Seven months after Santa Ana began licensing medical marijuana dispensaries, officials say there are up to twice as many unlicensed pot retailers as sanctioned shops in the city.

Some licensed dispensaries say competition from unregulated shops – which aren’t subject to the same city taxes, limits on operating hours and other oversight – is threatening to put them out of business.

“We’re stoked to have a store, and we’re trying to do everything right,” said Jeffrey Holcombe, co-owner of 420 Central dispensary. “But the rogue stores are making it extremely tough.”

There are unlicensed sellers who openly thwart the law, authorities say. Others are challenging the city’s procedure for awarding licenses or argue they have a legal right to provide medical marijuana as collectives under the state’s 20-year-old Compassionate Use Act, which legalized medical marijuana.

The Santa Ana Police Department has a dedicated task force working on enforcement of the medical pot industry and says it has shut down more than 90 of the 109 unlicensed operations identified to date.

Shuttering the remaining 20 or so unregulated shops has been a lengthy, difficult process, exacerbated in part by lack of information on who is actually running the businesses, said Cmdr. Jason Viramontes.

“We do everything within our power to shut these down,” Viramontes said.

The ongoing enforcement battle in Santa Ana, which has the only sanctioned pot shops in the county, highlights a larger question infusing the statewide debate over legalization of marijuana: Can the government gain full control of a gray, retail pot market that has gone largely unregulated for two decades?

BECOMING LICENSED

Medical marijuana has been legal in California since 1996, and storefront pot dispensaries have proliferated. But until October, state law made no provisions for such businesses or placed any regulations on their operations.

Cities across the state, including many in Orange County, have declared war on unlicensed shops in recent years, using police raids and court actions. Other jurisdictions opted to regulate and tax the businesses, as Santa Ana did when voters approved Measure BB on Nov. 4, 2014.

After the measure passed, the City Council approved a plan to allot 20 licenses on a lottery basis – only 10 of which have completed the permitting process. The City Council also pledged $1.5 million annually toward enforcement to gain “rapid closure of any collectives/dispensaries operating illegally.” Illegal pot shops lead to “a proliferation of crime” and lower the quality of life for residents, Viramontes said.

The locations of unlicensed shops may not be a mystery – police say they follow crowdsourced locations on the website Weedmaps. But Viramontes said determining who’s behind the operation often involves getting search warrants and sometimes conducting lengthy surveillance.

“There’s no background checks on the people. There’s no way of knowing who’s working inside of these places,” Viramontes said.

None of the dispensaries that appear on Weedmaps but not on the city’s licensed list agreed to speak with the Register for this story.

Some unlicensed shops have operated under the assumed protection of a limited liability corporation, masking the true identity of the owners, Viramontes said. Others operate different types of legitimate businesses, but sell pot on the side, he said, citing one store, since shut down, that was selling hats out front and marijuana in the back.

Landlords often aren’t aware pot is being sold from their buildings until they get complaints or see electricity bills skyrocket due to the extra air conditioning units and grow lamps used to cultivate pot.

“That’s when the property owners call us and say, ‘Hey, we think they are selling marijuana out of this shop,’” Viramontes said.

Most of the time, once a dispensary is closed, it remains closed, Viramontes said. But he said there are certain locations that have reopened numerous times.

For years, the city has been trying to shutter the Sky High collective, which opened in 2010 in a storefront on West 17th Street.

Attorney Matthew Pappas said he’s fighting for that dispensary and others to be able to stay open under state disability laws, which protect people with physical or mental impairments.

“It’s my belief that they provide for patients legally because they fall under the same provision as a methadone clinic or any other health care provider,” he said. “Disability law should protect these patients.”

Santa Ana police garnered unwelcome international attention after a May raid caught on video showed officers forcing Sky High customers to the ground and eating merchandise. Three officers involved in the raid were charged this month with petty theft and vandalism.

Attorney Anthony Curiale, who is also representing Sky High, said the city used “strong-arm tactics” to try to shut down the dispensary. A more responsible approach, he argued, would be to file a lawsuit and go to the court to obtain an injunction.

“We think it’s a violation of the Fourth Amendment and other civil rights because they’re using unreasonable force to enforce a law that typically doesn’t involve force,” Curiale said.

Attorney Arthur Travieso is representing Live2Love and four other unlicensed pot shops in lawsuits against Santa Ana, claiming the city’s lottery process was unfair because it allowed multiple entries by the same individuals, as long they applied and paid a $1,690 fee.

“If the city of Santa Ana was really serious about making this about safety and not just about money, then one would think they would have done a little bit more of a thorough check before they even let people into the lottery process,” he said.

Travieso added he is not against regulation, “but to pigeonhole (the industry) into very limited locations” deprives access to medicinal marijuana to patients who have difficulty traveling to licensed shops.

Those high-profile conflicts haven’t affected enforcement efforts, and the city continues to seek the permanent shutdown of all illegal dispensaries, Viramontes said.

But as long as some remain, Holcombe said, shops like his are handicapped.

AT A DISADVANTAGE

Unregulated shops aren’t paying the 5 percent tax Santa Ana imposed with Measure BB. That tax may be raised to as much 10 percent, although it’s not clear if or when that would occur. Holcombe said he believes some unlicensed competitors probably aren’t paying an 8 percent state sales tax, either, meaning they can cut prices.

Generally, as taxes and regulation on licensed shops get more costly, other sellers of various kinds can get a marketing advantage, said Beau Kilmer, co-director of RAND Drug Policy Research Center. “It largely comes down to price,” he said.

Travieso said the five unlicensed dispensaries he represents can’t pay city taxes because they didn’t win the city pot-shop lottery.

“My clients would be ecstatic to be paying taxes,” he said. “They could literally go to City Hall offering to hand them money for taxes, and the city would not take the money.”

In addition to not paying city taxes, unlicensed shops don’t have to close by 8 p.m. most nights, as Santa Ana requires of approved dispensaries. They also don’t face weeks of lag time hiring employees as they wait for police background checks to be completed. Holcombe contends many unapproved shops also grow their own supply, further reducing costs.

420 Central opened Oct. 10 as Santa Ana’s third legal dispensary. The owners have invested close to $1 million so far, Holcombe said, as they try to use high-quality customer service and products to lure customers who’ve grown accustomed to getting their supply from nondescript storefronts or delivery services.

“It just takes time to get those people in the fringe culture more comfortable with that,” Holcombe said.

At OC3, the second licensed shop to open in Santa Ana, owner Chris Francy said he is continuing to absorb the extra costs to operate legally, while he waits for the city to shutter the remaining illegal shops.

“This is still an industry in Santa Ana that is dealing with an abundance of enforcement problems,” Francy said. “But it will take time, and we as a business are understanding of that.”

STATE FIX COMING?

Sanctioned dispensary owners generally are optimistic their concerns will be addressed when requirements of California’s new Medical Marijuana Regulation and Safety Act, enacted in October, kick in.

The act, which is made up of three bills, establishes a licensing program for marijuana-related businesses and imposes criminal penalties on illegal pot shop operators.

“The best remedy will be when it is criminalized at a state level,” Francy said. “Then we’ll be sitting pretty.”

However, the new law’s provisions for licensing and taxation don’t take effect until Jan. 1, 2018. And Holcombe isn’t sure if 420 Central will be able to keep competing with unregulated dispensaries for 21 months.

“That’s really the bottom line for us,” Holcombe said. “Can we make it that long?”

As things stand now – with a mishmash of regulation from city to city and state to state – there’s no end to the larger battle over effectively regulating marijuana sales on the immediate horizon.

Consumers will continue to cross jurisdictional lines to buy cheaper weed. Growers will continue shipping from states where laws are more lenient to those where the supply chain is more restricted.

Even if Santa Ana shut down all of its unlicensed pot shops, bargain-hunting shoppers could drive 5 miles to Anaheim, where authorities are doing battle with 12 dispensaries they say are operating illegally.

Staff writer Scott Schwebke contributed to this report.

Contact the writer: bstaggs@ocregister.com