A man smokes marijuana during a hip hop performance at the Bushwick Collective’s 11th Annual Block Party on June 4, 2022 in Brooklyn, NY.
Alex Kent | AFP | Getty Images
The unregulated marijuana business thriving across the United States is devaluing the legal market awaiting banking and tax reform.
It’s a problem in states like Colorado, Michigan, and Washington, but it’s a bigger problem in New York. Unlicensed companies “account for a significant percentage of the potential market share,” said Amanda Lyman, a researcher at cannabis intelligence firm New Frontier Data. None of the 36 newly licensed clinics in New York have yet opened.
New York’s licensing program lags behind the state’s sophisticated black market by years. New York state granted its first license last month, but it’s been nearly two years since recreational marijuana was legalized in the state.
“These stores are masquerading as safe legal entities,” said Trivette Knowles, a spokeswoman for the New York State Cannabis Control Department.
Knowles said the problem is particularly troubling in New York City. Weed can be purchased from brick-and-mortar stores, trucks, pop-up shops, bodegas, and even direct-to-consumer courier services. His office has sent letters of suspension and suspension to some of the state’s unlicensed businesses, some trade groups He said there are likely to be tens of thousands of illegal businesses in the city alone.
New Frontier Data’s Reiman said: “If one goes down, another one pops up.”
Layman said her company doesn’t track data on the many illegal businesses that have taken hold across the country, but estimates the domestic market is worth about $60 billion. The legally regulated industry is only half that, she said.
“When you have pharmacies and distribution systems that mostly mimic regulated markets, it can be very difficult to move people,” Reiman said.
Unregulated markets also pose serious health risks to consumers, she said. November study A study of cannabis products from 20 illegal stores in New York City, commissioned by the New York Medical Cannabis Industry Association, found that about 40% contained harmful contaminants such as E. coli, lead and salmonella. .
New York City has begun cracking down in other ways besides ceasefire letters.
In December, Mayor Eric Adams announced the seizure of more than $4 million worth of illegally sold products. His office has also issued over 500 civil and criminal subpoenas as part of his two-week pilot program with various law enforcement agencies.
“Unlicensed establishments will not take away from the economic opportunities that legal cannabis offers,” the mayor said at a press conference.
Suspension of bank reform
The Safe and Fair Banking Act (also known as SAFE) has hit parliamentary walls for the third time this year after lawmakers removed it from the legislature. $1.7 Trillion Government Funds Bill. The measure would have strengthened the legal cannabis industry by allowing licensed businesses access to traditional banking services.
Under federal law, banks and credit unions face federal prosecution and penalties for servicing legal cannabis businesses because it’s a Schedule I substance, along with heroin and LSD. Schedule I substances, According to the Federal Drug Enforcement Administrationis defined as a drug with no currently approved medical use and a high potential for abuse.
Without access to traditional banks, legal marijuana businesses are forced to operate on a cash-only model, unable to access loans, capital, or even use a basic bank account.
“Sadly, this is a victory for an illicit market that pays no taxes and does not conduct regulatory or safety testing,” said Curaleaf co-founder and executive chairman Boris Jordan. .
“The whole industry will suffer as a result,” Jordan said.
The SAFE Act, which has bipartisan support, should be reintroduced during next year’s Congressional session when Republicans control the House.
Executives such as Brady Cobb, CEO of Sunburn Cannabis, said the trajectory was somewhat uncertain given the new political makeup of the House.
sticker shock
Consumers often turn to the black market for cannabis because they get better deals, said cannabis tax attorney Jason Klimek. He has advised various cannabis companies and currently serves as chairman of the New York State Bar Association’s tax committee for the cannabis law division.
Klimek is study As for New York’s cannabis tax, we predict that legal cannabis in the state will likely double in price due to higher state and federal taxes.
He said legal weed’s hefty price tag in New York “causes legal adult use of cannabis to be much more expensive than the illegal market,” giving customers “sticker shock.” He cites California as an example, where high taxes and competition from unlicensed businesses are still a problem for the six-year-old legal industry.
“California is being destroyed by a thriving illegal market because legal products are more expensive, more regulated and taxed more,” he said. rice field.”
There was some relief in July when Governor Gavin Newsom cut state farm taxes. However, high taxes still plague regulated market adoption. Marijuana sold in California retail stores includes 15% sales tax, 7.25% state sales tax, and up to 15% local tax.
Marijuana for sale at the “Freedom Festival” Marijuana Expo on Wednesday, April 20, 2022 in Bensenville, Illinois.
Erin Hooley | Tribune News Service | Getty Images
“Generating taxes from the legal side is a key element of the current legal model, but we also need to balance sensible regulation with a realistic tax structure,” said executive director of the California Cannabis Industry Association. Lindsay Robinson said.
In 2021, California will generate more than $1.2 billion in revenue from marijuana taxes, according to the report. motley fool60% of the proceeds will go to anti-drug programs for children, 20% to environmental programs and 20% to public safety.
Robinson fears that legitimate businesses will be “taxed and killed” under California’s current tax system.
New York is set to include a 13% retail tax on legal marijuana and a tax based on the potency level of tetrahydrocannabinol (THC), the psychoactive ingredient in marijuana.
Klimek said if New York wants to establish the profitable and fair legal market it intends, it may need to rework this tax system so that fixed prices in stores don’t alienate customers. .
He also said states should take steps to integrate illegal businesses into the new legal system, a move that New York’s cannabis regulator agreed with.
OCM spokesperson Knowles said, “We recognize that people who have sold in the past likely have great entrepreneurial skills that can be leveraged in our marketplace.” , has always insisted that those who have had to sell illegally in the past have the opportunity to do so in the future.”