Legal Marijuana Still Flowing Into Black Market

Legal Marijuana Still Flowing Into Black Market

Even at a time when legal marijuana sales are exponentially growing, the cannabis black market continues to thrive. Recent news coverage in Colorado and Oregon offers insight as to why this is happening.

Oregon "diversion" rates booming

Quoted by a Central Oregon news outlet recently, one anonymous Oregon farmer said he continues cultivating and selling product on the black market because, “one can make considerably more money for the same product.” According to the farmer, who sells roughly 100 pounds of illegal marijuana annually, “we ship it out of state, where we get much more money.”

It’s practice called “diversion.”

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By his estimates, a single pound of marijuana can fetch prices between $4,000 and $7,000 once it has been shipped to a state where cannabis remains illegal. With black market marijuana delivering such a massive return on investment, some estimates insist that up to 80 percent of Oregon’s marijuana exits the state for the East Coast.

Colorado's leaking "damaged" product 

In Colorado, the METRC program — used to track legal marijuana in the state’s seed-to-sale system — shows “leakage” into the black market. And while regulators say it’s difficult to estimate just how much legal marijuana has flowed into the black market, they have levied more than $680,000 in fines to licensees who’ve violated state law. One of the more prevalent infractions is when growers report a selection of their cannabis as damaged or contaminated and then sell into the untaxed and unregulated bootlegging world.

Tax rates and the black market

But whereas most black market product to date tends to leave legal states to states where marijuana remains illegal, some Coloradans are worried increased marijuana taxes will encourage increased intrastate black market transactions. As reported by the Denver Post, the state’s most recent spending bill includes what would be a special sales tax increase on recreational transactions, from 10 percent to 15 percent.

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According to the Tax Foundation, recreational marijuana in Colorado is already taxed at the second highest rate in the county. Here’s how The Denver Post broke those numbers down:

“The state’s cannabis consumers pay the standard 2.9 percent state sales tax plus a special 10 percent marijuana sales tax. A 15 percent excise tax applied on wholesale transfers is baked into the cost of sale. Under the legislative proposal, the increase to the 15 percent special sales tax rate is paired with the elimination of the 2.9 percent regular sales tax. So the move amounts to a 2.1 percentage-point tax hike for consumers.”

Consumer spending habits

As wholesale and retail prices of legal marijuana fall, which in turn increases consumer purchasing power, the risk of increased tax rates turning buyers to the black market likely decreases. However, basic economic principles apply to every market and one consumer realty transcends every industry: consumers like a good deal and will seek out opportunities to stretch their dollars.