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The Black Market for Marijuana is Undercutting Legitimate Firms

Successful, unregulated marijuana enterprises are undercutting legal marketplaces across the country as banking and tax reform are being implemented.

Despite being a problem in states like Colorado, Michigan, and Washington, it is a much bigger issue in New York. According to Amanda Reiman, a researcher at cannabis analytics firm New Frontier Data, unlicensed firms “take a hefty percentage of the possible market share.” New York’s 36 newly licenced dispensaries have yet to open their doors.

The sophisticated black market in the state is years ahead of New York’s licencing programme. Even though recreational marijuana has been legal in New York for almost two years, the state only recently granted its first round of dispensary licences.

The black market for marijuana

According to Trivette Knowles, a press representative for the New York State Office of Cannabis Management, “These stores are passing themselves off as safe, legal entities, but there are currently no licenced sales taking place in the state of New York.”

According to Knowles, the issue is particularly difficult in New York City. You can get marijuana from physical stores, trucks, pop-up shops, bodegas, and even courier services that carry it straight to customers. His agency has sent cease-and-desist letters to some of the unlicensed business owners in the state, but other trade associations claim that the city alone is home to tens of thousands of illicit enterprises.

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Reiman of New Frontier Data compared it to whack-a-mole. “If one disappears, another just appears.”

Reiman claimed that while her company lacks data on the numerous illegal enterprises that have sprung up throughout the nation, she believes the national market to be worth about $60 billion. Just half of that is covered by legal regulations, she claimed.

It can be very challenging to convince individuals to switch when dispensaries and distribution systems closely resemble regulated marketplaces, according to Reiman.

Unregulated marketplaces, according to her, also put customers’ health at considerable risk. After examining cannabis products from 20 illegal outlets in New York City, research released in November that was commissioned by the New York Medical Cannabis Industry Association discovered that 40% of them had dangerous pollutants like salmonella, lead, and E. coli.

In addition to cease-and-desist letters, New York City has started to take action in other ways as well.

Mayor Eric Adams said in December that more than $4 million worth of unlawfully traded goods had been seized. Over 500 civil and criminal summonses were also issued by his office as part of a two-week test project with several law enforcement authorities.

At a news conference, the mayor declared, “We will not let the economic prospects that legal cannabis offers be taken for granted by unauthorised establishments.”

Banking Reform On A Pause

The Secure and Fair Enforcement Banking Act, popularly known as SAFE, ran into a brick wall in Congress for the third time this year after being left out of a $1.7 trillion government spending measure. The legislation would have strengthened the legal cannabis market by enabling authorised enterprises to use conventional financial systems.

Since cannabis is still classified as a Schedule I drug, along with heroin and LSD, banks and credit unions that offer services to legal cannabis firms risk federal prosecution and sanctions. The federal Drug Enforcement Administration defines schedule I substances as medications with a high potential for misuse and no currently acknowledged medicinal use.

Legal marijuana firms are compelled to run on a cash-only basis and are unable to obtain loans, financing, or even standard bank accounts without access to regular institutions.

According to Curaleaf co-founder and executive chairman Boris Jordan, “This is regrettably a success for the underground market, which pays no taxes and has no rules or testing safety measures in place.”

The “entire industry will suffer as a result,” according to Jordan.

When Republicans take control of the House in 2018, they will have to reintroduce the SAFE Act, which has attracted some bipartisan support.

Brady Cobb, CEO of Sunburn Cannabis, and other executives claimed that given the changing political makeup of the chambers, the future is “pretty uncertain.”

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Sticker Shock

According to cannabis tax attorney Jason Klimek, customers frequently purchase marijuana on the black market because they can get a better value there. He has provided advice to several cannabis businesses, and he presently chairs the tax committee of the section on cannabis law of the New York State Bar Association.

According to a study on cannabis taxation in New York by Klimek, the state’s legal cannabis will likely double in price as a result of hefty state and federal taxes.

The high cost of legal marijuana in New York, according to him, will “make legal adult usage of cannabis that much more expensive than the illicit market” and leave customers in “sticker shock,” he claimed. He advised citing California as an example, where the state’s legal sector is still experiencing difficulties six years after its establishment due to high taxes and competition from unlicensed enterprises.

The underground market, which is growing because legal goods are more expensive, more regulated, and subject to higher taxes, is decimating California, he claimed. They were simply unable to compete.

In July, Gov. Gavin Newsom reduced the state’s cultivation tax, providing small cultivators with a lifeline. But adoption of the regulated market is still hampered by hefty levies. California shops charge a 15% excise tax, 7.25% state sales tax, and local taxes of up to 15% on marijuana.

According to Lindsay Robinson, executive director of the California Cannabis Industry Association, “raising money from the legal side is a key component of the present legal paradigm, but we also have to balance that with smart laws and practical tax structures.”

Robinson worries that legal firms in California will be “taxed out of existence” due to the state’s present tax system.

A 13% retail tax and a levy based on the concentration of tetrahydrocannabinol, or THC, marijuana’s psychoactive ingredient, are planned for New York’s legal marijuana market.

Klimek added that this tax system may need to be changed so that store sticker prices don’t deter customers if New York wants to develop the lucrative, equitable legal market it intended.

Additionally, he advocated for the state to include illegal operations in its new legal framework, a position shared by New York’s Office of Cannabis Management. According to OCM press officer Knowles, persons who have sold in the past are likely to have excellent entrepreneurship talents that can be put to use in our market. “We have always supported giving those who have had to sell illegally a chance to do so in the future.”

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Successful, unregulated marijuana enterprises are undercutting legal marketplaces across the country as banking and tax reform are being implemented.

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