REGULATORY UPDATES
Illicit Market Strangling California Cannabis Business Owners
by KRYSTINA SKIBO
The legal cannabis market in California is in distress, and has been for quite some time. After legalizing recreational cannabis in 2016, the state has struggled to deflate the illicit market, leaving legal businesses on their own to recover from the difficulties of competing with their low prices. This situation is causing financial instability, with many businesses struggling or failing to pay their taxes.
Cannabis business owners told LAist they struggle to pay high taxes and fees while they watch illegal operations go unchecked. They say when they’ ve tried to talk to city officials, they’ ve been stonewalled and shut out.
“ The cannabis market in California has been distressed for a while and it’ s not getting any better,” says Oren Bitan, litigation partner at Buchalter law firm.“ It’ s a confluence of a few different things: a proliferation of the illicit market where unlicensed players are in business and not getting shut down, the licensed businesses have to compete and are losing business share, and the prices in California have also plummeted over the last few years.”
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Oren Bitan is a litigation partner at Buchalter law firm.
A THRIVING ILLICIT CANNABIS MARKET
When prices of any product skyrocket, consumers look to where they can get it the cheapest. In the cannabis market, that means seeking out illegal stores.
Even though the consumers end up getting a discount, this process undercuts legal businesses and erodes their customer base, making it difficult for them to generate the revenue needed to cover their costs, including taxes.
“ There’ s really no penalties for illegal businesses now,” Bitan explains.“ They weren’ t necessarily that severe prior, but the penalties have been almost eliminated since there’ s not enough resources to enforce the law. So, even if regulators find an illegal store, they may get cited and even shut down, but there’ s nothing stopping the owner from opening another store across the street.”
Due to the lack of resources at the state level, these illegal storefronts fall into the hands of local municipalities, who also don’ t have the resources necessary to handle the situation.
All in all, it’ s a recipe for disaster, and the legal cannabis businesses are the ones suffering. These businesses are being squeezed by high taxes and an inability to compete with the illicit market, leading to widespread tax debt and business failures.
WHAT NEEDS TO BE DONE?
According to Bitan, in order to weed out the bad actors in the cannabis market, additional resources and enforcement are needed.
“ If there is more enforcement to the point where the unlicensed market goes away, that will help the licensed market because then they will be getting a larger share of consumer sales,” he says.“ An unlicensed store can pop up and go away, but a piece of property can’ t move. So, I think the tactic of citing a property owner for an unlicensed business would be an effective strategy.”
Until then, Bitan advises legal cannabis businesses to persevere through these difficult times.
“ There is some level of optimism at the bottom, but things can only get better from here. Hopefully that becomes a reality,” he says.
34 StateWays • Fall 2025 www. stateways. com