In LA, Legal Cannabis Stores Call for Crackdown on Illegal Pop-Ups

A customer considers cannabis flower presented in a sample jar at MedMen West Hollywood, one of many licensed adult-use cannabis stores in the LA region that are under seige from unlicensed competitors. (Richard Vogel/AP)

In California’s second month of legal adult-use cannabis sales, the nation’s largest retail cannabis scene, Los Angeles, is a mess.

'Due to the lack of enforcement, illegal shops and delivery services are opening up' and stealing sales from licensed dispensaries.
Virgil Grant, owner, Med EX Now dispensary

Licensed dispensary owners say the opposite of what was supposed to happen has happened: As they hold on with limited revenues—many still awaiting city and state licenses—illegal storefronts and delivery services have cropped up to siphon sales.

Some owners of licensed dispensaries are exasperated. Those who aren’t losing money so far in 2018 say they’re just squeaking by, as new underground shops and illicit delivery services steal their customers with cut-rate prices made possible by the fact that they’re not paying taxes.

Why Am I Paying Taxes, Again?

Those taxes are no joke—they include a nearly 10 percent county sales tax, a 15 percent cut for the state of California and a 10 percent cut on receipts that go to City Hall.

“Due to the lack of enforcement and due to legalization, it has empowered illegal shops to start opening up,” says Virgil Grant, owner of Med EX Now, a licensed dispensary. Grant is also the co-founder and president of the Southern California Coalition, the city’s largest cannabis industry trade group.

Customers are 'coming out in droves to illegal shops.'
Jared Kiloh, owner of the Higher Path dispensary

Jared Kiloh, owner of the Higher Path dispensary in Sherman Oaks, said he had to sit on his hands in January, when he was awaiting a license from the city. Meanwhile, multiple illegal shops opened in the surrounding neighborhood and dozens of new delivery services set up shop.

“It’s gotten worse,” says Kiloh. “Come January an uneducated part of the market said, ‘I can buy weed anywhere now.’ Guess what they are doing? They are going anywhere. They’ve come out in droves to the illegal shops.”

The Los Angeles market has long been seen as the grand prize for legal cannabis in the United States and perhaps the world. Even during the era of medical pot the city of L.A. alone had as many tax-paying cannabis retailers as did the entire state of Colorado, which began adult-use  sales in 2014. And that’s not counting the rest of the 88-city county of Los Angeles.

300+ Licensed Companies Expected

With recreational legalization and the coming of the city’s voter-approved Measure M, which overturned the loose framework of the past in favor of licensing, it’s expected that 300 or more retailers, not to mention manufacturers, delivery services and testing labs, will be blessed by City Hall.

'The situation is unfair to the businesses that have been playing by the books.'
Carlos de la Torre, Cornerstone Research Collective

But as the City of Los Angeles Department of Cannabis Regulations hustles to release the first batch of licenses to rule-following retailers, the most legitimate shops in town have had to serve a trickle of customers willing to pay their tax-enhanced higher prices, even as commerce rages at illegal storefronts, observers say. For some the dream of a green rush in America’s largest pot market has become a real let-down.

“The situation is unfair to the businesses that have been playing by the books,” says Carlos de la Torre who, with his wife, owns the Cornerstone Research Collective dispensary in Eagle Rock. “Measure M has enforcement issues. I’m actually competing with these businesses that aren’t paying all their taxes. They should have to play by the same rules.”

“With all the new regulations and taxation, and having to buy from only licensed producers, the margins become modest and it’s impossible to survive as long as there’s illegal competition,” adds Aaron Herzberg, managing partner of LA-based Puzzle Group law firm, which specializes in cannabis licensing. “The legal operators are going to have to suffer financially until the illegal guys are shut down, and that’s going to take a lot of time.”

Illegal Delivery: The Unkindest Cut

The biggest sore spot for legit dispensaries is illegal delivery. Why drive to a shop, which may or may not be legal, and pay high taxes when a guy can come to your door?  In conjunction with state law, the city is only poised to allow deliverers tied to licensed brick-and-mortar shops. And delivery licenses in L.A. have yet to be issued.

Kiloh, president of the UCBA (United Cannabis Business Alliance), a group of legit dispensaries in town that inspired Measure M, says he estimates that 200 new delivery services have popped up since the beginning of the year. “Delivery is not even legal in the city of Los Angeles,” he notes.

“None of us can deliver out of a storefront until we get our full license—so how is that fair?” asks De la Torre. “How many delivery services are there in the city of L.A.?”

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Pre-ICOs and Measure M

Delivery was essentially outlawed under the city’s last regulation framework, Proposition D, which was approved by voters in 2013. The measure only allowed 135 or fewer shops to exist, although they were not expressly legalized. Instead they were offered limited legal immunity.

Those stores are often called “pre-ICOs,” because they’re supposed to have existed prior to a failed attempt in 2007 by the city to enact an “interim control ordinance” that intended to freeze the growth of dispensaries in town.

The state’s new legal cannabis framework requires local municipalities to license cannabis companies, and “limited legal immunity” wasn’t going to cut it. The City Council stepped in with Measure M, which is now responsible for licensing all of the city’s cannabis companies.

Delivery services tied to brick-and-mortar shops will be licensed, but the city is initially focused on those so-called pre-ICOs, like the shops owned by Grant, Kiloh and De la Torre, who received the first “priority” licenses.

Herb Wesson: Expecting 157 Licensed Stores

According to a spokeswoman for the office of City Council President Herb Wesson, “the current working number is around 157 dispensaries” that are expected to receive priority licenses from the city. While that number could be seen as fishy given the longtime assumption that there were fewer than 135 pre-ICOs still operating since 2007, the possibility that poseur shops will receive the much-coveted priority licenses has taken a backseat to support for enforcement against hundreds upon hundreds of fully illegal shops.

Those who now favor the issuance of 157 or so priority licenses say there were 187 pre-ICOs in 2007 and that some of those shops that are no longer around should be given a chance to become legal again, despite the survival of fewer than 135 dispensaries since then.

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However, many observers agree that the figure of 157 could open the door to illegitimate shops that used doctored paperwork or other shenanigans—some pre-ICOs were split into multiple storefronts—to become legal. Those would-be pre-ICOs relied on documentation that many call “Frankenstein licenses,” backed by documents that included business tax registration certificates (BTRCs) that created the appearance of compliance, critics say.

“Plenty of people in the business for years have never done it right and will probably still get a license anyway,” says dispensary owner Kiloh. “There are [illegal] pre-ICOs that have six locations and change their address with the state of California every two weeks.”

“There are a lot of people who spend a lot of money to get creative to make something look pretty good on paper,” adds Adam Spiker, executive director of the Southern California Coalition. “Not all the pre-ICOs are clean as a whistle.”

License Means Nothing Without Enforcement

Both Kiloh and Spiker say licensing 157 or 158 dispensaries as good actors, even though some aren’t, is better than allowing fully illicit shops to operate without any enforcement.

Kiloh estimates there may be as many as 1,500 illegal dispensaries in Los Angeles, a figure echoed by other experts. Legal operators say they’re going through loopholes to stay open while illicit concerns take their business.

“The people who get the most scrutiny are the ones trying to be most legal,” Kiloh says. “They’re held accountable for paying taxes and enduring regulation paperwork.”

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Three Staffers. Yes, Three.

The legit dispensaries are counting on the city’s Department of Cannabis Regulation to help weed out the fakes by withholding licenses. But the department, run by former Drug Policy Alliance coordinator Cat Packer, appears to be overwhelmed. The office has only three employees, including Packer. They’re tasked with weeding through thousands of cannabis industry hopefuls. It’s a daunting challenge for a city that does not even know precisely how many pre-ICOs exist or how many illicit stores exist.

“In order for the department to be successful the City Council has to allocate money,” says Herzberg of Puzzle Group. Los Angeles, Herzberg adds, “is the largest legal marijuana market in the world. The city needs to make staffing a priority immediately.”

Says Kiloh: “You can’t run regulation in the largest marijuana market with only two employees.”

Press Conference Tomorrow?

Still, there’s faith among some legit retailers that Packer, the City Attorney’s Office and the Los Angeles Police Department will come to the rescue. The LAPD is expected to hold a news conference tomorrow (Feb. 13) regarding its enforcement efforts. Through department spokesman Josh Rubenstein, the captain of the LAPD’s gang and narcotics division, Stephen M. Carmona, declined to comment for this story. However, another high-ranking official in the department acknowledged that new dispensaries “are popping up fast all the time.”

“We’ve seen shootings surrounding marijuana business go up dramatically,” he added. “The new law has created a black market both for people who don’t want to pay the new taxes and for people who want to sell to those under 21. That black market poses a high potential for crime around a very valuable commodity. If what I’ve seen in the first weeks of the new year holds, it doesn’t portend well for the future.”

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Officials: No Comment

The mayor’s office, the City Attorney’s Office and the Department of Cannabis Regulation did not make anyone available to comment on the record for this story. For now, the good actors in the local cannabis industry are eagerly awaiting the cavalry to come and shut down their illegal competitors. Cops can raid shops under state and local law. But the City Attorney’s Office also has tools, including daily $20,000 fines for illicit operators and the landlords who facilitate them.

“I could find 10 shops to close down just driving down the street,” Kiloh says. “But I have yet to hear one business being assessed those fines since January 1.”

“In order for any kind of regulated system to be a success you need to have vigorous enforcement,” says Herzberg. “A surge is going to have to happen if in fact the licenses are to mean anything or be financially viable.”