Nearly 3,000 illegal marijuana businesses found in California audit, dwarfing legal trade

Merchandise for sale at an illegal marijuana dispensary shut down in Wilmington earlier this year.

Sept. 11, 2019 5:14 PM PT

SACRAMENTO — California’s black market for cannabis is at least three times the size of its regulated weed industry, according to an audit made public Wednesday, the latest indication of the state’s continued struggle to tame a cannabis economy that has long operated in legal limbo.

The audit, conducted by the United Cannabis Business Assn., found approximately 2,835 unlicensed dispensaries and delivery services operating in California. By comparison, only 873 cannabis sellers in the state are licensed, according to the Bureau of Cannabis Control.

The figures are the latest sign of California’s rocky rollout of its legal marketplace, which promised better regulations and control beginning in 2018. Legitimate marijuana businesses have repeatedly criticized state leaders and law enforcement for failing to curb unlicensed dispensaries and delivery services, which sell cannabis at a much lower price by skirting state and municipal cannabis taxes.

This year, an industry-backed financial audit projected that roughly $8.7 billion will be spent on unregulated cannabis products in California in 2019, compared with just $3.1 billion spent on cannabis sold by legal businesses.

Officials have also warned that cannabis products sold in the illegal marketplace can pose health risks because the edible products, vaping pens and flower on shelves of illicit stores have not been subject to state testing. Since June, the California Department of Public Health has linked more than 60 cases of acute lung disease to patients who had recently used vape pens, and it warned that many of those people had recently purchased products from unlicensed shops.

The UCBA, a trade association that represents dispensary owners, cultivators and other licensed marijuana businesses in the state, conducted its audit by scouring the popular and controversial website Weedmaps, which functions as a Yelp-like service for cannabis dispensaries and products.

Lawrence Mansour, chief technology officer for APOP Media, a UCBA member focused on cannabis advertising, said he calculated the estimate of illegal operators by compiling a database of every California-based listing for a cannabis dispensary or delivery service on Weedmaps. Mansour said he found 3,757 listings, a number far higher than the total list of approved cannabis sellers registered in the state.

Any attempt to quantify the number of unlicensed cannabis sellers in the state would be an estimate. The Bureau of Cannabis Control does not track such data, and there are illegal marijuana businesses in California that do not advertise on Weedmaps.

The UCBA presented the audit’s findings in a letter to Gov. Gavin Newsom and the cannabis agency early Wednesday and called for a crackdown on Weedmaps, which many in the cannabis industry have criticized for amplifying the reach of illegal sellers.

“Every day that Weedmaps continues to advertise for unlicensed retailers they are putting consumers at risk and suppressing the growth and very existence of the legal market,” the letter said. “The unlicensed operators on Weedmaps do not pay taxes or the cost of compliance with local and state regulations, do not follow required worker or consumer protections and do not allow labor unions to organize workers, in turn allowing them to charge a fraction of the cost.”

A Los Angeles Department of Water and Power worker shuts off electricity to an illegal marijuana dispensary

The trade association also called on the state to retroactively impose millions of dollars in fines on Weedmaps under Assembly Bill 97, legislation that passed in July and allows for $30,000 in penalties for each day a cannabis retailer operates without a license. Some have interpreted the law to mean that Weedmaps should also be subject to those fines for allowing unlicensed dispensaries to advertise without a license.

Alex Traverso, a spokesman for the Bureau of Cannabis Control, said the agency has been diligent in trying to combat the state’s sprawling illegal marketplace.

“The bureau would love to be able to license more cannabis retail locations in California,” he said. “Unfortunately, there are a number of factors that prevent us from doing that. It’s not all under our control. As far as illegal activity is concerned, the bureau will continue its enforcement efforts and continue looking out for the public’s health and well-being.”

The agency said this year that it had served 19 search warrants at illegal dispensaries and seized roughly $16.5 million in unregulated cannabis products in the first six months of the year. Both totals were more than the entirety of enforcement actions taken by the agency in 2018.

The cannabis bureau also sent a cease-and-desist letter to Weedmaps last year, demanding that the website stop working with unlicensed operators. But Weedmaps has argued in the past that it is protected from such orders under Section 230 of the 1996 Communications Decency Act, which has shielded platforms like Facebook and YouTube from responsibility for the content their users post.

Late last month, however, Weedmaps said it would stop allowing unlicensed businesses to advertise on its platform, an announcement met with a mixture of praise and skepticism from those who consider the website the bane of California’s legitimate cannabis industry.

In a statement issued Wednesday, the company said that in addition to requiring new advertisers to provide a state license number, customers will also need to provide state identification. Despite the effort, Weedmaps Chief Executive Chris Beals said California’s black market would not truly be curtailed until more municipalities allow legal cannabis sales.

“While these policy changes will only have a symbolic impact on the size of California’s unlicensed market without more licensing opportunities and other large listing platforms following suit, we want to continue to lead by example,” Beals said in a statement.

Less than 20% of cities in California — 89 of 482 — allow retail shops to sell cannabis for recreational use. Though many large cities, including Los Angeles, San Diego and San Francisco, allow for the sale of commercial cannabis, even those cities have struggled to curb the black market.

A Times audit of Weedmaps this year found at least 220 unlicensed dispensaries in Los Angeles. By comparison, the city has issued only 187 temporary licenses for legal storefronts.

At the state Capitol, lawmakers were also discouraged by the audit’s findings.

“California’s not making it easy for business to join the regulated market,” said Assemblyman Tom Lackey (R-Palmdale). “Right now there’s more incentive to be an illegal dispensary than a licensed dispensary.”

Queally reported from Los Angeles and McGreevy from Sacramento. Times staff writer Ben Welsh contributed to this report.