How the Black Market Hurts Legal Cannabis Businesses


Navigating the ever-shifting laws regarding cannabis businesses is difficult enough. But when you add the stress added by a booming black market marijuana economy, the pressure may be too much for some cannabis business owners. Despite assumptions that legalization would eradicate the illicit marijuana market, it has actually done the opposite, and illegal marijuana businesses have been booming up and down the West Coast. Sellers and distributors alike are feeling the pressure, as a glut of production has caused some to turn to illicit distribution, offering much lower prices to consumers than the dispensaries.

At Purdy & Bailey, LLP, our San Diego cannabis business attorneys understand this industry well, and how the legal challenges can present issues for business owners. In this post, we’ll touch on the growing crisis of the black market marijuana economy – and how you can combat these tactics and continue to succeed as a legal business owner.

Economic Threats for Marijuana Business Owners

Crossing state lines has always been a temptation for state producers where marijuana is legal. The reason is simple: When prices are low and overproduction gluts the economy in the first flush of legalization, some unscrupulous sellers look to states next door, where prices are still consistently higher for the same products. Depending on where you live, customers in the illicit market one state over may be willing to pay as much a $1,500 a pound – a massive increase over the $250 a pound currently projected for in-state producers.

Already, this attack on the legal cannabis business has put a damper on profits. Sales at two of the most well-known marijuana businesses in the Greater Los Angeles area, Blum and MedMen, have decreased significantly since last year, and other owners are gearing up for losses as high as 20% by the end of 2018. However, although the black market marijuana industry is partially to blame for the threat to customer demand, there’s another reason behind the crisis for cannabis business owners: The Bureau of Cannabis Control.

Because of the high costs of licensing a marijuana business in California, prospective business owners can expect to pay anywhere from $5,000 to $100,000 or more annually in fees, licenses, and lab testing requirements. Add that to sales tax that can reach as high as 60% in some places, and it’s no wonder that cannabis business owners are worried for their financial future.

Protecting the Legal Cannabis Industry

Although there’s little you can do individually to combat illicit marijuana sales, there are some small ways you can protect your own legal business. In most places, there are still so many people waiting on approval for licensee applications that marijuana testing labs are only operating at 10-20% of their total capacity. Additionally, many current marijuana businesses are opting to skirt the law out of fear, and avoid the fees associated with testing requirements altogether. This could mean that the labs necessary to review and test products will begin to shut their doors, and legitimate businesses will be unable to get the required test results to keep selling – meaning that the illicit businesses will have the advantage.

The testing rules may be stringent, but it’s imperative that cannabis business owners continue to rely on the accurate testing of these labs, and to be proactive about complying with all the rules and regulations in their jurisdiction. Because there are also many non-compliant testing facilities, it’s critical that you spend the extra time and money to ensure you’re using state-approved testing labs. Supporting these facilities means supporting the legal marijuana industry, and it will help your business thrive in the long run.

Additionally, be sure to report any signs of black market marijuana sellers near you. It’s estimated that more than 100 shops in the Los Angeles area alone do not have the proper licensing to operate, and they are directly competing with legal businesses. While the LAPD and other police departments across the SoCal region have finally started enforcing the rules and cracking down on these illegal shops, the problem has grown out of control. If you suspect anything, consider contacting the authorities.

If you have a cannabis business of your own, or if you’re looking to become established in this industry, our San Diego cannabis business lawyers at Purdy & Bailey, LLP, can assist. We can advise and represent you in any matters regarding this complex area, and ensure that you will be operating for years to come.

Contact us at (858) 360-7080 for a free consultation today!

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