Marijuana Business

California Has Completely Crapped the Bed Rolling Out Legal Marijuana

The black market still dominates. And more enforcement and fines aren’t going to fix it.

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Thanks to high taxes and overregulation, California reportedly has three times as many illegal marijuana dispensaries as it does licensed shops.

And that's probably an undercount. The numbers—873 legal vs. 2,835 unlicensed—come from a marijuana dispensary trade association that made its calculations by looking at who is advertising on Weedmaps, a site helping pot users order marijuana from dispensaries online. There's probably more than a few unlicensed dispensaries out there who don't advertise on Weedmaps either.

The trade association that provided this count, the United Cannabis Business Association (UCBA), has a mad-on for Weedmaps because it has been allowing unlicensed dispensaries to use its platform. The UCBA, which already pushed through a law increasing the fines on unlicensed vendors, is now lobbying for a bill that would prohibit sites like Weedmaps from hosting advertisements from unlicensed dispensaries, enforced by even more fines.

The Los Angeles Times reports that the state has served 19 search warrants and has seized more than $16.5 million in unlicensed marijuana products this year. That's barely even a drop in the bucket. One marijuana industry market research firm predicts about $3 billion in marijuana sales through licensed dispensaries in California and a whopping $8.7 billion in sales through illegal pot operations this year.

Both the state and local governments lump a host of taxes on legal marijuana sales, driving the prices up by more than 30 percent in many places. And in Los Angeles, the city has been dragging its feet when it comes to actually licensing people who want to open legally operating storefronts. The city has received more than 1,600 applications to operate legally, but it has licensed only 187 so far this year. Only now, in September—nine months after it became legal to operate recreational marijuana dispensaries—is it going to approve 100 additional licenses.

If these folks are going through the effort to invest in storefronts or in on-call delivery services and apply for licenses rather than lurking on street corners, it would seem like they actually want to operate legally. But the government has made it too costly for them to do so. And rather than making it easier for these folks to get licenses, UCBA and city leaders are promoting punitive responses, calling for bigger fines and more enforcement. The City of Los Angeles even went so far as to shut down the utilities of illegal dispensaries and do perp walks of the people they arrested. Yet it's largely the city's own fault that it can't get its act together to hand out the licenses people are asking for.

Meanwhile, the UCBA is acting like the taxi cartels that fight ridesharing services because they don't want to lose customers to cheaper competitors. It is true that UCBA members followed the regulations to operate legally. It's also clear that they have a lot of influence on what those regulations are. Their team includes several lobbyists and lawyers who are experts on licensing. These organizations stand to gain by punishing unlicensed dealers and the sites that help advertise them. They want more of that $8.7 billion flowing in their direction.

We're talking about marijuana here. After decades of a failed drug war, it's comically absurd to think a state or city can somehow wipe out illegal pot sales now when it was unable to do so before. Black markets persist when it becomes too difficult for consumers to purchase what they want legally. How many times do we need to learn this lesson?

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  1. Marijuana is NOT legal in California nor any other US State.

    Its heavily decriminalized in some states and that’s it. Taxes on it as a Sin Tax are so outrageous that Black Market weed can be cheaper.

    Repeal the Controlled Substances Act or Marijuana will likely never be actually a legal product.

    1. You don’t know what you’re talking about hayseed. I’d take the legal MJ here in CO over some black market Mexican ditch weed covered in toxic pesticides any day. It may be slightly more expensive, but I know exactly what I’m getting, and and I have dozens of strains to choose from.
      Crawl out of your hole and experience the free market at work. It’s amazing.

      1. Poor Lefty troll. He doesnt even know what a free market means or that the black market is the free market.

        1. Black markets are also free markets, but that doesn’t make them in any way superior to legal free markets.

          That said, I do think he missed the OP’s point – marijuana is still illegal according to federal law, so in a technical sense it’s not a legal product anywhere in the US. I am inclined to agree that you’d see more investment in the industry with the repeal of its federal scheduled status, but then again I’ve been rather surprised at the enthusiasm for cannibusiness investment right now despite its frequent legal troubles.

      2. “… experience the free market at work.”

        High taxes and heavy regulatory burden do not a free market make.

        Pathetic that what has happened in Colorado is what passes for libertarian.

    2. Here in WA legal weed was more expensive than black market weed at first. They adjusted, and legal weed is now cheaper. I doubt that the black market has been eliminated, but at the least they’ve adjusted prices down as well. I’m guessing that the taxes and regulations for legal weed haven’t changed, so the retailers must have dropped prices to gain market share at the expense of profit margins. The growers probably adjusted too. As much as I detest self righteous government money grabs in the form of “sin taxes” (like sugary drinks) I’d have to say legal weed is fairly well priced here in WA.

      1. Taxes actually did come down, because even idiots can read a spreadsheet, sometimes.

  2. Well. it’s Reason that has cheered these marijuana legalization efforts so much with limited licencing agreements.

    They should have pointed out the deficiencies of that PARTIAL legalization then.

    Rather than patting themselves on the back ?

    1. Reason writers have, in fact, have been warning all through this whole legalization process for the past six years or so that overregulation and overtaxation would cause all of this.

      So we’ll continue patting ourselves on the back.

      1. overregulation and overtaxation”

        Permissitarianism is Goldilocks libertarianism.

    2. They should have pointed out the deficiencies of that PARTIAL legalization then.

      They did. Again and again and again.

      I’ll bet you also think they want to force people to bake cakes.

      1. Only for gay weddings though, but not if its marijuana cake.

    3. They pointed it out in basically every article about the subject. They also correctly decided that having illegal storefronts operating out in the open is preferable to ruining people’s lives for possessing a plant.

      1. But on the other hand, maybe the perfect should be the enemy of the good.

  3. >>>comically absurd a state or city can wipe out illegal pot sales now when it was unable to do so before.

    this^. “oh okay guys, you take the reins now. we’ll work @Denny’s”

  4. 2100 illegal dispensaries adverting their presence which have not been shut down? Methinks the prosecutors have better things to do, otherwise that’s about as low hanging as the fruit gets.

    1. I wonder, though, how many of these cases would stand up to challenge.

      My local dispensary has been operating since the late-90s as a medical dispensary, and then went recreational when that became legal. They did everything they were supposed to do, despite receiving conflicting advice from the County, getting a different answer pretty much any time they asked a question.

      One day they had to give child-proof bags, the next it was just paper bags, then it was back to the child-proof bags, then it was the child-proof containers. They could let people in before checking IDs and then they couldn’t, etc., etc.

      Then one day the County told them they aren’t actually licensed for recreational at all and that they’d have to go back to medical only, at which point they had to re-register all of their customers with a McCertification company.

      If they actually got busted for something, they’d have a pretty good case that they were trying their damnedest to follow the law in good faith.

      1. It would still be an expensive defense. I can only guess that sheer numbers make it uninteresting to all prosecutors, even federal. Bigger fish to fry and all that.

        There are so many growers around my area that having too many plants is a matter for code enforcement, not the po po. They come around, tell you 500 is too many, and they can be seen from the street, they’ll come back in a couple of weeks. They don’t even do that much unless they get a complaint. PG&E has been all over the place, trimming trees, replacing poles, and neither they nor their contractors care.

        It’s a very weird change from how things used to be. If someone had said ten years ago pot would be effectively legal, I wouldn’t have believed them; and I sure wouldn’t have believed it would be like this.

        Truth is stranger than fiction, because fiction has to be plausible.

        1. It would still be an expensive defense.

          No doubt, and they do what they can to try to follow what rules they understand.

          I can imagine, though, that they may be one of the businesses that shows up on WeedMaps as an ‘unlicensed’ dispensary. I don’t think the County is trying to be difficult. It’s like Brexit – they have a mandate but haven’t the foggiest idea how to implement it and mostly just avoid dealing with it.

      2. I was looking into the regulations and how to get licences to be a legal dispensary in CA, and it is ridiculous. It as you put you have to jump through so many loop holes and they change what they want or need constantly. It is even worse because even if CA has legalized it each county and each city can make their own laws barring any dispensaries in their county or city.

        I have seen many cities in the greater Los Angeles area, but not LA itself, that will not allow any legal dispensaries to get licenses of have a building in that city, and because of this the illegal dispensaries pop up. If each city has their own rules when CA voted for it to be recreational is crazy. I do love walking into the nice legal dispensaries in OC because they look like an Apple store very nice clean beautiful displays, but not every city in OC allows this.

        When I visited Canada, and I know they have their own issues with the legalization, they did not overly tax it as much as here in California. They also allow you to smoke weed anywhere you can legally smoke a cigarette, which was weird and amazing. The price difference in Canada and California was crazy. I could buy the same amount in Canada for a significantly less cost than in California.

  5. How many times do we need to learn this lesson?
    As many time as it takes for government to realize that we have the right not to respect its authority!

  6. You know you’re in trouble when what Reason calls “crapping the bed” is considered a feature by the local politicians.

  7. Did you actually think they were going to give up complete contrl?

    1. The legalization lobby has been preaching the tax/regulate mantra since it’s inception many decades ago. At no time has any of them pointed out that it is self evident that burning a fucking plant is an individual right. Taxes and regulation were always the accepted end game and the politicians sure ain’t gonna give that up.

      1. At no time has any of them pointed out that it is self evident that burning a fucking plant is an individual right.

        That’s simply not true. I know a lot of people who opposed legalization precisely because of the taxation and regulation that would come along with it.

      2. It’s worth noting that most of the national legalization organizations (NORML even explicitly spelled this out) made a conscious choice to adopt the language of “tax and regulate” simply because they felt that stance was more likely to produce progress in the short term, i.e. it would appeal to a broader spectrum of people, as well as being an easier sell to politicians.

        Arguing that the govt should butt out of personal choices has been a losing game since 1910, but offering some cash strapped politicians a way to get a slice of all that drug money and come out looking like heroes is incredibly persuasive. Their stance all along was simply that yes, this would produce some undesirable results, but it’d be a lot closer to what they were looking for, and they can fight to reduce the taxes and regulation now that the battle for legal status is won.

        Personally, I think they’ve gravely underestimated the difficulty of reducing any taxes or regulations once the govt has the legal power to levy them, but I don’t disagree with their general stance that this produced the fastest progress.

      3. A lot of people wanted it to be legal like tomatoes, but that simply wasn’t realistic. It wasn’t going to happen without regulation and taxation similar to alcohol. States that overdo it with taxation ad regulation will drive people to the black market. They should see that coming. States that haven’t legalized will learn from the mistakes of those that have.

        No state will make it legal like tomatoes though. They’re all going to put age restrictions on it, restrictions on where it can be used and so on and they’re all going to want to tax it. In the long run though competition, mass production, and the economy of scale drive prices down so there is a lot of room for taxes before consumers are paying more than they once payed on the black market. In some states the price has dropped through the floor because they allow a lot of people into the game to compete and don’t have insane taxes and regulatory costs. Legislators need to start legalizing in other states so voters don’t lock them into rigid regulatory/tax systems that produce awful results. They can look at what has worked in other states and what has been a disaster and start out with lower taxes and plenty of growers and retail shops to get the system going in their states and knock out most of the black market early on.

  8. The fact that they are willing to prosecute those selling weed shows it’s about money, not judicial reform.

    1. I think it’s about a whole bunch of different interests that they tried to serve and failed on all fronts.

  9. It is true that UCBA members followed the regulations to operate legally. It’s also clear that they have a lot of influence on what those regulations are.

    Regulatory capture is what happens when stoners sell out.

    1. control?, but they accomplished regulatory capture in the guise of keeping dirty Big Business out of their morally pure pot selling.

  10. How is it compared to liquor? How about compared to liquor establishments when prohibition ended? Did that go smoothly?

    1. Sure. Transitions are messy.

      Compare CA to CO on this issue. CO didn’t screw it up as bad because CO wasn’t as greedy as CA.

  11. DC is the only place that got legalization right. And it happened completely by accident. No taxes or regulations. No officially legal sales either, but that’s not stopping anyone from what I hear.

  12. The UCBA, which already pushed through a law increasing the fines on unlicensed vendors, is now lobbying for a bill that would prohibit sites like Weedmaps from hosting advertisements from unlicensed dispensaries, enforced by even more fines.

    Didn’t take them long to go hard protectionist, did it?

  13. Let’s face it; governments cannot do anything related to retail sales correctly.

    1. True dat.

  14. UCBA needs to try some of their own product and just chill.

  15. I pointed this out over a decade ago, and it’s why I conducted the longest discussion threat in the history of the “Hit & Run” blog.

    A *child* could have seen this coming.

  16. Is it not possible to make a valid point without resorting to terms like “crapped the bed?” I’ve noticed an increasing level of vulgarity at Reason. Does it serve a purpose? I would have shared this on my FB page.

    1. I thought that “Shit the Bed” would have been better.

    2. Cut the post, edit the offending sentence to your liking, and paste. Free speech wins again!

  17. Article is spot on. Some of these cities are basically extorting entrepreneurs and businesses instead of encouraging a healthy market. Once again, California politicians have shown they have an over-inflated ego, sense of self importance, and greed.

    1. Honestly I think most of the local Californian politicians are just desperate to find some way to pay the enormous liabilities their govt union backers have foisted on them. If you want to know what living in Cali is gonna be like in five years, have a look at Chicago, which seems to be the first big city to finally go over the edge. Prepare to be fined for literally anything you can imagine, and to pay through the nose if you have the temerity to run a business without good political connections – or of course, you could move.

  18. Three times as many unlicensed ‘dispensaries’ is what a libertarian calls ‘crapping the bed?????’

    This place is doing it wrong.

  19. I can’t tell you how many times we told them the Estimated Cost of Production for Legalized Cannabis was around $8 per pound outdoors and $225 indoors. So it leaves lots of room for the black market to flourish for a long time as long as taxes are too high..

    https://www.rand.org/content/dam/rand/pubs/working_papers/2010/RAND_WR764.pdf

  20. Like Rubebarbs said: “decriminalization, not legalization.” Nobody important wanted hemp when they could get Vin Mariani and Mrs Winslow’s Soothing Syrup–unless they were suffering from corns. Oddly enough, marijuana was medicinal as all get-out when Cleveland was President.

  21. Science and widespread experience have shown marijuana has no significant harms. Hence, the only regulation it really needs is to prohibition sales to children and provide basic sanitation, as we do for all produce.

    After the dust settles on re-legalization, average quality marijuana sell for $25 to $40 an ounce. It’s just a plant. It will be grown in the best climates and shipped everywhere else. And it will be sold wherever beer and wine are available.

    Then the black-market will have no margin to operate in, and will follow the illegal, moonshiners into history.

  22. “Both the state and local governments lump a host of taxes on legal marijuana sales, driving the prices up by more than 30 percent in many places. ”

    Appropriately, the Laffer curve should be consulted.

  23. Thanks for sharing this article, Nice job

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