist letters, New York City began to crack down in other ways as well.

In December, Mayor Eric Adams announced the seizure of more than $4 million worth of illegally sold products. His office also issued more than 500 civil and criminal subpoenas as part of a two-week pilot program with various law enforcement agencies.

“We will not allow unlicensed agencies to take advantage of the economic opportunities that legal marijuana provides,” the mayor said at a news conference.

Banking reforms on hold

For the third time this year, the Safe and Fairly Enforced Banking Act, also known as SAFE, suffered a setback in Congress after lawmakers excluded it from a $1.7 trillion government funding bill. The measure would strengthen the legal cannabis industry by allowing licensed businesses to access traditional banking services.

Under federal law, banks and credit unions face federal prosecution and penalties if they provide services to legal marijuana businesses because it remains a Schedule I substance along with heroin and LSD. According to the DEA, a Schedule I substance is defined as a drug that has no currently accepted medical use and has a high potential for abuse.

Without access to traditional banks, legal marijuana businesses are forced to operate on a cash-only model, without access to loans, funding, or even basic bank accounts.

Curaleaf co-founder and executive chairman Boris Jordan said: “Sadly, this is a victory for an illicit market that pays no taxes and does not have proper regulations or testing safety measures in place.”

“The whole industry will be affected by this,” Jordan said.

The SAFE bill, which already has some bipartisan support, will have to be reintroduced during next year’s Congressional session, when Republicans control the House of Representatives.

Executives such as Sunburn Cannabis CEO Brady Cobb said the path forward was “somewhat blurred” given the new political makeup of the legislature.

sticker vibration

Consumers often turn to the black market for marijuana because they can get a better deal there, said Jason Klimek, a marijuana tax attorney. He has advised several cannabis companies and currently chairs the Tax Committee of the New York State Bar Association’s Cannabis Law Section.

Klimek authored a study on marijuana taxes in New York that predicted that the state’s legal marijuana prices could double due to high state and federal taxes.

He said the high price of legal marijuana in New York would “result in legal adult-use cannabis being significantly more expensive than the illicit market” and “surprise” customers. In California, for example, high taxes and competition from unlicensed businesses remain a problem six years after its legal industry launched, he said.

“California is being devastated by their thriving illegal market because legal products are more expensive, more regulated and taxed more,” he said. “They just can’t compete.”

In July, when Gov. Gavin Newsom cut the state’s cultivation tax, it provided a lifeline for small growers. But high taxes still plague adoption in the regulated market. Marijuana sold by California retailers includes a 15 percent excise tax, a 7.25 percent state sales tax and local taxes of up to 15 percent.

Marijuana is sold at the “Freedom Festival” cannabis expo in Bensonville, Illinois, Wednesday, April 20, 2022.

Erin Hawley | Tribune News Service | Getty Images

“While legally taxing is an important part of the current legal model, we also have to strike a balance between sound regulations and a realistic tax structure,” said Lindsay Robinson, executive director of the California Cannabis Industry Association.

According to the Motley Fool, in 2021, California will bring in more than $1.2 billion in marijuana tax revenue. 60 percent of this revenue goes to anti-drug programs for children, 20 percent to environmental programs and 20 percent to public safety.

Robinson worries that under California’s current tax structure, legitimate businesses will “be taxed and disappear.”

In New York, legal marijuana would include a 13 percent retail sales tax and a tax based on the potency level of tetrahydrocannabinol (THC), the psychoactive ingredient in marijuana.

If New York is going to create the lucrative, fair legal market it wants, that tax structure may need to be reworked so stores don’t put their sticker prices away, Klimek said.

He also said New York state should take steps to bring illegal operators under its new legal system, which the New York Office of Marijuana Regulation agreed.

“We recognize that those who have sold in the past are likely to have excellent entrepreneurial skills that can be leveraged in our marketplace,” said Knowles, OCM’s press officer. “We have always argued that those who have had to sell illegally in the past People will have the opportunity to do that in the future.”

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