Illegal Cannabis Businesses Harm Consumers and Their Community

Despite recent rollouts of regulations for cannabis licensing in Los Angeles, the city’s efforts to regulate have been hindered by illegal operators that refuse to cease operations. While the city gears up for the next wave of permitting, City Attorney Mike Feuer is simultaneously cracking down on illegal businesses operating in the city.

Illegal dispensaries undercut legal operators because illegal operators have a competitive edge. Illegal operators avoid costs of compliance (licensing fees, taxes, etc.) and are able to offer lower prices.

From the consumer’s perspective, those who are new to the world of cannabis may feel overwhelmed, unable to distinguish legal businesses from those that do not have operational approval. Currently, there are only 154 legal cannabis dispensaries in Los Angeles. The city has provided consumers with a way for identifying legal businesses through its website: cannabis.lacity.org/legal-businesses. The remainder of cannabis dispensaries are illegal.

The most detrimental consequence of these illegitimate businesses is the effect on the community. With the opening of California’s recreational cannabis industry, the state and localities expected to garner millions of dollars in tax revenue from commercial cannabis. Illegal businesses do not pay the state’s cannabis tax, an excise tax totaling 15 percent of all cannabis purchases. Black-market businesses don’t pay the city and state tax of 9.5 percent or local excise tax of 10 percent.

Last month, the city attorney filed 36 criminal cases against 142 defendants. Thirty-two commercial locations and one delivery service were cited for illegal operations. “Businesses that flout the city’s new cannabis law will be held accountable,” Feuer said. Illegal businesses may be cited and charged with misdemeanors for violations of the Los Angeles Municipal Code.

Despite the numerous businesses charged criminally, LAPD estimates that there are over 200 businesses operating illegally within the city. These illegal businesses will most likely be identified soon, as the City Attorney’s Office plans to continue working with the LAPD and Department of Cannabis Regulation to identify dispensaries believed to be operating without appropriate approval.

A legitimate cannabis business must have both a state license and local approval to engage in commercial cannabis activity. At the state level, the Bureau of Cannabis Control issues temporary licenses to cannabis businesses that have obtained a valid license, permit or other authorization from local jurisdictions. Locally, Los Angeles has slowly but surely established its licensing authority, the Department of Cannabis Control. The public may apply for local approval for retail locations during Phase 3. (The deadline for these applications is expected to be sometime in September.)

While illegal operators may be willing to roll the dice to cash in on short-term benefits, they cannot escape prosecution forever, especially with increased scrutiny from the City Attorney’s Office.

In addition to criminal charges and civil penalties, illegal operators risk being barred from establishing legal operations moving forward. While the line between legal and illegal operators may be hazy for those new to the industry, it is an important distinction.

Eradicating illegal operators will require consumers to make conscious decisions and the city to continue its enforcement efforts.

Aaron Herzberg is a founding partner at Puzzle Group Law Firm, PC, a law firm focused on cannabis licensing in Southern California.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the position or opinions of L.A. Weekly.

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