Marijuana Black Market

A funny thing happened on the way to cannabis legalization: illegal pot is still big business.

In the decade since the first states legalized recreational marijuana, about half the country has moved to allow adults to buy regulated pot from authorized sources. But in some states, that’s been more theory than practice.

In New York, which legalized marijuana in 2021, retail sales are dominated by ubiquitous illegal “smoke shops,” while the state struggles to license legitimate ones. Governor Kathy Hochul has called the transition “a disaster,” and has pledged to crack down on the illegal sellers.

In Maine, the congressional delegation last summer asked the Justice Department for help in combatting illegal cannabis producers, who outnumber the state’s licensed operations and are believed to be funded in part by Chinese investors.

And in California, where voters approved recreational pot in 2016, state officials readily acknowledge the industry still operates mostly in the shadows.

“The black market is very pervasive and it’s definitely larger than the legal market,” says Bill Jones, the head of enforcement for the state’s Department of Cannabis Control.

California is the biggest example of the unfulfilled promise of a legitimate cannabis market. Some entrepreneurs blame high taxes and start-up costs for licensed producers and retailers. Smaller operators often have trouble getting access to capital, as the continued federal prohibition on the marijuana business makes it virtually impossible for them to tap into traditional financial services.

Jones, however, focuses on what law enforcement did — or rather, what it didn’t do — in the first few years after the vote to allow a licensed weed industry.

“Most jurisdictions — local jurisdictions — police or sheriff’s departments and district attorney’s offices, were very reluctant to do any kind of enforcement on cannabis,” he says. “It really created an air of impunity, and the unlicensed activity really skyrocketed.”

Washington state, by contrast, maintained law enforcement pressure on illegal marijuana after voters legalized pot in 2012, which gave the new licensed industry time to establish itself.

In California, the DCC is now trying to close the gap. It gathers anonymous tips about unlicensed cannabis stores, which operate semi-openly out of storefronts that aren’t hard to identify.

“They’ll occupy buildings [where] the business itself has moved or is out of business,” says Wilson Linares, the DCC’s head of enforcement for the Los Angeles area. His officers and local police recently raided a shabby storefront in Long Beach. The sign reads “Flores Cabinets,” but inside they find cannabis edibles for sale, as well as loose marijuana flowers, sold in jars — a practice called “deli style,” prohibited under California’s cannabis regulations.

Linares says some of the unlicensed stores are identified with the green cross emblem, borrowed from the medical marijuana movement that predated recreational stores. Another clue, though, is the level of security. The ostensible cabinet store in Long Beach has a heavy metal door and security grates over mirrored windows.

“One of the biggest things that you can see is the cameras. The building itself is old but the cameras are new. That’s a pretty good indicator for us,” Linares says.

These raids have ramped up in the last couple of years, especially in Los Angeles. Some of the unlicensed retailers have shifted toward delivery services. But the penalty for getting caught selling unlicensed marijuana is relatively light — usually a $500 fine, unless the person has broken other laws — and Linares says his officers find themselves raiding the same storefronts over and over again.

“These places don’t pay taxes, it doesn’t help provide services for the people who live around here,” Linares says. “And the individuals who run these places, they’re often not the best,” he says. “Gangs and organized crime.”

This doesn’t come as much of a surprise to an economist.

“The black market becomes more competitive,” says Tiffanie Perrault, a postdoctoral researcher at McGill University in Montreal who studies cannabis markets. She says it’s understandable why illegal marijuana expanded in California after legalization.

“You remove risk — because you know, it’s legal — so you have more consumers,” she says. “And at the same time, your black market is going to react strategically by adjusting prices and levels of quality.”

The black market in California also benefits from the restrictions on the licensed competitors, such as the fact that only about 40% of local jurisdictions in California permit cannabis stores. That leaves the other 60% to the retailers who don’t wait for official approval.

California cannabis buyers are often unaware of — or indifferent to — the legality of the product they buy, but they do notice prices. Depending on the jurisdiction, taxes on licensed pot can reach 38%.

“I got a disposable and some edibles,” says Camerin Remmington as he exits an authorized store on the edge of town in Riverside. “It’s almost 60 bucks for two items. It’s a little more expensive here!”

He says he appreciates the fact that the licensed products are tested for quality.

“You know it is what it is,” he says. “You can’t go wrong with it!”

But with cannabis, legality for its own sake is not a concern for Remmington. He volunteers that he grew it illegally on his land in the high desert during the post-legalization boom a couple of years ago. He says it made money, until police showed up a year and a half ago.

“We got ticketed for it, for having a couple of processed plants, but they didn’t catch the bulk of anything,” he says. When he showed up for his court date, the case appeared to be a low priority. “They didn’t even know who we were!”

Those raids are still happening in rural Riverside County. On a Tuesday morning, the sheriff’s department’s Marijuana Enforcement Team leads a ten-vehicle convoy through the outskirts of the town of Perris. They’re following up on a tip about a house hidden at the end of a private drive. The operation commander, Sgt. Jeremy Parsons, comes out to the main road to report that it is, indeed, an illegal grow.

“When we went up to the house we could smell marijuana. We found a greenhouse in the backyard which contained a few hundred small marijuana plants,” he says. They also found guns, and they run the names of two people on the site to see if either one is a felon, and not allowed to have a firearm.

“There’s not a lot of criminal consequences [for illegally growing marijuana],” Parsons says. But the strategy here is to try to charge growers with other crimes — that’s why the convoy of vehicles was so long, as it included people from California Fish and Wildlife, the local water board and even code inspectors.

“That’s what we’re charging these people with: water contamination, pesticides that are illegal, the fertilizers that are illegal. That’s where we’re getting people,” says Riverside Sheriff Chad Bianco.

But for Bianco, the bigger issue is legalization itself. He’s against it, because he believes it encourages the illegal pot farms in the hills of Riverside County.

“It made it worse. One hundred percent, it made it worse,” he says.

A big problem, as he sees it, is exports. California has become a major exporter to states where marijuana is still illegal — and fetches a higher price — despite the warning from the Justice Department back when legalization got started that the states that legalize pot should make sure to keep it inside their borders.

Bianco says the marijuana gold rush has attracted Mexican drug cartels and Asian human smuggling rings.

“I mean, we’ve had multiple, multiple homicides, we’ve had multiple kidnappings, we’ve had multiple reports of human trafficking and rapes and the punishments that go with not doing your job — and it’s all related to this,” Bianco says.

Back at the DCC, Bill Jones says he thinks legalization was, as he puts it, “imperative,” but he also believes it should be possible eventually to curb the black market.

“I think it’s doable. But it’s going to take a lot of resources and consistent enforcement over years to get our arms around this,” Jones says.