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California's cannabis black market has eclipsed its legal one

Posted: 4:48 AM, Sep 20, 2019
Updated: 2019-09-20 07:49:25-04

Although marijuana has been legal in California for nearly two years, black market weed is still a booming business in the state.

Illegal sellers outnumber legal and regulated businesses almost 3-to-1, according to a startling analysis of California cannabis sellers released this month. Some critics blame the website Weedmaps for letting thousands of rogue stores advertise.

But cannabis regulators are cracking down. This week, they put publications, including Weedmaps, that advertise unlicensed marijuana businesses on notice that doing so is against state law.

"Failure to comply with the requirements for advertising may lead to significant financial penalties," the Bureau of Cannabis Control said in an email to the industry Tuesday.

The sellers analysis, which was completed by an association of legal marijuana businesses in the state, punctuates a tough year in an industry that launched with great promise in 2018 but soon faced heavy challenges including, a lockout of legit sellers in most of the state's cities, enforcement challenges and high retail taxes.

Critics say those hurdles have only emboldened an expanding black market.

The United Cannabis Business Association, a statewide group of legal marijuana businesses, found that about 2,835 illicit sellers, including storefronts and delivery services, are operating statewide. That's more than three times as many illegal sellers as legal ones — 873. The group unveiled the numbers earlier this month in an open letter to Gov. Gavin Newsom and state marijuana czar Lori Ajax.

"We’re the only state to go recreational and see a year-over-year reduction in legal sales," UCBA president Jerred Kiloh said.

When Proposition 64 made buying and holding cannabis legal for those older than 21, many in the industry expected a green rush; it opened sellers to perhaps the world's largest legal marijuana market.

But as the first licensed stores started welcoming customers in 2018 , rogue operators claiming to have permission to sell cannabis were also setting up shop in such places as Los Angeles and San Diego County.

Bay Area cities haven't struggled as much with black market storefronts, and some experts say that's likely a result of plenty of legal stores and diligence from local officials. "The Bay Area has been ahead of the curve on licensing for many years," said San Francisco-based Dale Gieringer, director of California NORML.

"We’ve yelled it from the mountaintop," Kiloh, who owns a licensed shop in Los Angeles, said. "We want better enforcement."

In making the results of its illegal-shop analysis public, the main focus of the UCBA's ire, however, wasn't City Hall or even Sacramento. It was the international website Weedmaps, which lists cannabis sellers in major markets like Los Angeles, regardless of whether they're state-approved.

In 2018, the state sent Weedmaps a cease-and-desist letter because the site allows unlicensed sellers to advertise, which violates California's cannabis regulations that require advertisements to display license numbers. "You are aiding and abetting in violations of state cannabis laws," the letter stated.

The site could be liable for $30,000 a day in fines, under state law.

In July, Weedmaps announced it would phase out ads from illicit shops.

Chris Beals, the website's CEO, said that the rogue advertisers would be gone by the end of year. But for some in the industry, that's not fast enough.

"We don’t want to let Weedmaps dictate when they’re going to stop breaking the law," Kiloh said. "That doesn’t make sense."

Weedmaps, which operates in nine countries and the majority of American states that have legalized some form of cannabis, says it's not the problem when it comes to California's black market.

No other recreational marijuana state has seen the black-market issues California has, site CEO Beals said. The main problem, he says, is there aren't enough legal retail locations to meet the market demand.

Many of the same black-market operators on Weedmaps can also be accessed on Google, Yelp and other platforms, he said: "This is really superficial. The real underlying problem is that there’s insufficient licenses address market demand."

That's an issue even state regulators have recognized: When California voters made recreational marijuana usage legal, they gave cities leeway to outlaw sales or limit them locally as they saw fit.

They have, and wide swaths of the state are dry. Forcing cities to accept cannabis is a long shot in a state known for its strong, not-in-my-backyard politics.

"The bureau would love to be able to license more cannabis retail locations in California," Alex Traverso, spokesman for the Bureau of Cannabis Control, said by email. "Unfortunately, there are a number of factors that prevent us from doing that. It’s not all under our control."

Less than 25 percent of the Golden State's cities allow legal sales, he said.

Gieringer of California NORML said the state's cannabis buyers also must consider that when buying from a legal shop, the price includes state and, often, local taxes that can add up to 25 percent to the cost. "I think the real problem out there is the regulations and the taxes are too expensive," he said.

"It's a sad state of affairs when the prices go up and the array of products goes down when they repeal prohibition," he said. "It's supposed to be the other way around. There are fundamental problems with the way California handles this issue."

On the street, police continue to chase down rogue operators who often undercut price and don't collect taxes.

In Los Angeles, where some observers say more than 1,000 shops operated before licensing was established, police have been scrambling to shut down fly-by-night dispensaries. The city has only 187 licensed shops.

The UCBA analysis found hundreds of illegal stores in L.A., and the Los Angeles Times in May counted 220 illegal stores.

Narcotics Detective Vito Ceccia of the Los Angeles Police Department's Cannabis Support Unit says shutting down rogue storefronts has "always been a whack-a-mole situation."

But he says police have reduced the number of illegal shops to fewer than 175 — less than the number of legal ones for the first time. And the City Council is weighing a measure that would allow authorities to padlock and board up rogue storefronts.

The detective said police use Weedmaps to find illicit business, particularly delivery services that don't always have a boulevard storefront.

"They are a great tool for law enforcement," Ceccia said.