The Marijuana Black Market in California Keeps Growing

According to California authorities, the state’s black market for unlicensed cannabis products is expanding under legalization.

In a New York Times exposé published on Saturday, California state officials and cannabis industry insiders said black marketeers were outcompeting licensed weed businesses.

The problem, officials say, is that black market weed isn’t subject to the state’s stringent regulations, which means none of it undergoes lab testing. Untested cannabis products could contain dangerous contaminants, such as mold or pesticide residues.

Additionally, black market weed doesn’t bring in tax revenue. California currently imposes a tiered excise tax on all licensed cannabis products.

But those taxes, coupled with the expenses from lab testing, have forced the legal market to keep its prices high. Cannabis consumers, many of whom have been buying from small family-operated pot farms for decades, prefer to buy weed at the black-market prices, which can go for as low as half the price as the legal stuff.

Roughly 80 percent of California’s municipalities do not allow licensed pot shops, which makes easy access to legal cannabis difficult in many towns and counties. Without nearby retail stores to buy weed, many consumers turn to their local black market dealers.

“This is starting to get ridiculous,” Robert Taft Jr., a licensed cannabis business owner in Santa Ana, California, told the New York Times. “It’s almost like the state is setting itself up to lose.”

Taft has invested heavily in the state’s legal cannabis. He founded and manages at least three cannabis operations: a dispensary called 420 Central, a distribution center, and a lab testing facility. Yet despite covering practically every major sector of the industry, he said sales have slumped since the state went legal in January 2018.

According to authorities, the black market also thrives due to increasing demand outside of the state. Black marketeers in California produce an estimated 11 million pounds of weed that is later transported elsewhere — including other countries — through the mail, private airplanes, or other delivery services. Organized crime can manage large-scale pot operations under the cover of legalization.

California’s Department of Fish and Wildlife told the New York Times that it seized more than double the amount of illegal weed in the year after legalization, compared to the previous year: from 700,000 plants in 2017, versus 1.6 million in 2018.

In February, California’s Governor Newsom requested additional funding from the federal government to crack down on illicit pot grows. Since then, the state has rolled out its National Guard to raid unlicensed operations, but some industry leaders believe using the military to enforce weed laws is overkill.

“The system of temporary permits and to annual permits is kind of in major disarray at this point,” Michael Katz, a co-founder of Emerald Exchange, told CNBC earlier this month.

“Instead of putting on a show and taking out the National Guard, there's a lot of regulatory fixes that we think should be offered to help more cultivators enter the regulated space.”

California’s legislature recently advanced a bill to extend temporary grow licenses to hundreds of the state’s weed farmers. As for high taxes and even higher barriers of entry to break into the industry, those issues remain unresolved.