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Even With Legalization, Illicit Pot Is Still a Problem

Cash, marijuana leaves, and rising graph arrow
By Christopher Coble, Esq. on July 30, 2019

Just because something is legal, doesn't mean everyone will purchase it legally. For instance, people still download pirated copies of music and movies rather than pay for them. And gun buyers may prefer to eschew the mandatory background checks and waiting periods associated with legal firearm purchases.

The same is true for marijuana. In the year and a half after California legalized recreational marijuana sales, the state has seized over $30 million in illegal weed, much to the chagrin of dispensaries that are following the 300-page rulebook.

Toking in Transition

"There's always going to be something of a transition period from a completely illegal market to a regulated market," according to Karen O'Keefe, director of state policies for the pro-legalization organization Marijuana Policy Project. "It does always take some time to have enough licensed stores and to have enough supply to meet demand." Most cannabiz entrepreneurs know that story well.

Between overlapping agencies, byzantine regulations, and long licensing waits, it could take years before legal dispensaries catch up to the black market. Data from the Boston Globe shows that in states where recreational marijuana has been legalized the longest -- Colorado, Oregon, and Washington -- the share of illegal sales in 2018 was the smallest: 33, 48, and 39 percent, respectively. Meanwhile, California and Massachusetts reported 82 and 90 percent illicit pot sales last year.

Price War

And then there's cost. Regulatory compliance and taxes can mean that consumers are paying twice as much for legal weed than they would from an illicit source -- another story with which any entrepreneur is familiar. So unless you're in Oregon, where a glut of ganja led to plummeting prices, it can be difficult to compete with black market discounts.

So, what is a legal weed dispensary to do when consumers would prefer an illegal source? While it's tempting to skip all the regulatory and licensing hurdles and avoiding passing on those taxes to your customers, patience seems to be the name of the game. Consider embracing competition as well -- studies have shown that the more dispensaries that open, the less inclined people are to purchasing pot illegally. And if you can provide a wider selection that is more accurately labeled than the black market, you might just have the name recognition and consumer trust when prices start dropping.

But adhering to all the new regulations in an industry as new as legal weed can be a challenge. Talk to an experienced commercial attorney for help.

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