California Targets Underground Pot Shops With Tax Warrants

As COVID-19 puts a crunch on the state’s coffers, the California Department of Tax and Fee Administration is targeting California’s multi-billion dollar underground cannabis economy to get a piece of the pie.

CDTFA announced last week it has taken  sweeping actions against 12 illegal cannabis retailers across SoCal, from Los Angeles to San Bernardino County, in recent weeks. The CDTFA served tax warrants to the dozen in collaboration with the California Highway Patrol, who also assisted with the investigations.

In the process of the tax raids, the state also seized nearly a million dollars in pot products on top of $100,000 in cash. CDTFA said that money will go toward the tax liabilities involved with the various retailers.

“The CDTFA’s collaboration with the CHP is an important deterrent to tax evasion,” stated CDTFA Director Nicolas Maduros said in a statement announcing the actions. “Tax evasion unfairly shifts the burden onto all other taxpayers and makes it tough for those businesses that are playing by the rules to survive.”

CDTFA went on to note that under the California Revenue and Taxation Code, if you are willfully evading or attempting to evade the cultivation tax, the cannabis excise tax or the sales tax you’re committing a crime. But it’s worth noting these actions target retailers that were completely illegal, as opposed to anyone who may be fudging the numbers in a legal operation to mail a few packages East.

Take the case of Florida — give them a few tons of legal midsy greenhouse weed and they’re more desperate for California weed than ever. If you grow pot in the top 10 percent of cultivators, the $4,000 tax-free pound prices of the underground economy are wildly tempting when the legal market is cutting those numbers in half.

And imagine if you own an underground shop and grow your own weed? If you have legit top shelf pot, you can charge $55 an eighth. That makes that pound value jump to nearly $7,100 from the just under 130 eighths you grew and sold through your vertically integrated tax-free trap life.

But CDTFA is not about that life. If you get caught during all this by the CDTFA Investigations Bureau that administers the tax enforcement and criminal investigations programs, you will be subject to fines and possible jail time.

But is this effort making a dent in the massively successful 60-year-old underground economy that stretches from Tijuana to Oregon?

Last summer the data crunchers at Arcview Market Research and BDSA estimated that California’s illicit cannabis market would bring in $8.7 billion in revenue. Arcview and BDSA’s numbers carry weight and are regularly cited in flashy headlines about the value of the cannabis industry in print and on TV.

That estimate of the underground market size was nearly three times the $3.1 billion they expected legal consumers to spend in California last year. The actual value of the legal industry come the year’s end would fall a little short of $3 billion, but definitely close enough that the summer guess was solid.

So if the $3.1 Billion prediction only ended up a couple hundred million off, even if they were five times as wrong about the value of the underground market that would put it on the low end around $8 billion. The amount of cash seized by CDFTA in recent weeks equals out to roughly 0.00125 percent of that underground market value estimate. It would take another 80,000 of these weeks-long sweeping efforts to get all that underground money.

Dale Gieringer advocated for the implementation of California’s legal market for decades as CANORML executive director, Proposition 215 co-author, and Proposition 64 supporter. We asked him if these kinds of actions by regulators can even dent the black market, and if lowering the bar to a permit is where the real tax revenue is at compared to this effort.

“Illegal marketers have no business evading taxes,” Gieringer told L.A. Weekly. “It’s unfair to those who play by the rules. This move gives the authorities greater leverage to claim some of their cash. Whether it will appreciably dent the illicit market is questionable, but it’s the kind of thing CDTFA is supposed to do.”

As noted with our line of questioning for Gieringer, one of the biggest things hovering over all of this is the debate around the over-regulation of the cannabis industry. Would the illicit market be worth more than $8 billion if it had been easier for these people that obviously know what they’re doing to take part in the legal marketplace?

It’s a very valid question but tough to draw a line in the sand of what those definitive numbers would look like. We don’t know how many people “just’ missed out” because the bar was set a little too high,  but it sure feels like a lot when you talk to legacy cultivators.

While things have seemed quiet through the pandemic on the enforcement front, state officials had been rattling their sabers about targeting the underground market with actions here and there since Prop. 64 was implemented. The biggest wave of enforcement came in the wake of the vape epidemic resulting from dirty cutting agents.

Last December, California’s Bureau of Cannabis Control spearheaded a massive operation in L.A. that seized more than 10,000 illegal vape pens from unlicensed cannabis retailers over three days. BCC actions led to 125 arrests, the seizure of more than two tons of cannabis and cannabis products that officials estimated to be worth more than $10 million.

“Nearly all the samples were also labeled with incorrect THC content. For example, one vape cartridge label included a claim that the oil contained 80-85 percent THC, but actually contained 33 percent THC; another label included a claim that the vape cartridge contained 90.66 percent THC, but actually contained 40 percent THC. Some vape products seized from the unlicensed stores contained as little as 18 percent THC,” the BCC said when announcing the enforcement action in January.

For bulk priced illicit market oil-bound mids, let’s say they are $800 a pound for random ugly outdoor, the value of the tonnage the BCC seized in L.A. would be about $3.2 million dollars.

This time around the enforcement is aimed at those who cashed in on a public health crisis in recent months, as opposed to those who created one last summer.