California’s Low Tax Revenue, and the Path to Solving It.

Adult use cannabis is still a giant industry, with tax revenue for California approaching $1 million a day. That milestone, however, falls far short of the forecasted $514 million for the 2019-2020 budget year. The cause of this missed projection? The black market.

So even with the opportunity of getting legal cannabis delivered to your door, why is the black market still flourishing? There are three surface level reasons:

  1. Pursuant to California’s Business and Professional Code, individual municipalities reserve the right to ban retail sales, and a majority have elected to do so.
  2. The law also allows adults to cultivate six of their own plants, barring any restriction from local municipalities. And,
  3. Legal cannabis includes a near 77% markup in order to cover taxes and other expenses.

But the biggest reason for the black market’s popularity? Unlicensed retail stores. The black market isn’t just your friendly neighborhood drug dealer, it could also be your favorite cannabis store in the strip mall. These retail stores need an “A-License” issued by the Bureau of Cannabis Control, and if they don’t have a license, they’re technically a criminal operation! So just get a license, easy enough right? Wrong. The law as written is nearly impossible to navigate for a small business owner. The Medical and Adult-Use Cannabis Regulation and Safety Act contains 23 chapters, two which deal with licensing, and ten of which regulate the entire supply chain from seed to spliff. Because of this confusion and difficulty, there are thousands of unlicensed retail stores throughout the state. Just last month, Weedmaps finally caved to regulators and will begin requiring businesses provide state license numbers in order to be listed on their site. In an August 21st, 2019 press release, Weedmaps stated:

While helping social equity businesses get licensed, the company is also committed to helping licensed businesses thrive. Beginning later this year, US retail advertisers on Weedmaps will be required to provide a state license number on their listing. This requirement joins existing consumer information tools offered by the company, including surfacing lab data on product pages and a “Brand Verified” program that combats counterfeiting.

The company is also restricting the use of its point of sale, online orders, delivery logistics, and wholesale exchange software-as-a-service (SaaS) platforms to licensed operators exclusively. In addition, Weedmaps will explore ways to make it easier for patients and adult-use consumers to identify the license number on advertised listings.

“These enhancements to existing safeguards on our platform will help patients and adult-use consumers find cannabis retailers that have provided evidence of state licensure,” Beals added. “It also underscores our commitment to working with lawmakers and regulators to foster a flourishing legal market.”

Alex Clark
(949) 345-7592

So what can California do to remedy this situation? According to BDS Analytics, a cannabis specific marketing research group, if the state doesn’t cut taxes to make prices competitive, almost half of all sales are going to remain in the illegal black market through 2024. Regulators and law enforcement also need to crack down on unlicensed stores that aren’t paying taxes, as well as websites and apps that advertise these businesses.

If California can make the price of legal cannabis attractive to consumers while simultaneously making sure businesses are playing by the rules, it may become the billion dollar industry that legislators expected.

12 thoughts on “California’s Low Tax Revenue, and the Path to Solving It.”

  1. I think the requirement of a state license to be listed on their “Weedmap” is a great move by Weedmaps, even though it may have been required. However, Cali should also try to get dispensaries in towns where it was banned to eliminate the black market sales in those areas.

  2. I think that rather than conducting raids and shutting down black market shops, California needs to amend their laws and lower the costs for entry. It has proven to be a problem and shutting down black market stores will only cure a symptom to the overall problem.

  3. This is an interesting post. People generally have a negative connotation towards “black market” (and rightfully so), but I read another article about how some states are ridiculously surcharging the cost of medical marijuana. I guess many people assumed that once marijuana (at least medical marijuana) became legal, it would somewhat lightened the burden of one having to resort to expensive pharmaceutical name-brand products. It seems like this isn’t the case. If costs don’t go down, the marijuana black market may be here to stay.

  4. I think Weedmaps decision to only list licensed dispensaries was a good decision, and hopefully, over time, California will make getting a license an easier process in order to encourage legal marijuana use.

  5. I wonder if Colorado also initially had similar problems or still does have problems with black market marihuana. If not, can California model its laws to do something similar to Colorado? And if so, will black market marihuana always have the competitive edge by not having to pay state licensing fees and taxes?

  6. It does appear that California is seriously lagging behind Colorado when it comes to establishing/maintaining a competitive market. One could argue that California should be ahead considering how long they’ve had legal medical cannabis. However, California is a much larger state and may face a greater number of road blocks in the present and future.

  7. Great piece Rolly! Following 23 chapters seems like a tall task for the industry. I wonder if many of these unlicensed business have made honest mistakes in implementing these 23 chapters or if they are ignoring licensing regulations in order to avoid paying full taxes.

  8. With any type of illegal, or even once legal, substance – I believe that a black market will exist. With there being such a big difference between the expected and actual revenue, I do believe that California should work with law enforcement on combating the black market enough to where they are making close to what is expected. If regulating the issue becomes even more money spent, then I believe they should attempt to make that money up in another way.

  9. A 77% markup is unbelievable. We’ve come a long way from the Boston Tea Party. The solution is simple, and the cost is so great. California is losing tax revenue meanwhile the black-market networks and inroads only strengthen.

    Will their legislature address this?

  10. California has had issues with legalization from the get-go, proposing legislation strongly favoring taxes and a few businesses. Not much has changed, and it seems only expected that the black market would respond like this to such heavy legislation. California would make much more money taking another look at their processes than trying to stamp out every illegal shop that sprouts up.

  11. California needs to realize their strict licensing process is not beneficial to anybody: businesses are having to operate illegally and the government is losing tax money. They have already legalized marijuana, so it seems pointless to make it so difficult for Californians to acquire it and for businesses to profit off it.

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