(Editor’s Note: This post originally appeared on Canna Law Blog; Daniel Shortt blogs there and is also a student in the Cannabis Law & Policy Project at UW Law)
In most states with state-legal cannabis, an illicit cannabis market still flourishes. In many of those states, a large portion of growing, processing, selling, and buying still occurs outside the state-legal regulatory system. This illicit market for cannabis stretches across the nation and impacts both states with and without state-legal cannabis. Before state-legalization, all cannabis was grown, processed, sold, and bought illicitly, and in about half the states, that is still the case. The Canna Law Blog has previously written about how cannabis state-legalization impacts the illicit market. This post further examines how the state-legal and illicit cannabis markets interact.
Colorado and Washington both allow for easy access to state-legal recreational cannabis, yet still some consumers in both states turn to the illicit market to get their marijuana. The reasons for this vary. Some consumers find it easier to buy from an illicit seller down the street than to travel 10, 20, 30, or even more miles to a town where they can buy state-legally. Some consumers simply prefer to stick with the same illicit seller from whom they have been buying for a long time. Others believe (sometimes rightly and sometimes wrongly) that their long-time or even new illicit seller has better, cleaner, or cheaper product.
Consumers face little risk in purchasing cannabis from an illicit seller. For example, in Washington State those over the age of 21 can state-legally possess up to an ounce of cannabis; the law does not explicitly dictate where that cannabis must originate. The Washington State Liquor and Cannabis Board heavily regulates cannabis licensees who produce, process, and sell cannabis, but its regulations apply to businesses, not consumers. Local law enforcement in Washington is just not prioritizing enforcing cannabis laws against consumers in jurisdictions that allow state-legalized cannabis (counties and municipalities in Washington have the power to prohibit state-legalized cannabis activities within their jurisdictions).
Those who grow or sell cannabis outside of their state’s regulatory regime face greater risk than consumers. The U.S. Department of Justice (DOJ) issued internal memos (the so-called “Cole Memos”) recommending that U.S. attorneys focus limited resources on prosecuting cannabis crimes involving eight priority areas, including where money from cannabis is diverted to criminal activity, gangs, or drug cartels. These memos de-prioritize cannabis activities in compliance with state robust regulatory frameworks. This means that the DOJ is looking primarily to prosecute those who sell cannabis illicitly. At the same time, a rider to a Congressional appropriations bill prohibits the DOJ from using appropriated funds to prosecute cannabis activities that are in compliance with these state robust regulatory frameworks. DOJ’s response to this bill has been the subject of litigation that we may cover in another blog post.
At the state and local level, those who illicitly sell cannabis are also subject to state and local level prosecution for failing to comply with federal, state, and local law. At a minimum, this threat of prosecution leads those who illicitly grow or sell cannabis to keep a low profile, which typically restricts their business growth. And of course, operating illicitly does sometimes lead to arrest and to jail time, as evidenced by this recent Washington State bust for illicit growing.
Despite the risks, those who grow or sell cannabis illicitly often have advantages over their competitors in the state-legal market, chief among them is their typically much lower tax costs. Many states with state-legal cannabis systems are catching on to this and lowering their taxes on state-legal cannabis growers, processors, and dispensaries. But because those who grow, process, or sell cannabis illicitly usually pay no state sales taxes (and often no state or federal income taxes either), they can usually undercut the prices of the state-legal market. In addition to these taxes, state-legal cannabis businesses must pay taxes and benefits for their employees and spend money to comply with state laws and regulations implemented to create the desired “robust regulatory framework,” including licensing fees, inventory tracking, security, disability access, labeling, food and cannabis safety, and pesticide use. All of these costs of operating in compliance with state cannabis regulatory systems make it difficult for state-legal cannabis businesses to compete on price with illicit cannabis.
The good news, however, is that state-legal cannabis sales are booming, and with that it is widely believed that illicit cannabis sales are shrinking. Thus, whether one thinks individuals should be using cannabis or not, this outcome suggests that one of the goals that united the sometimes odd political coalitions that came together to support state-legal systems is being advanced: reduce the illicit trade in cannabis that often brings involvement of organized crime and drug cartels. The Denver Post reports that in August alone, Colorado surpassed $100,000,000 in cannabis sales and the first week of legal sales in Oregon eclipsed $11,000,000, according to Time Magazine. During alcohol prohibition in the 1920s, the illegal market for alcohol was lucrative and large — think Al Capone and speakeasies. Prohibition’s repeal did not immediately destroy the illegal market in alcohol, but eventually it proved to be a fatal blow; today, the vast majority of alcohol consumers purchase alcohol from legal businesses, not from moonshiners or rum-runners. We see cannabis following a similar trajectory, especially if/when it becomes legal nationwide.