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Taking Marijuana Out Of The Black Market: Why The Business Community Needs To Lead

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business community black market marijuanaBy Justin Hartfield

The future of marijuana legalization hangs perilously in the balance. While some may view decriminalization as a fait accompli, the reality is that the results of initial implementation efforts in Colorado, Washington, and the other pioneering states of legalization will significantly impact the direction and momentum for subsequent efforts. The stakes could not be greater.

In their current form, the proposed regulations for granting retail licenses in both Colorado and Washington will result in insufficient supply to meet the increased demand of an adult-use regime. This is more than an economic problem. Market shortages in the legal market enable underground suppliers to gain increased market access, thus eviscerating one of the major public policy rationales for legalization reforms. In fact, it is possible to legalize badly.

The easiest way for states to remedy this problematic and dangerous supply deficiency is to authorize internet sales and delivery of cannabis from licensed suppliers to verified customers in state. Delivery services with internet ordering are already commonplace in medical marijuana states, and government-issued identification is verified upon delivery. Delivery sales also have the additional advantage of making the purchasing process slightly less conspicuous for customers concerned about potential social ramifications. The adult-use regime could simply do the same, ideally adding online payment processing to the established procedures. About half the states already authorize in-state internet sales of wine, and the number has only continued to increase.

Aside from the economic benefits, perhaps the greatest advantage of enabling in-state internet-based cannabis sales is to avoid the political hurdles of licensing of additional brick-and-mortar retail locations. In those communities where cannabis-themed modifications to the Town Center fascia are unpopular or outright verboten, internet delivery sales can fulfill demand without compromising perceived local identity.

Retail sales, however, represent only a fraction of the total opportunity created by cannabis legalization. On-premises consumption is just as important, as evidenced by the experience with alcohol. According to industry data, 40% of American alcohol sales (approximately $76 billion of a total $190 billion annually) is generated from bars, restaurants and other on-premises consumption establishments versus retail stores. When it comes to intoxication – alcohol or cannabis – people prefer doing it socially, out with their friends.

Despite this positive precedent, however, neither Colorado nor Washington regulators have authorized licenses for on-premises consumption. Ideally, officials should specifically authorize on-site consumption licenses allowing sales and distribution, the same way it is done with liquor licenses. The additional sales taxes alone could generate millions for city and county governments, and should be seriously considered, perhaps by the next state to pass a legalization initiative.

On-site consumption of cannabis may seem like a controversial issue, but it shouldn’t. This country’s collective experience with alcohol decriminalization provides a useful blueprint for allowing social intoxication as a business model. Every state in the union, even Utah, licenses alcohol establishments for on-premises consumption. From speakeasies to microbreweries, and from dive bars to nightclubs, the diverse array of on-premises options in this country shows how consumer choice and competition leads to greater value. Wine list, anyone?

On-site consumption may create number of particular challenges, but each of those challenges, under a proper rule structure, can become mitigated, if not transformed into opportunities for substantial market innovation.

One way to allow on-site cannabis consumption while protecting public safety is to combine on-site consumption cafes with hotels and lodging establishments. Cannabis-focused hotels and resorts could provide customers with an enjoyable experience without implicating public safety concerns. By providing shuttle transportation to guests, the exclusivity and convenience of such a hybrid establishment would certainly attract local cannabis connoisseurs as well as curious tourists from around the world. Think of it as the adult Disneyland. Or Americamsterdam. Like all great American spinoffs, our on-site consumption industry should take what’s useful from the Dutch model, but applied to local conditions, with a unique capitalist twist.

Cannabis users’ well-documented affliction known as the “munchies” presents an obvious yet untapped market opportunity. Licensing food vending services within on-site consumption establishments, or even licensing entire cannabis-focused eateries, would create significant tax revenue and local jobs. However, in addition to state licenses, local zoning codes and county health regulations would have to be adjusted in nearly every jurisdiction to properly allow for this new form of culinary experience.

Entertainment venues would benefit from a similarly targeted regulatory approach. One of our companies sponsors annual cannabis-themed concert events in medical marijuana states. Based on this experience, we believe that licensing designated entertainment venues to sell cannabis for on-site consumption would be extremely successful. Even restricting on-premises sales to personal-use sizes (such as one joint or blunt per customer), would generate revenue for all stakeholders in addition to enhancing the overall market share of the legalization regime.

The potential impact of marijuana legalization on tourism can be seen in Amsterdam. It is estimated that 10% of the tourists come specifically for the “coffee shops”, and another 40% just happen to drop in for a bit. Beyond that, as you walk around the city, most of the souvenir shops have their cannabis-themed schwag upfront. It is a part of the contraband culture.

A complete cannabis legalization ecosystem must consider the impact on all communities, particular the most vulnerable and disenfranchised. A productive use of legalization revenue would be to fund transitional programs to help new parolees (incarcerated for marijuana offenses) acquire useful skills to transition back into the workforce.

Most of all, we should keep in mind how much more we have to learn about cannabis from a basic scientific perspective. The global ban on possession has eviscerated the ability for researchers to understand the plant and its psychoactive effects. Rather than diverting licenses fees to the general fund for the whims of politicians, officials should use the revenue to support scientific study on the effects and impact of cannabis in all its forms. From grant programs to develop clinically-proven methods and devices to determine the physiological indicia of cannabis impairment, to university studies isolating the neurological impact of cannabinoid release, the acquisition of useful and accurate knowledge about cannabis should be the highest priority.

The drive to end marijuana prohibition is gaining momentum every day for a variety of reasons, but if it is left to the politicians and the prohibitionists, the result will be a prolonged mess when it is time for a clean break from the past. We believe that the time has come for the business community to take the lead in the drive to legalize marijuana, and in a realistic way that creates jobs, without excessive taxes and regulations.

Source: WeedMaps.Com – syndicated with special permission

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  • nedhoey

    I read things all the time offering ideas for regulatory policies etc. It amazes me that most seem to ignore a few very basic facts. Alcohol regulation works fairly well across the States. However it isn’t perfect. Cannabis is LESS dangerous than alcohol, so why implement a more cramped, more rigid system. The alcohol model can easily be adapted for pot.

    To wrest control from the black market? Allow scaled production. All current production is severely constrained. That keeps production costs and prices high enough to incentivize black marketeers. Allow the price fall dramatically by increasing supply. When scaled up production is the only way to utilize economies of scale to keep per unit production costs low enough to make a profit in a competitive market, the small black market operations cannot compete. Keep excise and sales taxes modest and reasonable. If you want voluntary compliance and ease of collection, that’s the way to do it. That’s how nearly all all alcohol taxes are. There’s no good reason in the world to tax cannabis at higher rates than alcohol.

    Indoor production isn’t necessary. It’s a huge energy hog and environmentally highly problematic. Allow sunny suitable climate states to produce and ship to unsuitable ones as is done with wine now. The “three tier” system is nice but shouldn’t be mandatory. Doing so creates a tyranny by the middle tier. This is a current ongoing problem in alcohol distribution. Interstate retail sales should be allowed, just like some States now allow with wine. There are no unmanageable risks and it is a sound free market thing to do.

    I could go on but the idea is that this isn’t a mystery. The last paragraph really sums it up. Politicians and prohibitionists should not have anything to do with creating the system.

  • nedhoey

    I read things all the time offering ideas for regulatory policies etc. It amazes me that most seem to ignore a few very basic facts. Alcohol regulation works fairly well across the States. However it isn’t perfect. Cannabis is LESS dangerous than alcohol, so why implement a more cramped, more rigid system. The alcohol model can easily be adapted for pot.

    To wrest control from the black market? Allow scaled production. All current production is severely constrained. That keeps production costs and prices high enough to incentivize black marketeers. Allow the price fall dramatically by increasing supply. When scaled up production is the only way to utilize economies of scale to keep per unit production costs low enough to make a profit in a competitive market, the small black market operations cannot compete. Keep excise and sales taxes modest and reasonable. If you want voluntary compliance and ease of collection, that’s the way to do it. That’s how nearly all all alcohol taxes are. There’s no good reason in the world to tax cannabis at higher rates than alcohol.

    Indoor production isn’t necessary. It’s a huge energy hog and environmentally highly problematic. Allow sunny suitable climate states to produce and ship to unsuitable ones as is done with wine now. The “three tier” system is nice but shouldn’t be mandatory. Doing so creates a tyranny by the middle tier. This is a current ongoing problem in alcohol distribution. Interstate retail sales should be allowed, just like some States now allow with wine. There are no unmanageable risks and it is a sound free market thing to do.

    I could go on but the idea is that this isn’t a mystery. The last paragraph really sums it up. Politicians and prohibitionists should not have anything to do with creating the system.

  • nedhoey

    I read things all the time offering ideas for regulatory policies etc. It amazes me that most seem to ignore a few very basic facts. Alcohol regulation works fairly well across the States. However it isn’t perfect. Cannabis is LESS dangerous than alcohol, so why implement a more cramped, more rigid system. The alcohol model can easily be adapted for pot.

    To wrest control from the black market? Allow scaled production. All current production is severely constrained. That keeps production costs and prices high enough to incentivize black marketeers. Allow the price fall dramatically by increasing supply. When scaled up production is the only way to utilize economies of scale to keep per unit production costs low enough to make a profit in a competitive market, the small black market operations cannot compete. Keep excise and sales taxes modest and reasonable. If you want voluntary compliance and ease of collection, that’s the way to do it. That’s how nearly all all alcohol taxes are. There’s no good reason in the world to tax cannabis at higher rates than alcohol.

    Indoor production isn’t necessary. It’s a huge energy hog and environmentally highly problematic. Allow sunny suitable climate states to produce and ship to unsuitable ones as is done with wine now. The “three tier” system is nice but shouldn’t be mandatory. Doing so creates a tyranny by the middle tier. This is a current ongoing problem in alcohol distribution. Interstate retail sales should be allowed, just like some States now allow with wine. There are no unmanageable risks and it is a sound free market thing to do.

    I could go on but the idea is that this isn’t a mystery. The last paragraph really sums it up. Politicians and prohibitionists should not have anything to do with creating the system.

  • Gabriel

    I don’t think i will ever stop buying from the black market as long as its cheaper.

  • Dr. B

    Well thought out, I agree.

  • wowFAD

    Great article, but I feel the points were given in reverse-order of priority.

    I am a big fan of every idea voiced herein. Especially the idea of getting the business community to step up to the plate, given the huge untapped revenue potentials in cannabis and cannabis-related business ventures. Money talks, after all. Law makers placate voters, but they listen to money. Sad, but true.

    The 2nd to last paragraph, which says we have more to learn — again, couldn’t agree more. We have much yet to learn, but in terms of the safety and medical efficacy, IMHO, we’ve already learned plenty about the health benefits and safety of this harmless little plant. Now, it’s only a matter of proving it.
    For example, anecdotally, we joke about cannabis users being safer drivers (an important detail if we’re advocating for “on-premises consumption” away from home). Drunk drivers run stop signs, stoned drivers sit there waiting for the stop sign to turn green — har har har. A *very* stoned girl was tested for driving by Washington State Police to see how she did (she did well). A study from last year showed that states with compassionate use (aka, medical cannabis) see an average 9% drop in DUIs and DUI fatalities.

    The problem cannabis detractors always bring up — none of this is clinically proven. They bring up that problem because they *ensure* that problem. The NIDA and DEA have rigged the game to make clinical research on cannabis virtually IMPOSSIBLE as a Schedule I controlled substance.

    Cannabis must *first* be removed from Schedule I to *prove* these things, clinically, before anyone in the business community tries to push for the interests of commercialization. Why? I mean, why should we bother doing so? Ignore the fact that it’s the responsible thing to do, for a moment. Put simply, solid, concrete, iron-clad PROOF is the only thing that will sway those in power to stop taking money from those who *already* make a fortune on cannabis prohibition (private prisons, big pharma, etc) and take it from those who are looking to cash in on legalization, regulation, and yes, commercialization.

    So yes, let’s get business batting for our team, but let’s be sure we bring them up at the right time. You don’t put Babe Ruth up first — he goes fourth or fifth, to hit everyone else home. We need several more states to legalize, we need the CSA amended, and we need clinical research proving its safety (beyond the shadow of a doubt, to shut up the Reefer Madness peddlers once and for all). After those things happen, a few big money investors will hit the grand slam when they start greasing palms in campaign contributions to allow for things like on-premises consumption and eateries.

  • Dr. B

    Very cool, all good ideas, someone has been smokin and brainstorming!

  • Shiloh

    you have great vision, I too have seen us moving in all of those directions and I look forward to the times to come where this is a reality. I would love to have an in-depth conversation with you about some of your ideas. Please feel free to visit my blog at http://ganjalicious.com/
    email- ganjadite@gmail.com
    Thanks

  • Lt. Fred O’Connor

    This is so true but the biggest problem is cities and towns that are business unfriendly to begin with, e.g. startup fees+taxes that border on criminal. That may not be a concern in CO and WA, but it is here. A lot of the municipalities around here won’t even allow dispensaries, so now there are delivery services advertising “zips” of medicine. Zip sounds pretty legit to me. /s