New York's massive Cannabis gray market could cost the State $2.6 Billion
According to a new report, with only four licensed cannabis dispensaries in the Empire State and more than 1,400 unlicensed pot shops, the Wild West of Weed will lose billions in revenue if it doesn't stop the lawlessness soon.
IfNew York doesn’t tame its Wild West of Weed, unlicensed cannabis dispensaries and illegal marijuana sales could siphon $1 billion a year from the legal market through 2030. That translates to some $2.6 billion in tax revenue over the next seven years, according to a new report exclusively obtained by Forbes.
While the numbers appear sound—according to analysts contacted by Forbes—the report is not completely unbiased. It was prepared by research and policy advisory firm MPG Consulting and commissioned by cannabis company Acreage Holdings, which has 23 dispensaries across nine states, including three medical dispensaries in New York. The report suggests that New York state’s slow rollout of licensed recreational dispensaries—there are only four state-regulated stores, three of which are in Manhattan, to serve the state’s 19 million residents—and proposed rules that won’t let multistate operators (MSOs) like Acreage from entering the adult-use market for three years is hamstringing the legal industry and strengthening the state’s ubiquitous gray market for cannabis.
New York, which opened its first licensed recreational dispensary in December 2022, is expected to become the country’s second-largest marijuana market after California, with legal sales projected to reach $4.2 billion in five years and more than $6 billion by 2030. But with the glacially slow rollout of the legal market and the strength of the unlicensed market, analysts can’t project when New York will actually hit these numbers.
Matthew McGinley, an analyst who covers cannabis at Needham & Company, believes the report’s findings are accurate and portend future losses. “The regulators have created a thriving cannabis market for illicit sales, not legal sales,” says McGinley. “What they seem to have ignored are the basic economics of operating a state-regulated cannabis business. I would say regulators failed to launch this program.”
New York’s lackluster medical marijuana program, which launched in 2016, is also disappointing—there are 40 licensed medical dispensaries that sold an estimated $168 million worth of cannabis last year, down 0.5% from 2021. Compared to Florida, New York’s medical program is a joke. Florida launched medical marijuana sales in 2016 and currently has 545 dispensaries that sold $2 billion worth of weed in 2022, a 25% increase from 2021.
“After you bust them, within two days, they’re back up and running,” says New York City Council Member Gale Brewer. “I’ve never seen anything like it.”
Unlike many other states that have legalized recreational cannabis and left businesses to operate in a free market, New York is attempting something different. The state, which legalized recreational marijuana in March 2021, is trying to foster an industry devoted to social equity with the goal of righting some of the wrongs in America’s decades-long war on drugs.
Although Black and white citizens use marijuana at similar rates, Black people are nearly four times as likely to get arrested for cannabis crimes, according to research by the American Civil Liberties Union. Instead of licensing the big corporations that dominate the state’s medical market, New York has given priority to entrepreneurs who have been arrested for drug crimes.
The New York state Office of Cannabis Management has issued 68 retail licenses to people who are “justice involved,” meaning they or a family member was convicted of a drug-related crime. The agency announced it will issue a total of 300 licenses to people who have been affected by the war on drugs before issuing licenses to other applicants. The goal, officials at OCM have said, is to create a legal marijuana market dominated by small- to medium-sized businesses. Chris Alexander, the executive director of the OCM, has said that social equity is not something the state is doing to check a box; “It’s the thing.”
But as New York is trying to prevent Big Weed from taking over the market as it has in limited license states like Illinois, the state’s problem with rampant unlicensed cannabis shops has drawn the attention and curiosity of the nation. Other states that participate in America’s $26 billion legal cannabis industry (2022 sales across the U.S., according to Needham & Company), such as California and Oregon, also have major issues with illicit sales, which is hurting the legal market. In 2022, California’s cannabis revenue declined for the first time since the adult-use market launched in 2018.
John Kagia, the director of policy for New York’s OCM, says he respects the report’s creators but believes they relied on “flawed” assumptions. “We think this analysis significantly underestimates the pace and momentum that we're building in New York and the trajectory of a regulated market,” says Kagia.
The MPG report estimates that New York will only have 36 licensed recreational dispensaries open by the end of 2023, but the agency has already issued 68 retail licenses and will increase that number to 300 before the end of the year. While Kagia would not give a specific estimate of how many licensed stores will be open by the top of 2024, he says it takes about six months to open a dispensary after a license has been issued.
As for the criticism that OCM’s focus on social equity and the slow rollout of the licensed market is effectively helping the unlicensed market take root on seemingly every corner of Manhattan and the other four boroughs, Kagia says doing the right thing takes time.
“Virtually every other market that has attempted to do social equity and cannabis, it has been done well after the market is already operational; it's largely been an afterthought,” says Kagia. “If you let the largest companies in immediately and only then open the market to equity, it becomes very difficult for those equity stakeholders to gain a seat at the table and to be competitive.”
In California, the country’s oldest and largest cannabis market with $5.3 billion in legal sales last year, there are 1,233 licensed dispensaries to serve its 40 million residents. (According to New York City’s official count, there are currently 1,400 unlicensed dispensaries in the five boroughs—though many believe that number to be much higher.) Legal retailers in California are constantly battling unlicensed, so-called “trap shops” that open all over the state. In mid-February law enforcement raided two buildings in Oakland, uncovering an illegal grow with 30,000 plants and a shotgun—an operation worth an estimated $25 million. In January, authorities busted a $22 million grow operation, also in Oakland, with 26,000 plants and 2,700 pounds of processed weed ready to smoke. Thanks to overregulation and over-taxation, California’s cannabis economy is rife with unlicensed and illicit businesses.
“The state would generate about $200 million per year with 20% of the existing smoke shops converting to a transitional license,” says Paula Collins, an attorney who represents unlicensed dispensaries.
Late last year at City Hall, New York City Mayor Eric Adams created a joint task force composed of the city’s Sheriff’s Office, the Department of Consumer and Worker Protection, the New York City Police Department and the state’s Office of Cannabis Management to start weeding out unlicensed pot shops.
Since November, the task force has conducted nearly 150 raids on unlicensed shops across the city, issued more than 285 violations and fines, totaling nearly $1 million, and seized more than $8 million worth of illicit products. (The task force is not only seizing cannabis but also untaxed cigarettes and nicotine vaporizers.) Mayor Adams is attempting to find a balance between enforcement and a newly legalized industry trying to find its footing.
“As the mayor has said, when it comes to cannabis enforcement, our goal is to educate and confiscate—not incarcerate,” Mayor Adams’ deputy press secretary Jonah Allon says. “We can’t be heavy-handed in our enforcement—but we will not tolerate establishments that threaten the health and safety of New Yorkers, or that aim to cut the line and undermine the legal market, including justice-involved operators that have received a license.”
The real issue at hand is that some of the unlicensed shops, especially those operating as private clubs with modest “membership fees,” have a sound legal argument thanks to a loophole, or a safe harbor provision, depending on your perspective, in the Marijuana Regulation and Taxation Act that allows their unlicensed businesses to operate legally. Some attorneys who represent the owners of cannabis clubs argue that the language of the current law, which narrowly defines a sale as a financial exchange, has given legitimate legal cover to many unlicensed dispensaries.
New York City Councilwoman Gale Brewer, who represents Manhattan’s Upper West Side and is the chair of the council’s oversight and investigations committee, says her team counted at least 65 unlicensed pot shops in her district alone. Brewer has gone on a few raids with the Sheriff, but she says that it’s like playing Whac-A-Mole with a rapidly increasing number of shops. “After you bust them, within two days, they’re back up and running,” Brewer says. “I’ve never seen anything like it.”
State Senator Liz Krueger (D-Manhattan), who worked for seven years with Assemblywoman Crystal Peoples-Stokes (D-Buffalo) to introduce the Marijuana Regulation and Taxation Act, introduced a bill in January that if passed, would create financial penalties for people and businesses selling illegal cannabis products. Still, it has not come up for a vote. Other bills have also been introduced that aim to close the gifting and membership provisions in the law.
According to Paula Collins, an attorney and accountant who represents several unlicensed cannabis dispensaries in New York, there is a simple and equitable solution to the unlicensed dispensary dilemma. First, admit that the genie cannot be put back into the bottle. Second, give these unlicensed shops a provisional license.
“I estimate that the state would generate about $180 million to $200 million per year with 20% of the existing smoke shops converting to a transitional license,” says Collins. “The way I see it is that the unlicensed market has always been here, and these transactions have always occurred. But it's really the state that’s not making the overtures to the unlicensed market, which I think would really solve a lot of problems and put money in the pockets of the State and the City.”
While city and state officials try to get their arms around unlicensed cannabis sales, the few licensed dispensaries are already feeling the pressure. New York’s second recreational cannabis dispensary, Smacked, is located on Bleecker Street in Greenwich Village, across the street from an unlicensed cannabis shop. Roland Conner, who owns the store with his wife and son, grew up in public housing in Far Rockaway, Queens. To make ends meet, he sold weed as a young man. “Poverty is the mother of crime,” he says. Eventually, police knocked down his door in the early 1990s and he was arrested, served time in jail, and is now the first business owner in New York who was convicted of marijuana crimes to open a dispensary under the state’s program. In essence, the 50-year-old Conner is the symbol of what the state is trying to accomplish.
Conner says the so-called legacy market is the most “resilient part” of the cannabis industry, so he knows there is a bridge from the illicit world to the legal world. But he doesn’t think it will ever go away. As for the unlicensed shops, which he sees as Johnny-come-lately profiteers, Conner believes the state’s regulators should eliminate them.
“If they wanted to do it, they don't need my help, they don't need my outrage,” says Conner. “If we take a look at what's really going on, it’s about taxes and how the government is getting into the weed business. If they want the billions of tax dollars, then they're going to need to start cracking down on those illegal shops making it hard for dispensaries like mine.”
A few blocks away on a Thursday night in Manhattan’s Washington Square Park, vendors selling weed have set up their folding tables around the fountain. At one table near the south entrance, India, a 45-year-old New Yorker standing behind a table covered in art and a cigar box filled with cannabis products, says she appreciates how the state is trying to regulate the industry, but the illicit and gray market will live on despite its best efforts. India says she has been operating in Washington Square Park since the pandemic started and the cops have seized her weed and issued her a court summons four times. She has a court date soon for vending without a license, which she expects to get dismissed like all the others. A few minutes later, a group of police officers start making the rounds, going from table to table until each vendor packs up their goods and acts like they’re leaving. India starts packing up before the cops come to her table for a second time. “Let’s go!” an officer yells.
When asked what will happen as the legal market expands, she doesn’t hesitate. “The black market will never go away—it is the market,” says India, who typically generates $1,500 a week in sales from her table. “As much as you want to legalize it, we’ll always be out here.”
