Even in Canada and some US states where marijuana is legal, the illegal market remains a tenacious competitor

One big reason to legalize cannabis is to wrest the market away from criminal enterprises and tax the proceeds. But in Canada and the US states where weed is legal, the illegal market has proven to be a tenacious competitor – and it’s likely to remain so for years.

Take California, the largest and most complex of the legal US markets. Here underground sales can be divided into two broad categories: the illegal or “black” market includes everyone growing and manufacturing products for export out of state, which is always against the law. The so-called “gray market” refers to companies that continue to operate in California even though they either can’t or don’t want to go through the time and expense to acquire licenses.

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For licensed businesses trying to follow the rules, California’s gray market presents the bigger problem. Because these companies don’t adhere to the complex regulations covering everything from security to product testing, they can undersell their law-abiding counterparts by up to 50%, according to Bryce Berryessa, the president of the licensed California cannabis company La Vida Verde.

In much of the state, gray-market companies operate in plain sight, and it’s not necessarily clear to customers whether a store is legal or not. Weedmaps, a popular online dispensary locator, doesn’t distinguish between licensed and unlicensed dispensaries – nor do mainstream sites like Google and Yelp. Gray market dispensaries and delivery services also stock counterfeit products, which are packaged to mimic the best known legal brands. (Consumers who want to be certain they are shopping at a legal dispensary can check on the state regulator’s website.)

To combat the illegal market and foster legal businesses, California’s governor, Gavin Newsom, said last month he would be sending national guard troops into northern California’s cannabis-growing regions. There have been crackdowns on unlicensed dispensaries as well, though legal businesses have called for more. Lawmakers have also proposed lowering marijuana taxes so legal businesses can compete against the gray market.

Facebook Twitter Pinterest On the east coast, where the gray market isn’t as pervasive, states need to set taxes at a level that won’t send users back to their dealers. Illustration: George Wylesol/The Guardian

But neither of these proposals address what could be the most significant problem for legitimate businesses: while California has legalized marijuana sales to all adults, most jurisdictions in the state do not yet allow marijuana businesses. This in effect forces millions of customers to shop on the gray market. “Hundreds if not thousands of companies who intend to shift into the legal market are forced to participate in the [gray market] infrastructure that has been in place for decades,” Berryessa said. In January 2018, the month California’s adult market opened, he says, there were about 200 fully legal pot shops in California, compared with roughly 4,000 gray market dispensaries.

Unlicensed businesses have continued to thrive in other markets as well. Canada’s gray market has capitalized on rolling supply shortages. In Oregon, where there is a glut of product, growers offload their crop on to the illegal market, sometimes referred to as the “traditional” or “free” market.

As legalization becomes more widespread and more corporatized, it seems likely that the black and gray markets will recede, though many law-abiding businesses are likely to go under in the meantime. Absent a mandate from the state capital in Sacramento, every city in California can legalize marijuana businesses on its own timeline. The resulting uncertainty nourishes the gray market.

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In states currently figuring out how to regulate the drug, striking a balance to encourage consumers to shop at legal businesses has become a key priority. On the east coast, where the gray market isn’t as pervasive, states need to set taxes at a level that won’t send users back to their dealers. Two recent reports in New York warned that a high tax rate “could hamstring the industry before even getting off the ground”, according to Neil Willner, a lawyer with the firm Wilson Elser.

The governors of New York and New Jersey want to legalize marijuana, but the debate in both states has hinged largely on taxing businesses at a level that won’t end up empowering illegal businesses.

Similar dynamics are likely to exist in many of the other nations which are flirting with legalization. But so far, there’s no proven formula to support those businesses trying to follow the rules.