Doing Battle With The Black Market in a Heavily Taxed State

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By Rob Hendrix

As discussed on previous occasions, I have operated an I-502 State legal retail Cannabis shop in Central Washington State, in my hometown of Ellensburg, since August 2014. In those very early days, the Black Market was chuckling at the total ineptitude and ineffectiveness of 502 and beyond any reasonable doubt kicking our collective backsides. Prices were crazy and variety and consumer choice was an absolute joke. I myself had six (6) items on my “menu”, two types of pre rolls and four types of flower.

And here’s the kicker…It was $30-$35 per gram out the door after all applicable state taxes. So in the very beginning, we were not competitive at all. But due to good old capitalism, this situation began to change in a very real way at the conclusion of the first quarter 2015. (More on this later, but even though our legislature preached early on their collective commitment to eradicating the Black Market, their policies and burdensome tax structure in Washington State have made this noble effort much more difficult to achieve.)

In the interest of full disclosure, I am an Economics major from Central Washington University in Ellensburg, Washington, class of 1982. So I do understand market forces, consumer benefits of competition, laws of supply and demand and economies of scale.  However, even though I was a college student and the fact that I had experience in marijuana as an industry and a business, my working knowledge was practically zero.

In the very beginning,  I certainly did not consider myself a crusader against the evils of the Black Market. I was just trying to survive the strangling restrictions of my State’s regulatory framework and the choking tax burden that was upon us at the time. But I did quickly come to understand that competing with and ultimately exterminating the Black Market is and should continue to be one of our industry’s primary goals.

To a certain degree, there will more than likely always be a Black Market. As long as the definition of minor is 21 years of age in our State, there will be a Black Market of sort. However, while there is a real threat of the continued viability of what we call the Black Market, there are other factors that are within our control and it’s these conditions and items that we need to remain focused on.

In Washington State at this time, probably at least in part due to an oversupply of Cannabis (but that’s another topic for another article), current prices are more than a match for the illicit market. Even though our State has sales tax AND a 37% excise tax, by far the highest in the Country, our out the door prices of product are lower than what illegal prices were on the street prior to 502.

Regulated product is tested for a myriad of conditions and chemicals as well as moisture and THC, and much more so it’s a very good bet it is safe for the end consumer.

The very fact it is taxed heavily at both the State as well as Federal level, is a selling point at least to those not currently in the industry! In Washington State for example, our industry is contributing $250,000,000 per year to Medicaid.

The guy selling weed to a minor on the unlit corner of the local grocery store parking lot doesn’t give a flying flip about what chemicals may be present in their product.

They certainly don’t give a hoot about whether their “customer” is of age or not.

And quite obviously, they do not nor have they ever contributed anything to anyone’s tax rolls.

My point is we are competing, and winning handily where we are allowed to compete. Even with the huge tax burdens and the myriad of rules and regulations and restrictions, legal Cannabis in Washington State is viable and strong. And yet the Black Market still exists and in many locales is still successful.

The primary reason illegal cannabis distribution still exists is due to bans and moratoriums across our state. Politicians; mayors, city councils, city managers, county commissioners, the public in general foolishly believe in many towns, municipalities, counties dotted all across Washington State that they can say no to the existence of cannabis in these areas. This is dangerous and foolhardy for anyone to believe that a government entity can merely say no and cannabis will stay away.

I have told many cannabis haters who have said no to the State legal retail Cannabis Industry coming to their town or county that in fact they have made the Black Market viable and healthier in their general locales. Let me repeat that last statement; if anyone says no to legal, 502 State legal shops in their towns, you are inadvertently saying welcome to illicit cannabis businesses.

Municipalities have to choose which way and under what conditions Cannabis is going to be made available to the people of your city or town. You can choose the bright lights of a compliance driven, product tested, taxed and regulated industry or you can choose the dark, untested, unregulated world that is the Black Market in which they sell to kids, include chemicals in the processing of their product (that can, in many cases, cause irreparable harm) and/or contribute nothing good to society and communities. Shortsighted, ill informed and under educated individuals are making these same types of frankly dumb decisions for the “good” of their citizens every day across the USA. It is past time we assign blame where and on whom it belongs.

When and where state licenses entities are currently allowed to operate, we are dominating the overall market, the primary exemption being sale to minors by non-state licensed individuals. It’s interesting to me as a political advocate in Washington that has witnessed our industry achieve nearly undreamed of levels of sales and by extension, tax revenues, that Congress will not change the rate of taxation for any reason, even the very achievable goal of the further eroding of illegal cannabis sales.

The free market is powerful and has been successful in spite of and certainly not in any way due to political input. Regulation, compliance and public safety is and should be the Congress’ purview. That said, we all need to remember the stated goals of our legalization of cannabis, one being the protection of our youth from predators in the Black Market.

The backdrop of all that we do, all that we discuss and all policy and regulations that we put in place should be the ultimate destruction of illicit cannabis sales. Period.

If regulators and lawmakers keep this idea in mind at all times as it relates to promoting a successful Cannabis industry in the Evergreen State, we in the legal Cannabis industry will be able to hammer the Black Market into a state of submission.