California, is one of the best places for the cannabis industry in the world. Followed the marijuana legalization in 2016, the black market in California has been flourishing, many have been engaging in this illegal business including a large number of cannabis growers and marijuana sellers, and of course, consumers from all over the world.
According to New Frontier Data, 80% of the cannabis sold in California was from illegal black market. It is estimated that the state’s illicit cannabis market is worth about $3.7 billion, more than four times the size of the state’s legal cannabis market.
Not only that, according to another survey conducted by Marketview Research in California, 18% of the 1,419 respondents purchased marijuana from the unlicensed black market in the past three months. In these black market transactions, 85% of consumers said that they are very satisfied with the products they purchased, and will continue to purchase from the black market if they want to re-purchase in the future.
What Caused the Prosperous Black Market?
Consumers often pay state and local taxes and excise taxes when purchasing legal marijuana product. In addition, companies also need to spend some time and money on licenses for growing, processing, distribution, and sales. Besides, such licenses are not easy to acquire. Most importantly, the profit from legal marijuana business will subject to high excise tax levied by state and federal governments.
However, for the black market sellers and consumers, taxation is the least of their worries. Also, growers do not have to wait for the official approval from the state regulator, everything is easy in the black market free of state and federal influence. Although all this is illegal, the black market is still booming, and the annual transaction amount can reach tens of billions, and this number continues to rise.
And California is a particularly striking example of the black market’s negative impact on legal cannabis sales.
In the case of marijuana company MedMen Enterprises, the company’s third-quarter revenue increased 22% from the second quarter, but most of its sales growth came from Arizona and Nevada, while in California, quarterly sales growth was only 5%. This has caused MedMen to lose a lot of money in California’s operations, and there are still many companies facing the same plight. In the final analysis, it is the black market in California that led to chaos in the cannabis market.
Why Is It Difficult to Curb the Black Market of Cannabis?
In fact, the flourishing of the black market of cannabis is also expectable. Even if marijuana has been legalized in many countries, the black market is motivated by the restrictions of many permits, high taxes and the bans in specific regions. Furthermore, high taxation mentioned above contributed a lot: in some parts of California, taxes account for 45% of the legal cannabis purchase price.
In addition to the above reasons, there are restrictions on the banking system. Cannabis companies currently cannot share the same services as other companies. Because of the risk of competition and taxation, many companies are forced to go for the black market. If banks open to cannabis companies, this situation may change.
But for now, the black market is indeed a big problem for countries that intend to collect taxes through the legalization of marijuana.
California, for example, in June 2018, is predicted that the cannabis sales tax for the fiscal year 2018-2019 would be $630 million. Recently, the Office of the Legislative Analyst has lowered the expected value to $410 million, and only if the legal cannabis market is functioning properly, otherwise it will not be reached. In that case, most cannabis users are more dependent on the black market, the situation will be out of control.
In order to get a healthy and normal cannabis market, the state has to reduce taxes and adjust a series of cumbersome procedures for cannabis companies. There is now some evidence that California is working to resolve these issues, and legislators are considering a bill that will reduce the consumption tax on legal cannabis from 15% in three years to 11% and completely eliminate the cultivation tax of growers by 2022. But before the announcement of the new law, the black market of cannabis is likely to maintain the momentum and continue to develop.