Insiders: Southern California Cannabis Still Plagued by Illicit Competition, High Taxes

The sixth anniversary of the launch of California’s adult-use cannabis market fast approaching, but the largest recreational marijuana market in the world still has yet to figure out how to replace its enormous illicit market with legal businesses.

That’s what several SoCal industry insiders told Green Market Report this week.

Competition from thousands of unlicensed storefronts and delivery services, according to various industry ballpark estimates, has been kept alive by high state and local taxes that make it impossible for legal retailers to compete on price points.

That’s been the reality for California marijuana companies of all stripes since New Year’s Day in 2018, when the new regulatory regime went into effect, complete with new state and local taxes of varying types and rates.

It’s also been the reality that has driven many multistate operators and brands to exit the multibillion-dollar marijuana market, despite the enormous number of consumers in the state. It’s that reality that has driven much of the contraction that has been happening for months.

And it’s that reality that has many still worried for the future viability of the legal market.

“I don’t think anything’s changed,” said Jerred Kiloh, owner of The Higher Path dispensary in Los Angeles.

If anything, “it’s gotten worse,” he said, adding that even if the illicit market hasn’t really grown per se, it’s gained confidence and become more organized due to the lack of enforcement or serious criminal penalties.

“They’ve become more efficient. And with that efficiency, they’ve become a little bit harder to find, and they’ve gone into different areas,” Kiloh said. “It’s not all on Weedmaps anymore. They’re not that dumb anymore.”

Local and state agents have been ineffective in shuttering illicit operators for good, he said. While they may change locations and tactics, those operators are still broadly active and sucking market share from people trying to play by the rules, said Kiloh, who also serves as president of the United Cannabis Business Association.

State agents even have a relatively new tool in the box. A relatively new law allows for civil fines of $30,000 a day to be levied against anyone found to be selling cannabis without the proper permits, but,  Kiloh alleged, it hasn’t been widely used in enforcement efforts.

The director of the California Department Tax and Fee Administration, Nicholas Maduros, even told Kiloh and others that he’s hesitant to put his staff at possible risk of assault from illicit operators.

“He said, ‘We don’t have Kevlar pocket protectors,’” Kiloh said, retelling a conversation with Maduros. “They’re concerned for their own safety. What about ours? We’re trying to survive.”

Kiloh said there was even a homicide at one unlicensed shop in downtown L.A. earlier this year, which resulted in the dispensary being shuttered by the city, but “within three months, it was back up and running, like nothing changed.”

“What’s the encouragement to actually run a licensed operation? Versus obviously the incentives to not do it?” Kiloh asked rhetorically.

That may be the million-dollar question.

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