the unlicensed sales. For exam-
ple, when California initially
approved small grows for med-
ical uses, many growers simply
grew more and sold it illegally
on the side. As a result, the ille-
gal market in California is esti-
mated at $5.4 billion—nearly
three times the size of the legal
market. Nationally, the illegal
market still brings in around
$50 billion a year.
Now entrepreneurs want to
replace the illegal market with
a fully legal market, but it’s just
not going as smoothly as antic-
ipated. That’s making opera-
tors and shareholders anxious.
California’s legal market has
been roughly flat for three years,
with issues like vapegate under-
mining good-faith business
efforts. “I think it’s becoming
more contentious when it comes
to the relationship between legal
and illegal,” says Jerred Kiloh,
president of the United Cannabis
Business Association (UCBA),
who also owns The Higher Path
dispensar y. “We’re tr y ing to com-
pete with illicit dealers who have
half-price everything.”That’s an irony of legalization.
The new laws make cannabis
accessible, but regulations and
taxes also make these products
competitively disadvantaged.
A report from Fitch Ratings
finds that after compiling state
and local taxes, the upcharge
for legal weed in Colorado is
36 percent; in Washington, it’s
50 percent; and in California,
it’s 35 to 45 percent. Kiloh esti-
mates the number is actually
much higher when you factor in
compliance costs and a lack of
tax deductions. (Since canna-bis is a Schedule 1 drug, federal
law forbids companies that sell
it to receive the tax breaks other
industries rely on to grow.)
So how can legal companies
compete? Some insiders say that
in the current environment,
competition is next to impos-
sible. “The only way to survive
in the legal market is by burn-
ing through cash,” says an ille-
gal dealer who agreed to speak
on the condition of anonymity.
“Either that, or they’re dealing
out the back door. The reality is
that a lot of cultivators are sellingMarch 2020 / ENTREPRENEUR.COM / 57