Cannabis Black Market Overview: Can It Ruin Legal Cannabis Business?

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In this article, we talk about the cannabis black market and how it impacts the legitimate and legalized cannabis industry.

Cannabis Black Market Overview per State

The legalization of medical and recreational marijuana in many states should have been a substantial economic opportunity for legal business owners. However, the underground cannabis black market is still cutting its own share of profits from licensed cannabis dispensaries.

The legalization of cannabis has remained at the state level, each with different degree of strictness. For one, the state of Colorado has approved both medical and recreational use of cannabis. Some states, however, have only approved low-THC, high-CBD products for medical purposes. It only allowed patients with severe medical conditions access to cannabis.

California, a cannabis-friendly state, also has to deal with illegal cannabis growers and sellers. Despite having legalized cannabis use since 2016, illegal growers and sellers in California still abound. Lack of enforcement has allowed the cannabis black market to flourish in the state. In an estimate by New Frontier Data, almost 80% of marijuana sales in California come from the underground black market.

Colorado is also facing problems regarding illegal growers. In 2017, officials seized 80,000 illegally-grown cannabis plants.

The presence of illegal growers has also resulted in an oversupply of cannabis in some states. The state of Oregon has so much pot on its hand right now, enough for a six years supply. Authorities also fear that those who have invested for a legal cannabis business might turn to the black market to dispose of their supply.

Research on the Problem

New Frontier Data, a global authority in business intelligence in the cannabis industry, examines the trends and market demand for cannabis. Reports say that only 40% of illegal sellers are projected to leave the cannabis black market by 2020. Top reasons why unauthorized sellers are not eager to make the shift are the high taxes and government-imposed restrictions.

Weak enforcement is one of the reasons why the cannabis black market still continues to grow. What’s worse, some legal cannabis business owners are also into the black market business. In 2018, Denver authorities arrested legal cannabis business operators for supplying the black market. The owners were charged with drug and racketeering charges. In Oregon, six individuals were also detained for interstate trafficking and supplying the black market in Texas, Florida, and Virginia.

Negative Effects on Legal Cannabis Business

The cannabis black market affects many things, but it affects the legal cannabis business the most.  Here are some of the adverse effects of the illicit marijuana trade to legitimate business operators and growers.

It is eating up potential sales of legal cannabis business owners.

Legal cannabis business owners pay taxes to operate. Yet, they are losing sales because of the existence of illegal cannabis operators. Legit cannabis business owners in Orange County have seen a drop in their sales in recent months.

In Massachusetts, people see buying cannabis in legal business operators as an inconvenience. Lines are long, and the few legal stores are in inconvenient places. Buyers who are inconvenienced by the situation turn to the cannabis black market for their pot supply.

It results in a surplus in Cannabis supply.

Since the legalization of cannabis in some states, the U.S. has seen a steady increase in the supply of cannabis. Growers and business operators have applied for permits to grow and sell cannabis legally. However, illegal growers still continued to operate. Even after the legalization of marijuana, the number of illicit growers continued to grow, instead of declining. Take the example of California. In the millions of pounds grown in the state, less than 20% is consumed in California. The surplus resulted in illegal interstate trafficking of cannabis in the black market. The rest is sold illegally outside the country.

It may force legal cannabis business owners out of business.

In California, where the cannabis black market is on a large scale, it can drive legal business operators out of business. The black market is cannibalizing the sales of licensed business operators, who have paid thousands for their licenses and permits. Cannabis businesses have to pay for federal taxes and are not allowed to file deductions for their business expenses. The effective federal tax rate can be as high as 90%. At the state level, these business operators are also taxed. Given the high competition that the black market provides and the taxes that authorized operators pay, it is the latter that will suffer the most.

The legal cannabis industry can thrive if existing cannabis users and new users will choose the legitimate sellers. Presently, the high prices of legal sellers and the scarcity of legal stores feed the cannabis black market. A national cannabis regulation can also help curb illegal growers in sustaining the black market.

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