Black marijuana market undermines legal business

A man smokes marijuana during a hip-hop performance at the 11th Annual Bushwick Collective Party in Brooklyn, New York, on June 4, 2022.

Alex Kent | AFP | Getty Images

Thriving unregulated marijuana businesses in the United States are disrupting legal markets in anticipation of banking and tax reforms.

While this is a problem in states like Colorado, Michigan, and Washington, it’s a much bigger problem in New York. According to Amanda Reiman, a researcher at analytics firm New Frontier Data, unlicensed businesses “take a fairly large percentage of potential market share.” None of the 36 new licensed dispensaries in New York have even begun operations.

New York’s licensing program is years behind the state’s sophisticated black market. New York issued its first set of dispensary licenses last month, but recreational marijuana has been legal in the state for nearly two years.

“These stores masquerade as safe legal entities,” said Trivette Knowles, a spokesman for the New York State Office of Cannabis Management, “but there are currently no licensed sales in New York State.”

The problem is particularly burdensome in New York, Knowles said. Weed can be purchased from convenience stores, trucks, pop-up stores, bodegas, and even courier services that deliver directly to consumers. His office sent out cease and desist letters to some unlicensed operators in the state, but some trade groups it is said that there are probably tens of thousands of illegal businesses in the city alone.

“It’s almost like hitting a mole,” New Frontier Data’s Reiman said. “If one falls, the other just pops up.”

Reiman said her firm does not track the many illegal businesses that have taken root across the country, but she estimates the national market is worth about $60 billion. According to her, a legally regulated industry is only half of it.

“When you have dispensaries and distribution systems that pretty much mimic regulated markets, it can be very difficult to get people to move,” Reiman said.

Unregulated markets also pose a serious health risk to consumers, she said. november to study commissioned by the New York Medical Cannabis Association found that after testing cannabis products from 20 illegal stores in New York City, about 40% contained harmful contaminants such as E. coli, lead and salmonella.

In addition to the cease and desist letters, New York began to crack down in other ways.

In December, Mayor Eric Adams announced the seizure of more than $4 million worth of illegal goods. His office has also issued over 500 civil and criminal summonses in a two-week pilot program with various law enforcement agencies.

“We will not allow unlicensed establishments to take advantage of the economic opportunities that legal cannabis offers,” the mayor said at a press conference.

Banking reform delayed

For the third time this year, the Safe and Fair Banking Act, also known as SAFE, hit a wall in Congress after lawmakers struck it out of $1.7 trillion public funding bill. The measure would strengthen the legal cannabis industry by allowing licensed businesses to access traditional banking services.

Under federal law, banks and credit unions face federal prosecution and fines if they provide services to legal cannabis businesses, as the substance is still a Schedule I drug, along with heroin and LSD. substances of Schedule I, according to the Federal Drug Enforcement Administrationare defined as drugs that are not currently used in medicine and have a high potential for abuse.

Without access to traditional banks, legal marijuana businesses are forced to operate only with cash, and they cannot obtain loans, capital, or even use basic bank accounts.

“Unfortunately, this is a victory for the illegal market that pays no taxes and has no rules or safeguards,” said Boris Jordan, co-founder and executive chairman of Curaleaf.

Jordan said that “the entire industry will suffer as a result.”

The SAFE Act, which has received some bipartisan support, is due to be reintroduced in Congress next year when Republicans take control of the House of Representatives.

Executives such as Brady Cobb, CEO of Sunburn Cannabis, said the way forward is “somewhat foggy given the new political makeup of the chambers.”

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Consumers often turn to the black market for cannabis because they get a better deal there, said cannabis tax attorney Jason Klimek. He has advised various cannabis companies and is currently Chairman of the Tax Committee of the Cannabis Law Section of the New York State Bar.

Klimek is the author to study on cannabis taxes in New York, which predicts that legal cannabis in the state is likely to double prices due to high state and federal taxes.

He said the high price of legal weed in New York “would make legal adult cannabis use much more expensive than in the illegal market” and give customers “sticker shock.” He said look no further than California, for example, where high taxes and competition from unlicensed businesses are still a problem for the legal industry six years after it launched.

“California is being destroyed by their illicit market, which thrives because legal products are more expensive, regulated and heavily taxed,” he said. “They just couldn’t compete.”

Some relief came in July when Gov. Gavin Newsom cut the state crop tax, a lifeline for small farmers. But high taxes continue to hamper the introduction of a regulated market. Marijuana sold in California retail stores is subject to a 15% excise tax, a 7.25% state sales tax, and up to 15% local taxes.

Selling marijuana at the Freedom Festival marijuana show on Wednesday, April 20, 2022 in Bensenville, Illinois.

Erin Hooley | Tribune News Service | Getty Images

“While legal tax collection is a critical component of the current legal model, we must also balance it with sound rules and realistic tax structures,” said Lindsay Robinson, executive director of the California Cannabis Growers Association.

California generated more than $1.2 billion in marijuana tax revenue in 2021, according to the agency. motley fool. Sixty percent of this income goes to drug programs targeting children, 20% to environmental programs, and 20% to public safety.

Robinson worries that with California’s current tax structure, legal businesses will be “taxed on the face of the earth.”

In New York, legal marijuana must include a retail tax of 13% and a tax based on the activity level of tetrahydrocannabinol, or THC, the psychoactive component of marijuana.

Klimek said that if New York wants to create the lucrative, fair legal market it intended, the tax structure may need to be redesigned so that store prices don’t deter shoppers.

He also said the state should take steps to integrate illegal operators into its new legal system, which the New York City Cannabis Authority agrees.

“We understand that those who have sold in the past are likely to have excellent entrepreneurial skills that can be used in our marketplace,” said Knowles, spokesperson for OCM. “We have always advocated that those who have had to engage in illegal sales in the past have the opportunity to do so in the future.”

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