It’s no secret that California has a massive cannabis illicit market, despite the fact that it is perfectly legal (under state law) to sell cannabis if a business goes through the licensing process and complies with state and local laws. However, since the passage of the Medicinal and Adult-Use Cannabis Regulation Act (MAUCRSA), and the opening of licensing in 2018, the state’s illicit-market problems seem to have only gotten worse, not better. There were reportedly 3,000 illicit cannabis businesses in late 2019; that number is probably much higher today.

It seems counterintuitive that a state that allows licensed medicinal and recreational cannabis activity would have such a robust illicit market. However, the reasons that the illicit market is alive and well are baked into state and local laws themselves. For starters, the fact that MAUCRSA allows cities to ban commercial cannabis activities altogether has led to many cities doing just that. This is a lose-lose for everyone involved: illicit businesses continue in those cities (why wouldn’t they when prohibition never worked in the first place), cities lose out on tax and licensing revenue, and customers lose out on access to tested and safe cannabis.

It doesn’t just end with local prohibition. The California Bureau of Cannabis Control (BCC) essentially gave up in a fight over whether retailers licensed in one jurisdiction could deliver into those jurisdictions that prevent cannabis activities. Had that litigation turned out differently, it’s possible that delivery companies would have been able to deliver statewide, and effectively eliminated the “deserts” where people cannot legally purchase cannabis. In turn, this likely would have forced more cities’ hands with respect to allowing physical cannabis establishments, as they would have realized they were missing out on tax revenues. But things will stand for the foreseeable future and only a few cities here and there will change course each year.

Even in those cities in which licensing is fully legal, there are so many challenges on getting and maintaining licenses that many would-be licensees decide it’s not worth it and take the risk of running an unlicensed business. Above-market rent, costly buildouts that are effectively mandated by intense regulations, high application and license fees (at the state and local level), and high taxes mean serious dollar signs for people that may not have the money and may not be able to or want to try to raise capital and cede control of their enterprise.

Another regulation that does no favors for the licensed industry is the prohibition on selling cannabis between 10 PM and 6 AM, which is often narrowed even further at the local level. It makes little sense that people can go to bars or purchase alcohol, but can’t go to a store or even have cannabis delivered. If someone wants cannabis “after hours”, they will probably end up getting it, just not from a licensed company.

What is the fix? It’s clear that the fix is not enforcement. Enforcement to date has been lackluster at best (and that’s a generous description), but even if the state became super aggressive with enforcement, would that really change anything? When the state and federal government were actively prosecuting cannabis activity prior to legalization, people still bought and sold cannabis. Enforcement in a regulated market is likely to have even less of an effect than it did previously and will be much harder for the state to carry out since in some cases, the line between legal and illegal is blurred whereas before, all cannabis activity was illegal.

The answer almost certainly lies in relaxing restrictions. In order to make a real change, the state legislature or voters (by initiative) need to either restrict local control or at least ensure that deliveries can be conducted statewide. Taxes need to be reduced. Licensing costs need to be reduced. Regulations that make little sense need to be amended or scrapped. These are all common-sense ways that the state can fight the illicit market without wasting too much time on enforcement. The ball is in the state’s court. Stay tuned to the Canna Law Blog for more California cannabis developments.

California’s Overly Restrictive Cannabis Laws Incentivize Illegal Activity on Harris Bricken.