California’s Overly Restrictive Cannabis Laws Incentivize Illegal Activity

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California's Overly Restrictive Cannabis Laws Incentivize Illegal Activity

It’s no secret that California has a massive illegal cannabis market, although it is perfectly legal (under state law) to sell cannabis if a company goes through the licensing process and complies with state and local laws. However, since the law regulating cannabis for doctors and adults (MAUCRSA) was passed and licensed in 2018, the state’s problems with the illicit market appear to have only worsened, not better. There were reportedly 3,000 illegal cannabis companies running at the end of 2019. that number is likely much higher today.

It doesn’t seem intuitive that a state allowing licensed medical and recreational cannabis activities would have such a robust illegal market. The reasons the illegal market is alive and well, however, are enshrined in the state and local laws themselves. For starters, the fact that MAUCRSA allows cities to ban commercial cannabis activities altogether has led many cities to do just that. This is a loss for everyone involved: illicit businesses continue to exist in these cities (why shouldn’t they if the ban didn’t work at all), cities are losing tax and licensing revenues, and customers are losing access to tested and safe cannabis.

It doesn’t just end with a local ban. The California Bureau of Cannabis Control (BCC) essentially abandoned the dispute over whether retailers licensed in one jurisdiction can deliver in those jurisdictions that prevent cannabis activity. Had this litigation been different, delivery companies could potentially have delivered nationwide, effectively eliminating the “deserts” where people cannot legally buy cannabis. This, in turn, would likely have forced more cities into allowing physical cannabis operations, realizing they were lacking tax revenues. But things will stand for the foreseeable future and few cities here and there will change course every year.

Even in the cities where licensing is completely legal, there are so many challenges in obtaining and maintaining licenses that many potential licensees decide it isn’t worth it and run the risk of running an unlicensed business. Above-market rents, costly buildings effectively mandated by strict regulations, high application and license fees (state and local), and high taxes mean serious dollar signs for people who may and may not have the money can or want to try to raise capital and give up control of their company.

Another regulation that is doing the licensed industry no favors is the ban on the sale of cannabis between 10 p.m. and 6 a.m., which is often further restricted at the local level. It makes little sense that people can go to bars or buy alcohol but cannot go to a store or even have cannabis delivered. If someone wants cannabis “by the hour,” they’ll likely get it, just not from a licensed company.

What is the problem? It is clear that the update is not an enforcement. So far enforcement has been poor at best (and that’s a generous description), but even if the state got very aggressive in enforcing it, would that really change anything? When the state and federal government actively pursued cannabis activities prior to legalization, people were still buying and selling cannabis. Enforcement in a regulated market is likely to have even less impact than before and be much more difficult for the state to implement, as in some cases the line between legal and illegal is blurred, while previously all cannabis activity was illegal.

The answer almost certainly lies in relaxing restrictions. To make a real change, lawmakers or voters (on the initiative) must either restrict local scrutiny or at least ensure that deliveries can be made nationwide. Taxes need to be cut. License costs must be reduced. Regulations that make little sense must be changed or discarded. These are all sensible ways the state can fight the illegal market without wasting too much time on enforcement. The ball is in the state court. For more information on cannabis developments in California, visit the law Law Blog.