California's Illegal Weed Industry Is Doing Better Than Ever
Those in the weed business have discovered that the black market is still more profitable in many ways than the newly legal industry.
Photo illustration from a photo of weed jars in a legal dispensary. Photo by Thomas Philip Galvez/Getty
It was 2004 when William P. first got into the weed game. He was 18 years old and spent much of his life on the road, traveling between Oakland, Los Angeles, and San Diego to deliver chocolate edibles and sell weed. In the 14 subsequent years, he tried his hand at nearly every aspect of the cannabis supply chain, from starting a delivery service to hauling pounds of weed from the Emerald Triangle—Northern California’s famed farming epicenter—to dispensaries and buyers across Southern California.
“It’s an adrenaline rush that you cannot describe,” William told me. “That becomes a drug. And the money is good too.”
His plan was to secure a license and join California’s newly created legal market this year but “money talks,” as William said, and instead he ended up working with a illicit medical marijuana collective that funneled weed out of state, tapping into that “OT” or out-of-town money, as he calls it.
William, who operated largely out of Southern California, is just one small part of California’s booming illegal market. Even though recreational (or “adult-use”) marijuana has been legal in the Golden State since January 1, the cannabis industry is still functioning largely as it has for for decades—in the shadows.
In fact, the situation become so dire that earlier this year, Governor Jerry Brown proposed allocating an extra $14 million of the state budget to policing unauthorized weed. The money would fund five teams within the state attorney general’s office that would focus on effort like “complex, large-scale financial and tax evasion investigations,” according to a statement from Brown. In June, however, the proposal was scrapped after a dispute over how to pay for it.
So cities throughout the state—including Los Angeles, widely recognized as the largest legal marijuana market in the US—continue to grapple with a unsanctioned industry. Six months into legalization, LA remains besieged by illegal businesses, said Adam Spiker, executive director of the cannabis trade group Southern California Coalition (SCC).
“It’s still a majority of the market,” said Spiker. “There’s no doubt about it.”
One reason is—as many predicted—the cost of legalization is daunting for would-be cannabis entrepreneurs. There are a slew of financially demanding requirements borne out of regulation, including required building and security upgrades, as well as attorneys’ fees to ensure compliance. There’s also operating costs that the illegal weed industry has never had to deal with, like having to pay workers’ compensation and pass pesticide testing standards required by the state.
Then there’s hefty taxes, which include a 15 percent excise tax in addition to sales tax and local fees that some say discourage customer spending and encourage illegal sales, where profit margins are wider. A bill introduced earlier this year in Sacramento proposed slashing the excise tax to 11 percent to help permitted businesses compete with illegal operations, but that effort was shelved in May.
To avoid these costs, some licensed LA dispensaries are “double dipping,” said William—working as an above-board shop out the front door while selling illegal weed out the back to supplement their income.
“Even the ones that are operating as a legal club, they’re still operating in the black market,” he said.
But industry veterans’ resistance to legalization is about more than money; it’s a disdain for the overall corporatization of cannabis by big-box chains like MedMen, which go against the founding principles of the industry, said William.
“The marijuana system used to be one of the last vestiges of the mercantile system,” he said. “That free market, fucking capitalism. [A] transaction between two parties.”
For Diego, a distributor who purchases cannabis flower and concentrate en masse and then sells it wholesale to dispensaries in San Diego and beyond, there’s not much attractive about the regulated market—besides the fact that since legalization, his illegal operation has actually picked up a bit.
“The unlicensed dispensaries are buying up pretty much anything and everything,” he said. “Because they’re making a quick profit right now.”
He’s been distributing cannabis for the last two years, and as the demands of the industry have evolved—from mostly old-school cannabis flower to a wider variety of manufactured products and consumption methods—it’s actually become easier to transport large amounts, he said. Items like vape pens and edibles are low-profile and much safer to ship, even via the US Postal Service.
“They’re really hitting on the black market,” he said.
Every three days, Diego drives from San Diego to Riverside County to pick up about 30 pounds of cannabis flower and concentrate. For each 30 pounds of flower that he sells, he nets about $30,000. While that money is divided up among a team of people, he said, some simple math shows he’s bringing in about $300,000 a month on unprocessed pot alone—that’s without having to pay licensing fees, taxes, or traceable employee wages (everyone’s paid in cash under the table).
With continued access to quick money, no notable run-ins with law enforcement, and little concern over getting robbed because, he says, he works only with people he trusts, Diego sees no reason to get licensed.
“I never really liked working for anybody but myself,” he told me. “I need money to survive and take care of my kids.”
A lack of licensed options and the absence of a fully developed regulated market leaves illegal operations with the “lion’s share” of business.
While the demand for cannabis hasn’t waned, Los Angeles’s slow regulatory rollout (including a more than five-month delay in the second phase of licensing) has contributed in part to the survival of illegal operations, said SCC’s Spiker. A lack of licensed options and the absence of a fully developed regulated market leaves illegal operations with the “lion’s share” of business, he said.
Policing these shops will fall largely on the shoulders of the very legal operations they’re undercutting.
“They’ve all rightfully been barking... about the illegal shops that are all around them, selling the same products for 40 percent less,” said Spiker. “I don’t think anyone wants to go snitching on others, but the reality is, they won’t survive.”
The city of LA has yet to identify funding for many aspects of its legal cannabis rollout, but the mayor’s budget for 2018-2019 did earmark $2.3 million for the LAPD to investigate the illegal cannabis market. In May, the city attorney’s office announced that it had already filed 36 criminal cases against 142 defendants related to illegal commercial cannabis operations in the city.
“It’s been whack-a-mole in the city of LA for forever,” said Brad Rowe, a public policy professor at UCLA and a member of the university’s Cannabis Research Initiative. Los Angeles has made regulation too complicated, he said, and needs to work harder to identify illegal shops and attempt to get them permitted. He thinks there should also be rewards for compliant businesses—such as fewer inspections and reduced fees—and a more effective understanding of cannabis’s “entrenched counter-cultural feel” that doesn’t jibe well with oversight.
The Bureau of Cannabis Control, California’s statewide cannabis licensing body, has slowly begun a piecemeal crackdown on illegal shops as well. Just this week, it announced raiding a Sacramento delivery business and seizing “cannabis, edibles and tobacco products” from a dispensary in Orange County.
This is just a drop in the bucket, however. While the illicit market will never disappear completely, increasing regulations and the growing political power of cannabis power players who will lobby for stricter laws against illegal operators may start to make a dent, according to experts and industry folk.
William’s not waiting around to see.
After years of raids by the DEA, being robbed at gunpoint, and watching “businessmen turn into gangsters,” William decided to retire just a few months ago. He told me that he was suffering from increasing paranoia and PTSD, and fearing for his sanity, checked himself into a mental health facility in San Diego.
The underbelly of the industry will march on without him though. In fact, William was able to get some black market weed couriered to his facility in San Diego while he was seeking treatment.
“I got pot delivered to the hospital within 30 minutes,” he said.
Correction: An earlier version of this article incorrectly stated that weed delivery is illegal in San Diego. Though William had his weed delivered by an unlicensed service, some dispensaries are allowed to deliver in San Diego.
Follow Hayley Fox on Twitter.