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Illegal Pot Still Plagues States Where Weed is Legal

U.S. News & World Report logo U.S. News & World Report 7/23/2019 Claire Hansen
a large white building: A tray of several varieties of marijuana plants. © (Getty Images) A tray of several varieties of marijuana plants.

Authorities in California have seized some $30 million in illicit marijuana products in the year and a half since retail sales of pot became legal as part of an effort by the state to tamp down on a flourishing underground cannabis market.

Despite legalizing the sale and possession of marijuana for recreational use, the Golden State is home to thousands of unlicensed retailers, frustrating rule-following dispensaries and denying the state and localities of tax dollars.

And it's not just California. Illicit marijuana markets continue to operate – and are even boosted – in states where adult-use cannabis is legal. An analysis from BDS Analytics, a Colorado-based cannabis industry research firm, estimated that 78% of all marijuana sold in California in 2018 was illicit, as was nearly 90% of the weed sold last year in Massachusetts. More than half of marijuana sales in Oregon and Washington were illegal last year.

One of the main reasons appears to be cost. Marijuana sold at state-legal dispensaries is often more expensive than drugs obtained on the underground market and is heavily taxed, often at multiple stages of the supply chain. Abiding by state regulations can be costly for growers and retailers, too, with licensing fees and other regulations.

Karen O'Keefe, director of state policies for the pro-legalization organization Marijuana Policy Project, says another reason illegal sales continue to thrive is just growing pains in the burgeoning industry.

"There's always going to be something of a transition period from a completely illegal market to a regulated market," O'Keefe says. "It does always take some time to have enough licensed stores and to have enough supply to meet demand."

In Colorado, where sales became legal in 2014, an analysis prepared for the state found that it took until 2017 for the state's pre-existing illicit market to be largely absorbed into the regulated market and for supply to meet demand.

Consumers generally want to buy from legal dispensaries and most retailers want to follow the law, but onerous regulations and slow licensing processes can slow the transition from an illegal market to a legal one, O'Keefe says.

In Massachusetts, where legal sales began in November, increased demand, high prices, and low supply have sustained an underground market.

Twenty-two cannabis retailers have been licensed in Massachusetts, where the rollout of retail sales has been slow, in part because of regulations requiring dispensaries to first negotiate contracts with local governments before getting a state license, according to the Boston Globe. Customers complain of long lines and high prices: Marijuana sold at dispensaries can be double the price of that sold illegally – and that's before state and local taxes, which can add up to 20%, according to the Globe.

When legal marijuana sales began in Oregon in 2017, the government made a concerted effort to minimize entry barriers into the legal cannabis market as an incentive for cultivators and sellers to participate in the regulated market. Now, marijuana is cheap and widely grown in Oregon, and the state's cultivators and more than 650 dispensaries are far outpacing demand. There's also evidence that some of Oregon's marijuana is making its way into states where the drug is not legal.

States have also had to crack down on illegal growing operations, which are, in many cases, harder to track down and easier to hide. With adult-use marijuana illegal in 39 states, a demand for marijuana in the underground market will always exist, O'Keefe says.

Analysts say that decades of a lightly regulated medical marijuana industry contributed to a high number of unlicensed and illicit weed shops in California.

California legalized medical marijuana in the 1990s but largely left it up to municipalities to enact marijuana regulations, according to Alex Traverso, spokesman for the state Bureau of Cannabis Control. Voters approved a ballot item legalizing adult use and sales in 2016 and a regulated retail scheme began at the start of 2018, when medical marijuana shops also suddenly became subject to state and local regulations. A lot of those shops stuck around but have not gotten licensed, Traverso said.

Complicating matters is the fact that cities and counties in California can make their own regulations about cannabis shops, including the decision to ban them altogether.

Los Angeles – the largest U.S. city where marijuana is legal – has restricted its licensing process, leaving shops that want to obtain a license but aren't able to do so in a "weird limbo" Traverso says. A system of overlapping agencies and regulations also makes it difficult to legally run a dispensary. Illicit storefronts far outnumber the city's 186 licensed dispensaries, and consumers don't often know if a store is legal or not unless they check with the city's cannabis agency.

Along with targeted enforcement efforts from both a state and local level, the state has launched a public awareness campaign focused on educating consumers about unlicensed businesses in an attempt to steer them toward legal shops.

But businesses that shirk the law to keep costs down or avoid taxes are the focus of the state – not those waiting for a license.

"If you look at, say, a smaller shop that doesn't bring in a ton of revenue, if you're asking them to pay these taxes and fees, a lot of them are just going to say, 'No, I'll keep moving my operation wherever and try and stay ahead of the state. It's not worth it for me to come into the regulated market,'" Traverso says. "Those are the people we need to do our best to focus on and try to shut down because they are undercutting the legal operators."

Copyright 2019 U.S. News & World Report

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