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Can Licensed Cannabis Dispensaries Compete With the Black Market?

Can Licensed Cannabis Dispensaries Compete With the Black Market?

Cannabis legalization gives consumers a safe, regulated way to purchase the specific products they want. The black market lacks regulation, so it can never offer that promise. Still, no one ever expected cannabis legalization to eradicate the black market. Legalization creates a way for law-abiding residents to acquire cannabis products they can trust, which should at least shrink the black market’s size.

Some cannabis companies worry that the black market has so many financial and regulatory advantages over licensed cannabis dispensaries that illicit sales make it nearly impossible for legitimate businesses to succeed.

Why Black Markets Thrive

The cannabis black market has several opportunities to thrive.

Cannabis Consumers Are Used to Buying Illicitly

Perhaps most importantly, it has existed for decades. No business could sell cannabis until 1996, when California legalized medical marijuana. Dispensaries couldn’t sell to recreational users until 2012, when Washington and Colorado became the first states to allow recreational sales. Nearly half of the states still don’t have recreational cannabis laws.

It took so long for the U.S. to legalize cannabis that the black market had ample time to build an underground distribution network. That network has evolved, but illegal operations remain flexible and can reach consumers virtually anywhere. The legal market doesn’t have that option because it must contend with a patchwork of regulations that differ from state to state.

Licensed dispensaries, like most retail stores, need to collect sales tax. In fact, some states rely on cannabis taxes to support government-funded projects. Increasing tax revenues make it possible for them to pay for education and substance abuse programs.

While dispensaries expect to collect tax, some face undue burdens that keep customers at bay.

In Washington, dispensaries must collect a 35% sales tax on cannabis products.

Colorado charges a 15% sales tax and a 15% excise tax.

Illinois has a confusing tax structure:

  • 7% for wholesale exchanges
  • 10% for cannabis with less than 35% THC
  • 25% tax on products with THC concentration over 35%
  • 20% on edibles and other products infused with cannabis

It’s easy to see why some consumers might prefer maintaining relationships with their black market sellers. While cannabis dealers charge somewhat high prices because they want to offset the risk of breaking the law, prices are often lower than what consumers find in dispensaries.

Regulators Have Responded to Challenges Too Slowly

States that pass cannabis legalization often take too long to write regulations and approve licensing applications. The time between legalizing cannabis and instituting a licensed infrastructure creates opportunities for black market sellers to come out of the shadows and pretend they’re legitimate businesses.

New York offers a prime example of how a slow licensing process hurts the legal industry and benefits the black market. Two years passed between the state’s legalizing recreational cannabis and finalizing licenses. During that time, dozens — if not hundreds — of stores opened in New York City. None of the stores were licensed, but many of them were selling legal products. Customers could walk into the stores, believe they are legitimate, and purchase cannabis they think has been regulated by the state.

The situation puts consumers and regulated dispensaries at risk. Consumers don’t know what they’re buying, and dispensaries lose money to stores operating without licenses.

The legal cannabis industry has several paths that could lead to success. All of them require cooperation from state and federal governments.

Some of the most important actions state governments can take include:

  • Charging reasonable taxes on cannabis products so frequent users feel less tempted to buy from the black market.
  • Making regulations and the licensing process part of cannabis legalization, instead of trying to finalize the details after voting.
  • Reviewing license applications quickly, so businesses can start generating revenues.

The federal government could also help by:

  • Removing cannabis from the Schedule I list of drugs.
  • Letting banks and other large financial institutions work with licensed dispensaries.
  • Creating a framework states can use to jump-start their regulatory processes.

Conclusion

The legal cannabis industry has some advantages over the black market. Customers looking for quality and consistency will choose licensed dispensaries over black market dealers. The legal industry has also developed several innovative products that the black market can’t duplicate. Licensed dispensaries can offer concierge experiences that direct new and experienced cannabis users to products that match their needs.

The legal cannabis industry can thrive, but governments will need to change how they approach their role. Instead of stymieing growth, governments should partner with the industry to ensure success. In the long-run, trusting partnerships between states and dispensaries will prove beneficial for everyone.

December 27, 2022Comments Off
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