Regulators may examine legal marijuana production caps to curb black market sales
After seven months of recreational marijuana sales in Colorado, the newest goal of state regulators is to increase the amount of marijuana produced and sold by legal retailers.
“Right now we are pretty significantly under what should be produced,” said Ron Kammerzell, deputy senior director of enforcement for the state Department of Revenue.
“What that does is raises the prices and if the price is too high, then we can’t compete with the black market and that was our ultimate goal with Amendment 64 – we wanted to eliminate the black market,” Kammerzell said.
But new data comparing demand for marijuana in Colorado with legal supply suggests that criminal enterprises could continue to flourish.
In a report commissioned by the Marijuana Enforcement Division earlier this year, data show that Colorado residents and visitors will consume an estimated 130.3 metric tons of marijuana in 2014, but only about 77 metric tons will come from legal medical or recreational outlets.
The rest, about 53.3 metric tons of cannabis, or nearly 40 percent of the total marijuana demanded, is expected to be produced by unregulated sources. Those sources include “gray market” producers, including home-growers who can legally grow up to six pot plants for personal consumption, or black market producers, including gangs, who operate outside of the Colorado legal system.
The state’s solution, then, is to increase the amount that is produced legally.
“Basically, the state is trying to ensure that the amount that is being grown in Colorado equals what the demand is,” said Mike Elliot, the executive director of Marijuana Industry Group, a trade association representing the interests of the Colorado marijuana industry. “If there is too much, then people want to take it out of state or sell to kids (minors), and if there is too little then the black market will fill in the gaps.”
Right now, the state is facing a shortage of legal marijuana.
For state regulators, this creates a problem, as reducing the black market was not only a priority of Amendment 64, but it is also a federal priority.
U.S. Deputy Attorney General James Cole issued a memorandum a year ago that listed selling to minors, exporting marijuana out of state, and enriching the black market as offenses to be avoided in order to keep the Justice Department on the sidelines in states where pot is legal.
While the state, the federal government and legal marijuana businesses all hope to undercut the black market, their ideas about how to do so vary dramatically.
As the state looks toward altering production controls, marijuana retailers say supply isn’t the issue. The real problem is price.
“After the cost of producing each pound, I still have to pay a 15 percent excise tax, licensing fees, huge rent because landlords overcharge marijuana dispensaries, and when I pay federal income tax I can’t deduct like a regular business,” said Brian Ruden owner of Starbud, Altermeds and Tree of Wellness medical and recreational outlets in Denver, Louisville and Colorado Springs. “It ends up that I am selling an eighth (of an ounce) for $60 when the street price is about $25.”
On average, sales taxes on recreational marijuana are just over 21 percent, while the taxes on medical are about 7.6 percent. Even though the federal government still categorizes marijuana as a dangerous drug, it collects tax revenue on income from its legal sale in Colorado and Washington.
And the black market benefits from the high taxes, too – as their products can be sold for much less.
“I have had locals come in here without their med cards, and ask what our recreational prices are and just turn around and leave,” said Nelson Figueiredo, a “budtender” at Medicine Man dispensary in Denver. “They have friends who can sell them pot for much cheaper.”
One of the demand study’s authors, research analyst Adam Orens, agreed that the price and tax structure could contribute to the continued black market, but the focus now is to reevaluate the production management system.
“We don’t have it right yet,” Orens said. “But one thing that came through during the study was that the Marijuana Enforcement Division did not want to restrict the market, but was very thoughtful in trying to make sure they have a functioning system.”
The current production controls are monitored using a plant count, where different stores are issued licenses that allow the production of up to 3,600, 6,000 or 10,200 plants, depending on the stores’ license designation.
This differs from the approach taken by the state of Washington, which monitors marijuana production by square foot of growing space, but which has much less data available, as retail sale of marijuana has only been legal there for just more than a month.
As the Colorado industry continues to grow, regulators hope to allow steady growth of the legal market.
“We really want to do this in a very predictable and controlled way,” Kammerzell said. “I think what we are seeing is that the biggest driver right now is supply, and that is what we intend to address.”
Kammerzell explained that the Marijuana Enforcement Division does not control tax structure. Changes there would have to be considered by the Colorado General Assembly.
“It’s going to be a dynamic work in progress,” Kammerzell said. “Whatever comes from this work group won’t mean our work is done. It will keep changing overtime and we will make adjustments.”
The first scheduled work-group meeting to discuss a new production control proposal was held Wednesday, August 13.