Unlicensed Cannabis Sales Overrun New York's Legal Program, Strangle Tax Revenue

The five boroughs now have more than 10 times the number of shops selling marijuana than Amsterdam.

This story was republished with permission from Crain’s New York and written by Aaron Elstein.

This is what the legal weed rollout had hoped to avoid.

When the New York State Legislature legalized recreational marijuana two years ago and dramatically reduced penalties for illegal sales, the intent was to create a network of carefully located dispensaries to be safely run by people who had been incarcerated for selling weed in the past.

Instead, the smell of weed is quite literally in the air all over New York City, and the government isn’t collecting much tax revenue from it. New York state’s marijuana marketplace could be worth $7.5 billion, Washington research firm New Frontier Data estimates. But most sales take place within the thousands of unlicensed bodegas, delis and other retailers in the city selling flower, edibles and extracts.

Sales at licensed dispensaries statewide trickled in at $33 million in the first half of the year, according to the state Cannabis Control Board. Tax revenue was coming in at $3.3 million a month through mid-May, according to a study by the industry group Coalition for Access to Safe and Regulated Cannabis; the Hochul administration had projected $4.7 million.

The five boroughs now have more than 10 times the number of shops selling marijuana than Amsterdam, the global capital of cannabis consumption ever since that city decriminalized casual pot smoking in 1976. New York City has at least three times more cannabis shops than all of the Netherlands, with only half that country’s population. The vast majority of stores here are unlicensed and have overrun the city’s nascent legal marijuana business.

Click on image to enlarge.

The Illicit Market

West Village attorney Paula Collins, who represents unlicensed stores, said she believes there are close to 8,000 shops citywide, five times the most commonly circulated estimate of 1,500 put forth by the sheriff’s office. Although the black-market stores, by far the biggest growth story in New York retailing, threaten to strangle the legal market, Collins argues the stores should be allowed to stay in business.

“Closing them would not only put a lot of people out of work but people will simply return to selling from their apartments like before,” said Collins, who told a judge at a recent hearing that she estimates 36,000 unlicensed retailers, wholesalers and growers are dealing in weed statewide.

About a dozen of them work from folding tables set up around the fountain in Washington Square Park, long a favorite spot for recreational drug use and sales. One recent afternoon a college student from France named Yves bought a potent, 35% THC joint for $10.

“I don’t do this in Paris,” he said, firing up his pre-roll.

Moments later a police officer walked by, and Yves asked if it was really OK to smoke a joint in the park. He was told that it’s illegal to smoke marijuana or tobacco in a park under the city’s Smoke Free Air Act. But on the sidewalk, he would have no problem, based on a Parks Department advisory that reads: “Smoking is allowed on sidewalks outside parks, including sidewalks that form the perimeter of parks. For example, smoking will be allowed on the sidewalk on Fifth Avenue outside Central Park.”

“I’m going to the sidewalk,” Yves said.

For many years Amsterdam was the most accommodating place for weed smokers like Yves. In the late 1990s there were around 850 cannabis cafes in the Netherlands, according to a 2014 report by U.K. charity Transform cited by the United Nations Office on Drugs and Crime. But over time the Dutch have become less tolerant of stoned tourists. There were 564 cannabis cafes in the country by 2020, according to Statista, and Marloe Boon, a spokesman for the Amsterdam government, said 166 operate nowadays in the city. Coffee shops produce 400 million euros a year in tax revenue, Transform said.

Tired of hosting a never-ending party, the city of Amsterdam in May banned marijuana smoking on the streets of old city center. It’s targeting other vices too, banning alcohol sales at stores after 4 p.m. Thursday through Sunday. And prostitutes were ordered to finish up by 3 a.m. instead of 6 a.m.

New Yorkers are making similar complaints. At a City Council hearing in June, Times Square Alliance President Tom Harris said that over the course of five months, Times Square had gone from two illegal weed stores to 12.

“To effectively deal with this crisis, we need to take the handcuffs off law enforcement,” Harris said.

There are signs of action. On July 18, the Manhattan district attorney’s office ordered the owner of 11 unlicensed shops to stop selling cannabis and pay $400,000 in fines.

Most unlicensed New York smoke shops aren’t collecting the 13% tax levied on cannabis sales, though they do tend to charge the regular 8.75% sales tax rate for lighters and other non-weed merchandise.

The black market for marijuana remains dominant in New York because it’s cheaper. Chris Jones, an Alameda, California-based cannabis journalist and registered medical user since 1998, said underground prices are usually half the legal market rate, which in New York is around $200 an ounce.

“Until the prices are about the same, the underground is going to dominate,” Jones said, adding that legal marijuana sales fell in California last year by 7%, or $400 million.

The illicit market is expected to generate $5.4 billion worth of sales in New York this year, according to New Frontier Data. It forecasts $2 billion in legal sales for New York, a figure that feels optimistic considering business at the state’s licensed dispensaries—there are 21 now—has gotten off to a slow start.

Click on image to enlarge.

The state “has failed by every measure in its rollout of the adult-use program, and every member of New York’s cannabis community—from growers and processors to justice-involved licensees and medical patients—are paying the price,” said the Rev. Kirsten Foy, a spokesman for the Coalition for Access to Safe and Regulated Cannabis.

Tremaine Wright, chair of the Cannabis Control Board, has no tolerance for whiny weed merchants even if they’re licensed. Black markets don’t move into the light right away, and anyone who invested in a dispensary looking for a quick buck was looking in the wrong place.

“Those people entered into this marketplace knowing exactly what the landscape was,” she told Crain’s.

Burden of Being First

New York legalized recreational marijuana the spring of 2021, after it became available a PATH ride away in New Jersey, and lawmakers prioritized seeding the new market with shops owned by individuals punished under severe drug laws. Gov. Andrew Cuomo described legalization as a policy that “rights the wrongs of the past by putting an end to harsh prison sentences, embraces an industry that will grow the Empire State’s economy and prioritizes marginalized communities so those that have suffered the most will be the first to reap the benefits.”

Benefits have been slow to materialize because, with financial conditions tightening, it’s not easy for ex-offenders to raise capital even if they were unjustly convicted. In New York City it costs up to $2 million upfront to open a licensed dispensary, insiders say.

“We took people who were the most economically unable to handle the burden of being first,” Cannabis Control Board member Jennifer Gilbert Jenkins said at a June meeting.

Slowly, the state is starting to close unlicensed shops so the legal ones can get a foothold. The first legal dispensary to open in the city last year, sponsored by the nonprofit Housing Works, generated $12 million in revenue in the first half of the year, accounting for better than a third of all legal sales statewide. But the shop is surrounded by dozens of outlaw operators. One was Varieties on Broadway, at 736 Broadway, until it was shut down June 30.

“It’s a very unfortunate situation,” said attorney Michael Becker, who represents shop owner Husam Assaedi. City records show the landlord is Jeong Hoon Kim, who the New York Post says is a dentist. Lawyers for Kim didn’t return calls.

Over a three-week period in June, the state Office of Cannabis Management issued cease-and-desist orders to 33 shops selling illicit weed and their owners ordered to appear before an administrative law judge to face fines of up to $10,000 a day. But the state is reluctant to throw the book at marijuana offenders and OCM’s 2024 budget includes just $5 million for an additional 37 staff to carry out enforcement.

The wheels of justice turn slowly. A hearing for a Greenwich Village shop called NYC Smokes was postponed for about a month because an attorney said the owner was out of the country. The unlicensed stores recently fined by the Manhattan district attorney were allowed to remain open and owner Rami Alzandani won’t be prosecuted so long as the weed sales stop.

Meanwhile, landlords look the other way because some unlicensed shops pay $30,000 a month in rent or more. After an East Village store at 14 First Ave. was sued by the city for selling illicit weed, it changed its name from Runtz Tobacco to Convenience Tobacco, and a recent visit by a Crain’s reporter showed it’s still selling weed. An attorney for landlord Son Dinh Tran said he was unaware of that.

“We’d rather not have the aggravation,” said the attorney, Julian Kaufman.

Sasha Berger, a 14-year-old Park Slope resident, can no longer visit the cats that live in five bodegas near her former middle school because the stores turned into smoke shops, with a minimum entry age of 21.

“Bodegas are very useful,” said Berger. “These cannabis stores are taking up everything.”

Looks Legal

The best-performing unlicensed shops make $15,000 a day in profit after paying rent, said Collins, the West Village attorney, and smaller shops make at least $2,000.

Unlicensed shops have significant competitive advantages over licensed dispensaries. Prices can be lower and they can take credit cards while licensed retailers accept only cash or debit cards. Although black-market weed is of unverifiable origin and could be full of pesticides, underground dealers and distributors have served New Yorkers’ marijuana needs for 50 years, and for most users that’s enough.

“The unregulated market in New York looks and acts a lot like a legal one,” said Amanda Reiman, chief knowledge officer at New Frontier Data. “And when consumers are used to getting products they are satisfied with in the unregulated market, it is tough to get them to switch over.”

Click on image to enlarge.

She said dispensaries in Illinois and Michigan have been more successful because unregulated markets weren’t so large.

New York state officials say more licensed dispensaries are in the pipeline, starting with 10 medical ones to open later this year that will sell to recreational users. Another hopeful sign is that Chicago Atlantic, a commercial real estate investment trust, recently committed to lending $150 million to a state assistance fund designed to cultivate licensees. This could be quite expensive capital, however, because Chicago Atlantic charges a weighted average of 17.5% for its loans, according to a regulatory filing.

Perhaps the best New York can hope for is a marketplace that eventually resembles California, where the legal market accounts for 40% of sales five years after legalization, according to New Frontier. There are more than 1,200 dispensaries in California, which has twice New York’s population, suggesting the Empire State could need at least 600, or 30 times more than it has now. One way to get there quickly would be to give unlicensed smoke shops a 90-day deadline to register and close the ones that don’t meet it.

“New York would be wise to create an easy and cheap pathway for unregulated delivery services to become legal,” Reiman said. “They have the consumer base.”

But dishing out licenses like that would mean sacrificing social-justice goals and the Hochul administration is betting the legal market will gain traction over time. On July 19 the Cannabis Control Board approved more than 200 new licenses, doubling the number outstanding, a move Executive Director Chris Alexander said would “accelerate the transition of New York consumers from the illicit market to the legal market.”

It isn’t clear when the new dispensaries will open, considering the industry’s high borrowing and rent costs, but cannabis entrepreneurs remain hopeful.

“We’re still really optimistic about New York; it’s going to be a huge market,” said Ron Gershoni, CEO of California-based Jetty Extracts, “over time.”

Meanwhile, the fragrance of weed has become as much a part of New York’s streetscape as the stench of summertime garbage. Mary Ann Tighe, CEO of the New York Tri-State Region at commercial real estate broker CBRE, recommended New Yorkers familiarize themselves with the Dutch concept of gedoogbeleid, which means “tolerance policy.”

“The Dutch are saying that human beings sometimes do things that aren’t so attractive, and the best we can do is to tax those things,” Tighe said. “We need to find a way to tax the cannabis that everyone can tell is out there.”

Ana Altchek contributed to this article.

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.

 Sign up

About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


Recent Tweets

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.