29 March 2022 |

How Legal Cannabis Companies Are Supporting The Illicit Market

By Kaitlin Domangue

The legal cannabis industry does not like the illicit market.

That said, certain legal cannabis companies are finding ways to support the success of the illicit cannabis market.

Bad Behavior In California…

The illicit market and legal market aren’t always fighting each other, with legal cannabis growers having been caught selling products to the illicit market.

This became such a problem to the point that a privately owned California cannabis retail establishment, HNHPC Inc, the parent company of Catalyst Cannabis Co, filed a lawsuit last September in an attempt to resolve this issue.

The lawsuit claims that criminals are buying cannabis distribution licenses called “burner distros” using front men.

These burner distros buy large amounts of legal cannabis at wholesale prices and then sell it out of the back door, avoiding California’s taxes and oftentimes selling the product through interstate channels.

Hundreds Of Millions Of Dollars

The lawsuit in question estimates “hundreds of millions of dollars” in damages to California state tax revenue from legal cannabis purchases going to the illicit cannabis market in California.

The lawsuit names the Department of Cannabis Control (DCC) as the defendant, as the suit alleges that the DCC has refused to fix a loophole in the state’s seed-to-sale tracking system, which allows this activity to take place.

While California is the most well-known in terms of burner distros, it’s by no means the only region in the world having to combat the issue.

Bad Behavior In Canada…

The same kind of operations are happening in Canada, too.

This has been an ongoing problem in Canada, so much so that the Lieutenant Governor and the Executive Council signed legislation to tackle this very issue on July 13th, 2020.

In Canada, it has also been long known that certain medical cannabis license holders apply for permission to grow more cannabis than they need under Canada’s medical cannabis system to legally grow cannabis that goes to the illicit market.

Thankfully, as the prices of legal cannabis products continue to fall in Canada – the impact of this issue has declined.

Bad Behavior In The Big Apple

Medical cannabis has been legal in New York since 2014, however, adult use cannabis wasn’t legalized until 2021.

Despite this legislation having been passed, adults living in the state are still unable to purchase cannabis from the legal market, with retail stores not opening their doors until 2023 in the state home to 8.4 million people.

Enter the gifting loophole, where retail stores “sell” non-cannabis goods like t-shirts, hats, or a piece of art. With these purchases, customers are given pre-rolled joints or edibles as a gift, as gifting cannabis is permitted in New York. 

Enforcement In New York

Unlike California, New York doesn’t need a lawsuit to get the hint.

The state of New York has already spoken out against these cannabis shops, with Cannabis Control Board Chair Tremaine Wright having said:

“Gifting does not include instances in which cannabis is given away at the same time as another transaction nor when it is offered or advertised in conjunction with an offer for the sale of goods or services.”

Letters have already been sent to some unlicensed cannabis shops in New York from the overseeing department. 

Looking Forward

So long as it’s cheaper for consumers to purchase cannabis products from the illicit market, there will remain certain consumers who will purchase their cannabis products from the illicit market.

We think lowering the barriers to entry, taxes, and general costs of bringing cannabis products to market in California, and North America in general, will severely reduce the reliance on the illicit market to access cannabis products.

Our Take

With states, and nation states applying such high taxes on the sale of cannabis products, it’s likely the illicit market will retain a certain competitive advantage, however, I don’t think this will be enough long term.

As we onboard the next 100 million cannabis consumers in North America, I don’t foresee a large percentage of these people having a willingness to purchase cannabis products from the illicit market.