Six Ways California Can Combat the Cannabis Illict Market

California’s illicit market for cannabis is booming—not just out in remote grows deep in the wilderness, but also in delivery and even brick-and-mortal retail stores in big cities all over the state. Our California cannabis attorneys regularly receive questions from licensed cannabis companies about what they can do to stay competitive in the face of unlawful operators who charge lower prices and operate (sometimes) 24 hours a day, seven days a week. There isn’t always a clear or easy answer since the illicit market is so rampant and even state and local authorities are having a hard time eradicating it.

When it comes to tamping down the illicit market, there is often little that legitimate, licensed cannabis companies can do besides out-market and sell a higher quality product. Instead, the ball is largely in the state’s court. And to date, the state has not really made a noticeable dent in that illicit market.

This may lie in the fact that the state’s biggest (and sometimes only) method to combat the illicit market is through enforcement of cannabis laws rather than using the legislature to deal with certain illicit-market problems (though, to be sure, there have been some attempts which I’ll get into below). In fact, trade groups in the City of Los Angeles are threatening to sue the city for not enforcing against local operators enough. This is a tricky issue, and it’s not always so clear. The limited resources at the state and local level mean that there is only so much enforcement that government agencies can do, and enforcement alone is not likely to do anything unless the cities and state can better incentivize lawful operations.

The biggest problem with enforcement over legislation is that it’s not a whole lot different from the prohibition era. Shutting down illegal pot shops is sort of like a game of whack-a-mole, which doesn’t get to the root of the problem. Creating comprehensive legislation that makes sales easier for licensed operators and eliminates barriers to entry for new operators could reduce incentives and opportunities for illicit-market sales and make the lawful market more competitive. I’ll take a look at some ways the state could do that below.

#1 Allow More Licenses

It almost goes without saying that the number one way to tamp down the illicit market is to just allow more licenses. I’m not just referring to retail sales, but to all license types. The more licensed operations there are, the less of a likelihood that there will be illicit-market sales.  As our Washington and Oregon cannabis lawyers can tell you, it’s harder for the illicit market to survive in a state with high supply and lower prices, and having more licensed cannabis companies is certainly a way to accomplish that.

As readers of this blog are likely aware, there was recently an effort under way in the state legislature to force certain cities to allow retail licenses if more than 50 percent of their populace voted in favor of legalizing adult-use cannabis a few years back (the bill was AB-1530, which I wrote about here). Unfortunately, in April, the bill failed to pass. It could be re-introduced, but that will probably take significant time and even then, it may not be likely to muster sufficient votes to ever become law.

The bottom line is that prohibition doesn’t defeat the illicit market. It didn’t for decades while cannabis was 100% illegal, and it won’t now in the regulated market. Cities that don’t allow lawful cannabis sales aren’t going to block pot from entering their limits, they are just going to miss out on taxable sales, permitting fees, and job creation, and ensure that criminal activity continues to proceed. Another possible remedy for these cities is to allow even delivery, but as I’ll talk about below, there is resistance to even that across the state.

#2 Allow More Deliveries

Allowing deliveries is perhaps the best compromise for cities that want to eliminate the illicit market but get queasy when it comes to the idea of having a pot shop on main street. Allowing deliveries from other cities that license delivery retailers is a win-win for cities like this. Cannabis will still be available, and they won’t have to deal with it head on.

But many cities, again, oppose this concept. In fact, more than 20 cities banded together earlier this year and sued the California Bureau of Cannabis Control when the Bureau passed a rule allowing pot deliveries into any jurisdiction in the state. So far, not much has happened with that lawsuit and it may be quite a while before it’s resolved. But the point is that cities here are doing everything in their power to resist this compromise, and the result may be a bigger illicit market.

#3 Speed Up the Licensing Process

Even if the state can’t force cities to accept permit applications just yet, it can expend additional resources on assisting current state licensees with their applications. Earlier this year, it was reported that businesses across the state were losing their licenses because certain state agencies couldn’t process them fast enough. Our California cannabis attorneys see the same thing—cannabis companies press on to file applications and the applications seem to just sit there for a long time. There are obvious budget issues and the agencies are clearly under a lot of pressure, but the state can act to better fund the agencies to ensure that they can process licenses more quickly.

It’s true that the state has now begun issuing provisional licenses more quickly, but those are currently only available for cannabis companies that once had temporary licenses (see this update from the BCC).  In other words, for any cannabis company that didn’t get a temporary license in 2018 (they can no longer be issued), provisional licenses aren’t currently available, and those companies will have to sit in line for who knows how long.

If licenses aren’t issued and companies can’t operate, then the same problem that I identified in points 1 and 2 above exists. The illicit market will continue to flourish where there’s a lack of competition.

#4 Broaden Hours of Operation

Cannabis stores across the state have very restrictive permissible hours of operation. The Bureau of Cannabis Control allows retailers (including delivery drivers) to make sales only between 6 AM and 10 PM. Cities can’t allow broader sales, but many of them restrict those hours even further. This is a problem, when illicit sales are available 24/7. If a customer wants to purchase cannabis at 10:30 PM, they may just look to the illicit market rather than wait. There is no great reason for cutting sales off at 10 PM or earlier and expanding the permissible sales hours could reduce the illicit market.

#5 Lower Taxes

Probably one of the bigger reasons that the illicit market can survive is the price of cannabis. Illicit-market sellers probably aren’t paying taxes or charging sales tax, and therefore can charge much lower prices. Even taxes on cultivators here in California will ultimately drive up the price of cannabis sold at retail. So, California lawmakers introduced a bill recently to lower the excise tax and temporarily suspend the cultivation tax, but that bill effectively died last month. It looks like, for now, we’ll still have high taxes on cannabis here.

#6 Enforcement

I know I said above that enforcement isn’t the answer to the illicit market, and that’s generally true. Enforcement alone will never be the solution to illicit-market sales, if there is also prohibition. We’ve already seen enforcement efforts across the state, but they’ve generally been few and far between and not too successful given the flourishing illicit market. Simply increasing them isn’t likely to do very much unless the state can ramp up its efforts to get more cannabis businesses licensed.

However, enforcement combined with active and broad licensing will be a way for states to eradicate the illicit market. If the state and local jurisdictions adopt policies that make it easier for a sufficient number of legitimate cannabis companies to survive and operate, while going after the companies that don’t follow the rules, that’s the best thing they can do to ensure the viability of the legal market.