Legal marijuana didn’t end black market elsewhere. What can Michigan learn?

Neighboring states that don’t have legal cannabis markets provide fertile ground for black market producers to export their products.

Out of the darkness and into the light.

That’s how Michigan marijuana proponents framed the state’s transition to legalized pot — a regulated system they promised would bring new tax revenues, expand access for medical patients and protect public safety by making it unnecessary for consumers to buy from underground pot dealers.

But if Michigan’s experience is like that of other states with legalized weed ‒ among them, Washington, Colorado and California ‒ illegal sales will remain alive. Regulators in those states tell Bridge that underground sales continue to flow to neighboring states where recreational pot remains illegal.

The result: unrealized tax revenue, fewer sales for licensed businesses and customers who continue to be exposed to untested weed.

Related: Meet the ex-drug cop who now regulates Michigan weed

“That’s definitely a concern and one of the biggest concerns of law enforcement,” said Nickolas Galendez, an attorney at the Cannabis Legal Group, a Royal Oak-based law firm specializing in marijuana law. Industry advocates hope “the risk of federal charges for trafficking and interstate commerce won’t be worth the reward.”

Legalized pot found its first home in Washington and Colorado, which voted to approve recreational use in 2012. Buyers there mostly made the switch to a regulated market, choosing to buy cheap, tested weed from a dispensary instead of their neighborhood dealer. But falling retail prices created an incentive for growers to sell in neighboring states where pot remains illegal and can fetch a higher price.

In California, where the fledgling recreational industry is just over a year old but the medical industry has existed for more than 20 years, there is a similar issue. Sales leach east into states where marijuana remains illegal. But even local pot smokers don’t always buy from state-approved outlets, citing a complex two-part licensing system and continuing consumer confusion over which retail shops are legal and which are not.

Michigan’s Department of Licensing and Regulatory Affairs (LARA) has until December to make applications available for recreational marijuana facilities, which means residents likely won’t be able to head to a recreational dispensary to buy pot until early next year. In the meantime, they are allowed to use marijuana but not buy it, which makes it likely they’ll continue to buy pot illegally, or from “gray” market services like gift-based dealers.

When Michigan’s recreational industry gets up and running, Michigan will be the second-largest pot market in the country after California, based on population. As businesses clamor for a piece of the industry and consumers embrace their newfound rights, experts in cannabis law say the state is likely to experience many of the same growing pains as their western counterparts — including the survival of a black market that will feed neighboring states.

The danger of over-production

When Colorado’s first recreational cannabis retailers opened their doors, the getting was good. Consumers were eager to get their hands on newly-legal marijuana and the existing licensed growers and dispensaries could charge what they wanted — over $125 per ounce in 2015.

In the four years since, Colorado’s marijuana prices have dropped like a stone. Now consumers pay just over $50 per ounce by 2018, according to reporting by the Coloradoan newspaper.

The same trend happened in Washington state. Now, consumers can buy weed at less than $7 per gram including taxes, said Brian Smith, communications director for the Washington State Liquor and Cannabis Board. Industry members estimate it’s actually closer to $1.50 per gram, or just over $40 per ounce. Locals buy from the dispensary, but there’s a strong incentive for underground growers to sell out of state. Some illegal growers even mimic the look of licensed facilities and operate out in the open.

Brian Smith is communications director for the Washington State Liquor and Cannabis Board. (Courtesy photo)

“No one can put their finger on what impact (the low cost of marijuana) has had on the black market,” Smith said. “But I would have to question why would anybody buy from the guy down the street when they could go to a store with a huge variety that's been lab tested and is cheap.”

California’s product is massively overproduced, making it similarly cheap (just over $60 per ounce). The state grows up to 15.5 million pounds per year but sells only 2.5 million, according to a 2017 report for the California Department of Food and Agriculture, indicating the product is being sent out of state for consumption.

There are tens of thousands of unlicensed California businesses and locals still buy primarily from the black market. Most of those facilities haven’t been licensed in the year since recreational pot was legalized, but nor have they been shuttered. Alex Traverso, chief of communications for the California Bureau of Cannabis Control, attributes the limbo to a two-tier state and local regulatory structure. The state has had few resources to enforce the law, so black market dispensaries still sell pot, and their clients keep buying.

Alex Traverso is chief of communications for the California Bureau of Cannabis Control. (Courtesy photo)

What Michigan can learn

Michigan is far from having the booming production conditions that incentivize out-of-state sales. In fact, there’s a major shortage of marijuana as slow licensure has left existing grow facilities struggling to provide product for medical marijuana patients.

This month, the state’s marijuana facilities licensing board — under pressure from industry advocates and new Gov. Gretchen Whitmer — voted to extend temporary rules that allow unlicensed shops to stay open and for caregivers to provide pot to dispensaries.

It will likely take years for the state to reach equilibrium in the cannabis market, experts say. But when it does, Michigan runs the same risk of uncaptured state tax revenues as its predecessors. With the exception of Canada, none of Michigan’s neighbors has legalized recreational marijuana.

The gateway to Colorado and Washington’s problems started early. In Washington, licenses were cheap and business success rates were surprisingly high, leading to over supply. In Colorado, medical marijuana patients could possess up to 99 plants at a time, which made it confusing for law enforcement to distinguish between illegal grow operations and legal personal use.

Dominique Mendiola is the deputy director of regulation, communication and policy with Colorado’s Marijuana Enforcement Division. (Courtesy photo)

Colorado passed a law in 2016 lowering that number to 12 per household, a limit “that provided some bright line for law enforcement in response to some of the challenges that we saw,” said Dominique Mendiola, deputy director of regulation, communication and policy with Colorado’s Marijuana Enforcement Division. But “we still see cases of Colorado marijuana seized in other states, so that’s a focus for us.”

Michigan already has a 12-plant limit per person, and the barrier to licensure for commercial facilities is high: It costs $6,000 to apply for a commercial license and the required regulatory assessment fee paid by each licensee is $66,000 annually — though that could change as more facilities enter the system, said LARA spokesman David Harns.

Colorado and Washington use a tracking system that follows weed from seed to sale in an effort to make sure licensed growers aren’t smuggling product underground, which Michigan has already emulated. The system relies on growers to input information about their crops on their own, which is later randomly checked by LARA officials. In some areas, that has allowed licensed growers to cultivate off-the-books pot for sale on the black market — though state officials who spoke with Bridge Magazine said that’s rare.

Because of the tracking system, caregivers (people licensed to grow and purchase medical marijuana for patients), home growers and underground grow operations make up the bulk of diversion to other states in Colorado and Washington rather than licensed growers, say local regulators.

“Caregivers have been filling a need for medical marijuana patients but there are a lot fewer regulations and requirements put on the caregivers in terms of verifying where their products are going, testing their products… so there could be opportunities there for sure,” for product diversion to other states, said Josh Hovey, spokesman for the Michigan Cannabis Industry Association who formerly worked on the Proposal 1 campaign that lead to voters approving recreational pot in Michigan in November.

Regardless of regulation, the force of supply and demand means it’s likely some weed will make it to Michigan’s neighboring states.

Advice from predecessor states may be unwelcome to industry advocates: Overregulate.

“It’s easier to start off tight and then release the pressure than to allow something and take it back,” said Smith of the Washington State Liquor and Cannabis Board. “So go slow, recognize that it’s a new industry and we’re all kind of learning as we come.”

California, which is struggling to transition to a regulated market after decades of loosely regulated medical marijuana, may more closely mirror developments in Michigan, where largely unregulated facilities operated between 2008 and 2016. A California industry association estimated that only 5 percent of growers in the state are licensed, said Traverso, of the California Bureau of Cannabis Control.

California law enforcement agencies sometimes rely on third-party websites like Weedmaps to catch illegally operating facilities. State officials say they are trying to better educate operators this year on the need to become licensed, while urging customers to avoid the black market.  

“I would definitely preach patience,” Traverso said of Michigan. “The one thing that we have done well here is we really involved stakeholders… we had to say, ‘Let’s make this a collaborative process as we’re moving towards regulations.’”

Michigan's “gray” marijuana market  

Michigan is still a year away from having a regulatory system that will likely steer underground pot customers above ground. In the meantime, “gray” market options are popping up to fill consumers’ needs.

Pop-up businesses are selling products like art, books or chocolate at a high price that comes with a free “gift” of marijuana. Private social clubs offer clients the chance to play games, snack on sandwiches and smoke weed. You can even get CBD oil in your cocktail at some local bars.

Smoke’s Chocolate, an Ann Arbor-based delivery service, sells chocolates “delivered with gift by a Medical Card Holder.” The site’s about page says “no purchase is necessary to receive a free gift, however it's up to the delivery driver's discretion as to who wants to give his gift to.” (Screengrab from www.a2getsmoke.com)

Experts in cannabis law say these are most likely illegal, but whether these businesses' founders get in trouble depends largely on where they operate. Michigan State Police spokeswoman Shannon Banner said state police will “take our direction regarding enforcement based on what acts (local) prosecutors are willing to criminally charge in each specific instance.”

It’s too early to calculate where prosecutors are likely to crack down on gray market activity, Banner said. Besides, “we’re mostly focused on illegal drugs like heroin and meth.”

The gift-based selling system should be a legal concern for gray market entrepreneurs, said Galendez of the Cannabis Legal Group.

“They’re trying to vaguely indicate that this isn’t a gift,” he said. “But the fact is that if there is any kind of marijuana (being exchanged) that could be considered advertising or promoting to the public, which violates that adult-use law and could get you exposed to a civil infraction.”

Hovey of the Michigan Cannabis Industry Association said gray market services are likely to dwindle once the fully licensed recreational system gains ground in 2020. He hasn’t heard of any gift-based dealers being prosecuted yet, “but they’re definitely pushing the limits of the law.”

In the meantime, he said, consumers should know that if they’re buying product from gray market providers, it’s not tested. That means it could be contaminated with pesticides, mildew or fungus.

“It really is a buyer beware situation because you have no idea how they obtained it, whether it was tested or what it was grown with,” Hovey said.

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Comments

Don
Fri, 02/01/2019 - 8:52am

Seems what I heard is it cost 75% less on the street then from a lab!!!

Cathy Lawrence
Fri, 02/01/2019 - 11:33am

Well-written, interesting, and informative. It leaves me wondering about the business ($$$) impact that legalizing marijuana will have on Michigan's illegal drug dealers. I know, from watching my daughter and her friends experiment with pot, that marijuana IS a gateway drug. Not because of its chemical composition, but because the network of people you meet when you seek and share and buy marijuana has grey edges, places where users and dealers of harder drugs wait to meet you. These dealers are tied directly into the sophisticated dark business of hard drugs. And legalizing marijuana will hit the distributor-owners of this dark business right where it hurts: Revenue.
If I were a distributor, I'd be looking at a serious revenue shortfall. I'd see Michigan's December 2019 deadline for regulating marijuana sales as an 11-month-long attack on my business stability and long-term success. I'd respond immediately. I'd double my dealer network. I'd flood every market with a range of new and flavorful and fun varietals, at every price point, to broaden my customer base.
And I'd put significant effort into converting every current marijuana user into an addict. Sure, a lot of them will die (my daughter did). But along the way, they'll put every cent they can get their hands on into buying my stuff (my daughter did).
The other business push I'd make as a distributor is to buy a partial ownership of every licensed dispensary in the state. What an opportunity to become a legitimate business owner!
So, if any of this is true, I hope that our state is anticipating it and preempting it with a robust and sophisticated strategy.

Riley Beggin
Fri, 02/01/2019 - 3:23pm

Hi Cathy, thank you reading and for sharing your experience. I am so sorry to hear about your daughter. Would you be interested in sharing your viewpoint in a longer piece under our commentary section? If so, please reach out to me at rbeggin@bridgemi.com and we can talk more about the details.

Gary
Sat, 02/02/2019 - 9:55am

Riley Beggin,

"Cathy Lawrence" shared her straw-man argument/experience with her daughter (age unknown, could be 45 for all we know), and her "friends" experimenting with marijuana, not harder drugs. This was a heartstring-tugging screed that provided no facts, no evidence. She postulates what a dealer facing legal retail would do - double the network, expand the connections. Sort of like Amway for drugs, yet she entirely ignores the risks inherent in selling narcotics through insecure dealer networks and loose lips of those low-level dealer trainees who get popped selling to an undercover cop.

Also, I'd like to point out that your poorly researched article misinforms the reader:

https://www.michigan.gov/lara/0,4601,7-154-89334_79571_83746-453480--,00...

"LARA is currently determining the annual regulatory assessment for fiscal year 2018 for each of the five license categories authorized by MMFLA. Grower A licenses are capped, by statute, at $10,000. Grower B-C, Processor, Transporter, and Provisioning Center licenses will be dependent on the number of total licenses subject to assessment and could be as low as $10,000 or as high as $66,000. The exact amounts of the regulatory assessments are not available at this time."

Cathy Lawrence
Sat, 02/02/2019 - 10:54am

Riley, I understand your doubts! Thanks for expressing them. Your reply exposes two very significant mistakes I made in my comment. First, I didn't read the Bridge article closely enough. Second, my assertions are personal, not supported by any evidence. I appreciate your honest feedback, because now I see that my words didn't give you and me an emotion-neutral way to talk about the facts.
Cheers, Riley, and thanks again!

Anonymous
Sat, 02/02/2019 - 10:56am

Dang it, Gary! Look at me misreading info again! You were addressing Riley, not being Riley. Sigh. More work to do...

Riley Beggin
Mon, 02/04/2019 - 10:37am

Hi Gary, thanks for reading Bridge and for your comment. The $66,000 figure was given to me by LARA spokesman David Harns. As noted in the quote you offered here and as reflected in the story, that cost will change depending on the number of licensees. Harns said $66,000 is the current figure because of the number of licensees and may drop as more facilities are licensed. Because policy tends to change faster than the state websites are updated, we make sure to ask people who work in the department for up to date figures. Thanks again for your comment!

Matt
Fri, 02/01/2019 - 11:38am

So heavy regulation and taxes leads to black marketeers trying to circumvent the law???!!!! Who could imagine such a thing? Next thing Gov Whitmer will be crying that it didn't raise the money she was counting on so she needs to raise taxes somewhere else?

DevonWallace
Fri, 02/01/2019 - 12:30pm

Black markets for cannabis, or alcohol for that matter, can never be completely eliminated, but they can be greatly diminished. Even though some consumers in Colorado believe the tax rate is a bit high, the state estimates that in just the first 3 months of legal cannabis sales,60% was already purchased legally. There is Colorado cannabis leaving the state and supplying other states, but this should not be considered part of Colorado's black market as it is not sold in Colorado. Once the rest of the U.S. legalizes cannabis, its entire underground market will greatly shrink just as was the case for alcohol when it was legalized in 1933.

As with alcohol, most consumers would rather buy from a licensed establishment that has a wide variety of known quality products, with better quality control rather than a limited selection from an unlicensed black market dealer selling stuff more likely to be contaminated with pesticides, molds, fungus, and maybe even other drugs. Also, it is more convenient to walk into a store than to conduct some shady transaction with some shady dealer at a specific time and place. As long as tax rates are set appropriately (unlike California which over taxed it), black market cannabis will not be much of an issue for long.

Stanz
Fri, 02/01/2019 - 3:05pm

I don't remember anyone lamenting the existence of an alcohol black market.

Kevai
Fri, 02/01/2019 - 6:15pm

The reason everyone still shops the black market is because the "Legal" market aka Government has made cannabis unaffordable (over taxed) and has taken compassion off the table. The minute the did that the cannabis community revolted! This plant is about compassion and healing. If you try to take that away you'll never control it or stop the black market. There is no incentive for the black market to stop when your watching people die now that CA has priced them out of their medicine and your making us criminals if we help them. Bottom line the plant mandates compassion, without it the black market will always thrive!

Dennis
Sat, 02/02/2019 - 9:30am

"Experts in cannabis law say ["gray" market options] are most likely illegal, but whether you’ll get in trouble for using them depends largely on where you live."

No one is going to get in trouble for purchasing from the gray market. It is legal to purchase, possess, and consume marihuana in MI, regardless of its source. Only those selling unauthorized pot are at risk of legal trouble.

Marc
Sat, 02/02/2019 - 6:35pm

This will be the case til its properly regulated across the whole US. This will then balance out to one very low...im talking .99 flat from state to state. Then after about 10 years there will be no desire to really abuse it for money, there will not be a billion stores and there will be any black market value. If they are moving large amounts you will know. Meaning it will not ...be...worth it. The money for cannabis as any old school dealer will tell you is slow very slow but steady, very dependable. People will smoke with less intensity and taboo sensationalize impulse. This is the only way to do it right, but the world has listen to the taboo talk so many years they are dreaming of grandiose things. The Cannabis/ Hemp plant is a food a supplement and a gift. Comfort and wellness is what it proves for nothing but a little water and love. The abuse comes when we sit around a table and figure a way to pay ths bills with it. Meaning the value America had for the plant will show on the Forex. The foreign exchange, we need to look for profit as a nation with the plant. Top in the technology and production of quality hemp and cannabis products. As a nation. Message from. Plant/oxygen lover! Freebie also it sounds like. Plea to sik the police on more minority citizens. Keep it ethical.

James Black
Tue, 03/19/2019 - 6:07pm

Dispensaries charge 2 to 4 times what you can buy it for on the streets and the quality is the same. Regulations and rules just drive more people back underground. Should have decriminalized it and been done with it, now there will be all kinds of headaches and my quality of life will suffer because of it.

Rizzo
Mon, 08/12/2019 - 3:52pm

$60 per OZ in California is just a bullshit number! If someone is paying that price they are smoking dirt weed. Dispensary prices are often $60 per eighth, not per ounce.