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California's Legal Weed Is So Heavily Taxed and Regulated That the Black Market Might Survive

"The situation in the market is pretty dire," one major cannabis seller told us.

Anyone over age 21 in California can now walk into a store and pick up some marijuana. After three months of legalized recreational cannabis sales, how is the industry doing?

To learn more, we tracked one product—the Kiva chocolate bar—up the supply chain, from seed to sale.

What we found was surprising: Cannabis entrepreneurs are anxious about the future of the legal market under California's highly regulated and highly taxed system. Under these conditions, some industry insiders expect the black market will continue to thrive.

"The situation in the market is pretty dire," says Kristi Knoblich Palmer, COO and co-founder of KIVA, which recently had to lay off employees for the first time in its history. "That has everything to do with the cost of cannabis to the end consumer."

Produced by Zach Weissmueller. Camera by Alex Manning and Weissmueller.

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  • No Longer Amused||

    Washington's black market for weed didn't go anywhere. I suspect as long as the taxes remain stupidly high there will always be a black market.

  • Leo Kovalensky II||

    There's still a black market for cigarettes and they've been legal (yet heavily taxed) for a long time now.

  • Cloudbuster||

    And the black market is proportional to the tax burden. You don't find the consumer end of the black market in tobacco-growing states (though obviously they source their product there). New York, on the other hand, invites a black market with its ridiculously high cigarette tax rates.

  • Agammamon||

    The insanity is that people buy cigarettes here in AZ to smuggle them up to NY.

  • marshaul||

    Dude, I making way more than $7k a month smuggling cigarettes from AZ to NY. You need to think more about your markup...

  • Leo Kovalensky II||

    Was the bracket just a ruse for you to take on this additional sock?

  • DajjaI||

    Yes taxes are high - 24% in LA - but still, weed is pretty cheap. And you can get a doctor's rec to avoid the tax, which is also pretty cheap and easy to do (just say you need it for anxiety or sleep). I think the black market is more of a cultural thing, for rebellious types who don't care as much about purity. As for Kiva, I think it's great. But they are very potent, so take only a single square of the chocolate bar - not the whole thing! (And wait an hour before taking more.)

  • sarcasmic||

    Once you get that doctor's rec you surrender your 2A rights. The feds can legally search your home for firearms, and seek a 25yr sentence for each one they find. Doesn't mean they will, but they can. Doesn't seem worth it to me.

  • dave b.||

    They already surrendered them by living in California

  • sarcasmic||

    True. The latest pistol I purchased has a big bold sticker on the case that says "NOT LEGAL IN CALIFORNIA".

  • Citizen X - #6||

    "This product is known to the state of California to cause cancer."

  • ThomasD||

    Kowtowing your way to libertopia I see.

    Enjoy the soma.

  • ||

    And you can get a doctor's rec to avoid the tax

    Technically speaking, yes, but the place I go, which is still one of the only licensed places in the county, just charges recreational tax on everyone. Plus, there's been a crackdown on the doctors, and they're harder to find now, too.

    That's on top of the stupid "child-proof carrying case" (i.e. opaque zip-lock bag) we all have to carry with us now, and the extra person the dispensary needs to check to make sure your purchase is in the opaque bag before you leave the store with the big pot-leaf sign, so that no one knows what you bought, I guess.

    The persistence of the black market is not hypothetical - if anything it's getting more robust.

  • ||

    The story implicitly discounts without evidence the overall potential market of buyers who would never buy on the black market. That market is not going to materialize overnight. I'm sure there's a point where the taxes would be just too damn high, but I suspect that many consumers would prefer a product that a higher standard of production values and vendors with an incentive to not deliver crap vs. the risk/hassle of dealing with black market vendors with cut rate products.

    There's black markets in almost all moderately to very expensive goods. A more substantive analysis here would be the impact on the volume of illicit weed coming from Mexico and further south. One would suspect a substantive impact there by the end of 2018. If not...then I think that's where the real story is. Not just the black market, but the particulars of that market.

  • Francisco d'Anconia||

    but I suspect that many consumers would prefer a product that a higher standard of production values and vendors with an incentive to not deliver crap vs. the risk/hassle of dealing with black market vendors with cut rate products

    Competition will drive the black market to improve

    Win!

  • ThomasD||

    Don't be so harsh. He's just extolling the benefits of regulatory capture.

    Permissitarians are like that.

  • ||

    Black markets in tobacco and alcohol both deal in products which are manufactured by non-black market entities. They are tax arbitrage based black markets.

    Weed will likely go that route as well, particularly for weed based consumables.

    Competition will only improve black market weed if the producers are able to prove a quality product. For that to happen, they'll need to be legal producers. Otherwise, the black market discount willing to be paid by consumers will be primarily a risk discount. And I still believe that long term, the risk discount will be less than the tax charged to legal producers (in other words, consumers will be less willing to take on the risk vs. paying for the higher priced/taxed goods).

  • marshaul||

    Competition will only improve black market weed if the producers are able to prove a quality product. For that to happen, they'll need to be legal producers.

    Egregious question-begging.

    I submit that most dedicated users would take severe umbrage at your suggestion that they require regulatory bonafides in order to discern quality product.

    You can smell it, for Pete's sake.

  • ||

    that many consumers would prefer a product that a higher standard of production values and vendors with an incentive to not deliver crap

    It's the licensed dispensaries that are infamous for peddling cheap crap for high prices. It's the black market where you find the quality stuff at a reasonable price. Or so I hear.

    In this case, you're paying a premium for convenient and legal, and you're sacrificing quality to get it.

    A more substantive analysis here would be the impact on the volume of illicit weed coming from Mexico and further south.

    My understanding is that it's been quite some time since a significant amount of weed crossed the border. Domestic production became safer, cheaper, and much higher quality after medical passed 20-odd years ago. Mexican weed has long been bottom-shelf stuff.

  • marshaul||

    Square = Circle is largely correct. So I hear....

  • Agammamon||

    The story implicitly discounts without evidence the overall potential market of buyers who would never buy on the black market.

    Its weed man. Its been available on nearly every street corner from your friendly stoner dealer for over a generation. The market potential of people who would have never bought from a black market dealer is near nil.

  • Curly4||

    The legalization of marijuana will make almost impossible to catch the illegal stuff also.

  • sarcasmic||

    Not really. They just have to require that the legal stuff stay in the original packaging to prove it is legal. If it's in a baggie then it's illegal. Busted.

  • SQRLSY One||

    Buy yourself ONE set of original packaging... Or maybe start selling "faked" original packaging? ... And then keep stuffing your untaxed, illegal weed into re-used "real", or fake, "original packaging"!!!

    Problem solved, tax pigs thwarted!

  • SQRLSY One||

    What I meant to say is, do NOT do this, PLEASE!!! Government Almighty NEEDS your tax money, to go and bomb third-worlders who grow stuff we don't like, or to hold data (emails etc.) about or from Americans who Government Almighty doesn't like.

  • EscherEnigma||

    Don't most of these decriminalized/legal weed laws include a provision for growing your own plants (under a certain amount)?

    Assuming California has such a provision (I think it does, but I'm not bothering to check), requiring such "packaging" sounds infeasible.

  • ||

    Don't most of these decriminalized/legal weed laws include a provision for growing your own plants (under a certain amount)?

    I'm speaking from memory here, but I seem to recall that you have to have a medical card in order to grow, and you're pretty limited in how much you can grow (although you can grow plenty enough for one person).

    The new law, however, changed a lot of things and further restricted who is and who isn't allowed to grow. A lot of suppliers who have been operating under the table in a gray area for decades are now officially "unlicensed" and have to try to compete with the few licensed industrial operations that are cropping up.

  • EscherEnigma||

    Well I went ahead and looked it up. Found at least one county webpage (Sonoma County) that spelled out local law.

    And what I found was that you have to be over 21, no more then six plants, and there may be weird restrictions on where you can grow it based on locality†.

    So yeah. Personal grow is permitted, but if you live in an apartment with no garage or backyard it might be complicated to comply.
    ________
    †Apparently local authorities can ban outdoor growing but not indoor growing, but you're not supposed to grow it in your house if you have a garage or shed you can grow it in instead. There was also a line about being allowed to grow it inside your house if you didn't have a garage or shed, so I'm going to leave it at "weird restrictions".

  • ||

    So no need for a medical card for personal growing, huh? Some of the leaflets I was getting may have been exaggerating things.

    And yeah - it seems like six plants should be sufficient for personal use, as long as you're not into variety.

    So far, for "packaging" I'm just seeing the same stuff as before, but with the added "child-proof" zip-lock bag I mentioned above (which is only used to get the weed from inside the store to outside the store, at which point you are free to remove it from the bag). Once it's in your pocket, it would be very, very hard to distinguish "licensed weed" from "unlicensed weed."

    Mainly what it seems like is that none of this was terribly well thought out, and the producers and sellers are experimenting with what does and doesn't get them in trouble. So far, authorities seem to have been being fairly hands-off about the whole thing.

  • EscherEnigma||

    Mainly what it seems like is that none of this was terribly well thought out [...]


    Sure, but that's what happens when your legislature refuses to take action so you get citizen propositions instead.

  • Naaman Brown||

    I suspect the tax enforcement effort would be to identify and interdict illegal traffickers at the distribution level, not identify and interdict illegal product at the consumption level.

    Counterfeiting of legal packaging could become a cottage industry.

  • Agammamon||

    You'd think. But its a lot easier to make busts of buyers in stings than to find producers.

    Look at how they do it for moonshiners.

  • EscherEnigma||

    Not impossible, but more difficult, and less violent.

    And that still sounds like a "win" to me.

  • Number 2||

    I thought the California Cannabis law required that preference be given in licensing to those minority communities harmed by the racially disproportionate application of the laws criminalizing pot. The pot merchants in this video seem awfully white to me.

    But why am I surprised? People in the minority communities harmed by the racially disproportionate application of the laws criminalizing pot are highly unlikely to be able to afford the cost of compliance with the regulations California has imposed on "legal" marijuana.

  • marshaul||

    Regulatory onus nearly always benefits those with prior advantage.

  • Juice||

    Awesome weed is going for $50-60 oz in certain places, from what I understand (Oregon, Colorado, and places in Canada).

  • Juice||

    'Decimated' by oversupply, Oregon wholesale prices for outdoor-grown trim, flower for oil drop to $50 a pound

    Wholesale prices for trim and outdoor-grown marijuana flower sold to processors have dropped to as low as $50 a pound. According to one industry insider, prices have undergone a 50% annualized drop over the past two years.

    Actually someone posted signs for $50 oz retail, but I can't find it with the googlings. $50/lb, now we're talking! I

  • Ecoli||

    Fifty bucks a pound is about ten times more than it is worth.

    Can you imagine growing and selling tomatoes for $50/pound, wholesale?

    Farming won't make any normal guy rich.

  • ||

    Keep in mind that one pound of tomatoes, depending on size, is about 3-4 tomatoes. One pound of MJ fills a garbage bag, and would last a moderate smoker about a year.

  • sarcasmic||

    At the height of my smoking days I was at 1/4oz a week of Mexican. That is still less than a pound a year. Currently a half ounce of the good shit lasts me a year.

  • ||

    At the height of my smoking days I was at 1/4oz a week of Mexican. That is still less than a pound a year.

    Yeah - how much that is was really driven home for me when I read somewhere that Reagan's famous declaration that MJ was proven to cause brain damage was from a study where a Rhesus monkey was forced to inhale one pound's worth of MJ smoke through a gas mask in fifteen minutes. It caused me to figure out exactly how much a pound really is - i.e. they force-fed this monkey in fifteen minutes as much as a really, really heavy smoker would smoke in more than a year.

    Needless to say, when that study was made public, most reviewers concluded the monkey's brain would have been damaged by inhaling that much of any kind of smoke that quickly.

  • gaoxiaen||

    The researcher was Dr. Gabriel Nahas, IIRC. Many of the monkeys died from suffocation, thus brain damage.

  • Devastator||

    Damn I'd be afraid of that monkey if it wasn't braindead after that much pot. Fuck scientists can be cruel bastards.

  • Rastaman||

    More like it fills a large ziplock bag.

    Ecoli- Have you ever grown cannabis? Even black market costs more than $50 a pound to grow.

  • EscherEnigma||

    Farming won't make any normal guy rich.
    Not if you're farming food staples.

    But if you swap over to luxury items that sell for much higher (because of demand) then the labor it takes to produce and prepare them? Then it's just dandy.

    Which is to say, regardless of the current regulation/taxation environment around MJ, just by virtue of it being a luxury item it's always going to have a price disproportionate to it's actual production costs.

  • marshaul||

    Production costs aren't as low as y'all seem to think.... Certainly not comparable to tomatoes.

  • sarcasmic||

    I was paying $80 for an 1/8th back in the late 80s, early 90s, for the good shit. Times have changed.

  • ||

    $35 for an eighth has gotten common in CA, but I have a hard time imagining $50/oz. Are you sure that was retail and not wholesale?

  • Josh Walker||

    Here in CO, a lot of dispensaries sell ounces of shake for around $50. If you keep an eye out for deals, though, you can sometimes find an ounce of top shelf bud for $80 plus tax.

  • marshaul||

    Key word: trim.

  • Naaman Brown||

    When they repealed prohibition of alcohol they set the taxes on alcohol high enough to provide an economic stimulus to keep moonshining and bootlegging profitable; the Bureau of Prohibition became the Alcohol Tax Unit.

    Sounds like the same thing is happening with marijuana. We may have legal taxed pot and a War on Untaxed Pot, too.

  • Citizen X - #6||

    When Hillary Clinton said that we can't legalize drugs because "there's too much money in it," she was right, but not at all in the way she meant.

  • ThomasD||

    She can actually be honest in unguarded moments.

  • Citizen X - #6||

    And when she is, it almost invariably reveals something horrible about her worldview and political goals.

  • ThomasD||

    That is the tell.

  • Ecoli||

    Hillary was just demanding her cut. To support charity in Haiti.

    Chelsea tried, really TRIED, to care about money but it just wasn't in her. She had to recline on a chaise lounge and gaze out her penthouse window at the greenery of Central Park to recover from her efforts.

  • Hank Phillips||

    I remember a Rudebarbs cartoon depicting this very situation. The punchline was "decriminalization, not legalization!" Observe that econazis and communists have now finally come around to wanting the pothead vote, and they say "TAX AND REGULATE!" This is the totalitarian mentality showing its true colors.

  • marshaul||

    I still don't think etymology supports this semantic paradigm.

    "Decriminalization" clearly means eliminating the criminal status of something -- this very much fits with the fact that many states did remove criminal before civil penalties on the road to further steps.

    That which is not explicitly prohibited by law has always been ipso facto legal. Therefore "legalization" is intrinsically nothing more than the elimination of legal prohibition. QED.

    Tax-and-regulate (something I remember arguing against to MMJ advocates nearly two decades ago) is merely another, more onerous, form of decriminalization. Yeah, failing to obtain the proper license may not (or may still) be a criminal offense, but it isn't "legal" in the sense that most day-to-day activities are "legal": by virtue of not having been prohibited.

    It is a truly indoctrinated mind that associates the concept of tax-and-regulate automatically with "legalization", which historically implies the precise opposite.

  • ||

    Removing cannabis from the CSA is needed to normalize the market. Should that happen (along with a non-punitive tax structure), the business will look nothing like it does today. It will become a commodity, and prices will drop. The black market will never go away, of course, but it will noticeably shrink.

  • Devastator||

    Everyone knew the black market would always be there, it's just what percentage would remain. Potentially demand could go up enough that it basically remains unchanged now that weed is legal.

  • JeremyR||

    Well, yeah, cigarettes are one thing keeping the Mafia alive. And alcohol taxes were what fueled bootlegging (and NASCAR)

    But as long as people can grow their own and not get fined for possession, it's a pretty minor deal.

  • tombstone||

    Who would have guessed this??? Black markets thrive as a direct result of high taxation or bans. I was stationed in England over forty years ago, and we could purchase rationed hard liquor on base with a ration card, being allowed four quarts a month. Cost was about $8.00 for a bottle of Jack Daniels. The same bottle could sell for significantly more off base, and still be much less expensive that the highly taxed legal booze available to the average Brit. God help those that took part in the black market and were caught. California is going to spend more and more money on enforcement of their draconian regulatory measures, but the leviathan must be fed.

  • NoVaNick||

    Those who pushed for pot legalization sold it on the idea that it would bring in lots of tax revenue, so why are you surprised when the government decides to heavily tax it?

    For any substance (pot, alcohol, tobacco, even opioids.) the argument should always be that the government does not have any right to dictate what adult citizens can put in their bodies-NOT, we will pay you (the government) to let us use it and the government gets to decide the price.

  • LEAPGuyAZ||

    The black market will have a long prosperous life. It TRUTH it costs $225 per POUND to grow marijuana indoors, and $8 per pound outdoors.... Don't believe me? Read the Estimated Cost of Production for Legalized Cannabis
    goo.gl/Lvzi3U

  • Dave_C||

    You can't grow weed for $225/pound unless your electricity is free.

  • Shoreline1||

    I was just trying to think of something our government does well.

  • Árboles de la Barranca||

    I demand they tax my weed - heavily. I also demand the FDA approve all weed products for sale. For safety and security, only BigAg, BigTobacco, and BigPharma should grow or process weed. I also demand that only farmers licensed by the USDA grow only GMO weed. No other weed should be allowed, with heavy fines and jail sentences mandated for illegal growers and distributors. In the future, users should will need to obtain a use permit card, and all buyers will be tracked by a new government agency, Brave New Bud.

    Stupid "Tax My Marijuana" crowd. What did they expect?

  • EscherEnigma||

    What did they expect?
    Getting police to stop attacking and arresting users.

  • Árboles de la Barranca||

    They have to pay HEAVY TAXES to stop the police from busting down their doors, roughing them up and arresting them - (which by the way, the FEDS have continued do do anyway in some cases, in spite of state laws)?

    I guess if it is considered a shakedown, okay. I know I might be a naive dreamer, but couldn't they just demand "Stop Criminalizing My Pot" instead of "Tax My Pot? I guess that's not how politics work.

  • Fred G. Sanford||

    Only California could legalize marijuana but still find a way to make it economically unprofitable.

  • Dave_C||

    Utter nonsense.

    Here in WA, cannabis is triple-taxed--10% at production, 10% at processing/packaging, 10% at retail. Yet prices have fallen to 30-40% of what they were 3 years ago, while the industry is thriving.

  • Reverendcaptain||

    One of the biggest mistakeslegal weed advocates is the excessive emphasis on tax revenue. Yes that can be an upside but a lot of people push that as if it is the biggest reason that people should not be prosecuted for smoking marijuana. "Think of all the money for SCHOOLS!"

    The biggest reason leave people alone is the moral issue and that should always be the main emphasis. Maybe then we wouldn't be facing a ridiculous situation as described here.

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