Above photo: Sheriff’s Office personnel with the Santa Cruz County Cannabis Licensing Office have identified and dismantled a large-scale, unpermitted commercial processing and distribution operation in the Summit Road area of Santa Cruz County. SOURCE: Santa Cruz County Sheriff’s office.
Selling cannabis illegally is still a viable and popular option in the U.S. It’s easy to understand why, the black market can significantly undercut dispensary prices, no fees—no taxes. However, as soon as weed is legalized federally, the black market will likely not be able to survive.
Pot legalization has held great promise, and in many of the states where it has happened, that promise has been fulfilled. People who are ill and anxious have found their medical administrations of weed to be free from the legal hell of prior years. Recreational users who want to get high are not forever looking over their shoulders for the cops, nor are they wondering what they are smoking, with lab testing in some states now supplying precise and regulated THC and CBD contents.
In addition, there are those remarkably detailed varieties of available strains that climb the consciousness ladder, from your mellow morning smoke to your mid-day booster toke to your post-prandial demitasse bowl. There is even mounting evidence that cannabis products can help with serious conditions, like PTSD and opioid addiction.
Therefore, you would think in California, particularly in a liberal, laid-back area like Santa Cruz County, where there were many medical dispensaries before bud was fully legalized and many fancy recreational ones now, you would think that pot politics and practices should be settled. You would think that all the growers would fall in line, regulate their acreage and their harvests, wrap up their wares in eye-catching packaging, and generally come in from the cold—right?
As of May 1st of this year, Santa Cruz’s Cannabis Licensing Office, in conjunction with the Sheriff’s Office, had removed over 27,000 unlawfully cultivated plants, and issued 35 cultivation citations. According to Santa Cruz County Deputy Sheriff Steve Carney, who heads a team of three sheriff’s personnel conducting enforcement in the Cannabis Licensing Office, “The exact extent of the black market is unknown, but it is still operating within Santa Cruz County and throughout California. We continue to see unlawful stream diversion, illegal grading, weapons at large, and nonpermitted grow operations in remote locations of the County. I don’t have a dollar figure, but the total value of the operations is likely somewhere in the millions.”
Nevertheless, those reports just went to May 1. As I was writing this in late May, investigators found a grow with more than 9,700 pot plants inside 11 greenhouses, each one 3,000 square feet. The grow had four on-site staff living in a small trailer in a rugged mountainous area in the county. Another four greenhouses were found a week earlier in another part of the county, and in early May, two other illegal grows produce 2,800 seized plants. That is a lot of green.
Sam LoForti, the Cannabis Licensing Manager for Santa Cruz County, seconds Carney’s observations: “The main issues are the undercutting of the legal cannabis market and nonpermitted infrastructure development occurring associated with illegal operations. This development includes illegal water diversions, structures and roads,” he says.
Carney says that many growers are trying to move into the regulated market in good faith and that the vast majority of growers have been involved in the licensing process and are following the rules. However, “The individuals my team addresses have not chosen that route, and appear determined to undermine their competition in the regulated market by operating outside the scope of the law,” Carney says. “But our priority is compliance over convictions.”
There are challenges for legal growers as well, in licensing, fees, and oversight. “The permit process is very challenging for some companies, while others understand the pathway and see this as a slight variation on the standard use permit process,” says LoForti.
The specifics of local regulations have been fluid since legalization, with some growers confused over continued changes to the legal structures. “The process is evolving, and our regulations may be changing,” says LoForti. “We have worked diligently with other departments in the County to create a clear path forward through the permit process. This work is not done, but we have received positive feedback on the steps we have taken in the last three months.”
Giving Green the Business
Colin Disheroon, founder of the two Santa Cruz Naturals dispensaries in the county, says that legalization has created more of a level playing field for the involved business owners, and has made it clear how they need to operate. However, that does not mean it’s all in clover. “The format by which we operate as a business is much more like a standard, or like what the alcohol industry would be,” he says. “We buy a product that is coming from a licensed distributor, and we check it into our inventory and it’s managed. But the fees and the licensing are all really arduous and excessive, in my opinion.”
Disheroon has some mixed feelings about the black market. “The black market was there first. I would not say it is necessarily a good thing for the business currently. However, I think as a dispensary operator, I would say it is unfair to withhold a nod to the black market’s existence. The cannabis industry should not have been demonized and made illegal in the first place. We’re here now essentially because the whole market was given bad policies 100 years ago.”
Disheroon explained that during the early days of the legal medical pot era, there was almost a self-regulating playing field, allowing many mom-and-pop shops to grow relatively small amounts of pot, with their competition being their next-door neighbor. “The market was starting to stabilize, but once regulations kicked in, it basically said you’re no longer gray market; you’re black market. Whether you grow 1200 square feet or 500 square feet or 10,000 square feet, you are now black market. Therefore, the moms and pops that did not want to take that risk pulled out. But the risk takers don’t care—they’re already illegal no matter what they do, so they’re scaling up.”
He said that some legal growers are shipping cannabis out of state because of the black-market competition and higher out-of-state prices. As we will see later here, that is the case with black-market growers as well. There is competition in the legal market from some other in-state distribution structures as well. “There are a lot of delivery services, illegal unlicensed delivery services that are advertising, marketing, and selling black market cannabis and are undercutting the dispensaries,” says Disheroon. “That’s a problem, because when a legal licensed dispensary goes through all the expenses and hoops, goes through all the regulation, gets a delivery service license, and tries to do delivery, they can’t compete,” he says.
“We have to charge a 15% excise tax and 8.5% sales tax, and all the added costs of shipping, weight, fuel for our drivers, and packaging. There’s no way to compete against the $25–$30 rates that the black-market delivery services are charging.”
In many ways, the black market is benign regarding legalization, in that they can undercut dispensary prices. “I know that many of my grower friends that had previously been assisting in the black market voted no for legalization. They didn’t want it to be legalized because they saw this happening,” he says. “They just undercut our prices. We cannot do that. It is not a war, but it is tough to deal with all of these application fees and license fees, etc. But it’s still working—our businesses are doing really well now.”
Legal Has Its Liabilities
Legal growers face some structural challenges as well. Max Cain, who originally grew shishito peppers on his farm in the south of the county, now grows cannabis indoors, hydroponically. He has a cultivation and distribution business, selling both packaged and bulk, some unbranded, some branded with his Farmer Max brand. He has some issues with the licensing and fee systems.
“I think that the state looked at this as a way to make money,” he says. “And because of that, the fees and taxes perpetuate the black market no matter what. The expense of licensing, compounded with the taxes levied all up and down the supply chain, create a situation where the growers and producers are being squeezed on price, and so are the dispensaries and the consumers. It is pushing many people out of the system. And further, the people who grow for the black market feel totally justified in doing so because they feel the state is taking money they don’t deserve,” Cain says.
As for the competition from illegal growers, that is not a cut-and-dried issue either. “Unlicensed growers don’t sell to the dispensaries, so they don’t compete against me directly. Many consumers would never shop at dispensaries because they are too expensive. So the black market is handling all those other people,” Cain says.
He feels both markets will survive for the near future. “I think both markets will continue. Some people will put their energy into ‘knowing a guy’ and dealing with all that goes with buying on the street, and some will go to the store and shop like it’s Whole Foods, because they value that experience,” he says. “But California will not be able to stop it. This whole system was created by proposition, and the proposition system is deeply flawed. This should have been crafted by professional legislators. It wasn’t and it shows.”
Black Is the New Green
For black market growers, the risks are worth the rewards. “Jane,” a second-generation Santa Cruz County black-market grower says, “It costs more to operate conventional, legal, permitted business because of the county taxes and the general business structures, like payroll taxes. In the black market, we don’t have any of those restrictions, so basically it’s 25% less expensive to grow in the black market.”
Those profits can come at a bit of a paranoia price, however. “If you are a greenhouse grower that’s becoming more difficult because of aerial surveillance that’s going on through satellite. Opportunities are becoming less because the county will systematically come through, visit those locations and give them cease and desist orders,” Jane says.
Moreover, it is not the criminal penalties that are the challenge—it is the civil. “If you get caught you aren’t going to go to jail—you’ll just get a fine. However, you’ll be visited by city planning people, who might fine you for other violations,” she says. “Fish and Game might fine you for illegal grading and those fines can be hefty and even daily. I have heard people in Humboldt being fined up to $10,000 a day. They could not pay, and then they would have their properties seized. The problem is no longer the sheriff, but planning and Fish and Game.”
Fade to Black
Jane foresees the good times will end, as state-to-state legalizations become common. “The black market is going to slowly diminish due to national legalization, she says. “ We have the advantage right now of being able to transport and sell in other states, but as soon as it is federally legalized, that advantage will slowly go away. People in other states will start growing their own pot.”
California will no longer be able to take the high ground, so to speak, with legalization extending across the country. “I definitely think the black market in California is good to go for another couple of years, but you can see it tapering off as soon as more states legalize it. And tapering more once it goes legal federally, which I expect it to in the next two to three years,” Jane says.
Therefore, the promise of the legal pot scene is not quite as dreamy as it was first imagined to be. As with any industry that deals with large amounts of money—and with people—that there are contradictions, complications and even psychological contentions should not be surprising. We would like to say, “Can’t we all just eat some THC-infused Gummy Bears, and get along?” but it is never going to be that easy.
For Further Information
Santa Cruz County Cannabis Licensing Office– http://www.co.santa-cruz.ca.us/CannabisLicensingOffice.aspx
Santa Cruz Naturals– https://santacruzcannabis.com
Farmer Max– https://farmermax.com
“Jane”– She ain’t available