Low-cost street weed gives legal vendors heartburn

BOULDER – Dylan Donaldson is glad he converted his medical marijuana dispensary to a retail marijuana store, Karing Kind LLC in Boulder.

He had struggled with his medical marijuana business when prices of pot plummeted. Since opening his retail store Feb. 18, higher marijuana prices have helped lift his business.
But he knows he may have a tough time competing with the cheaper black market for marijuana sales, where a half ounce of weed can go for $100 and one ounce can sell for $180. Karing Kind sells its least expensive half ounce and ounce for $140 and $280, respectively.

“It’s hard to ask a legitimate business who pays taxes and license fees of tens of thousands of dollars to compete with someone who doesn’t,” Donaldson said. “What’s going to happen longterm?”

Since retail marijuana stores first opened Jan. 1, illegal marijuana sales have continued to thrive – if not blossom – after voters legalized recreational marijuana in November 2012.
Marijuana grow operations that feed illegal street sales are proliferating, thanks to new laws that allow marijuana to be grown and small amounts to be given away legally for free, said Larimer County Sheriff Justin Smith.

As a result, deliveries for “free” weed are advertised throughout Craigslist. In addition, because people can cultivate six marijuana plants legally, if they have more than six they can still tell deputies that someone else is responsible for the other plants, making arrests for small illegal street growing operations difficult to execute.

“It’s really becoming the wild West out there,” Smith said. “They’re growing it everywhere and there isn’t much you can do about it.”

In fact, retailer Donaldson said he has been contacted by black-market growers who want to sell their lower-priced products to his store, a practice in which he refuses to engage because it is, of course, illegal.

Meanwhile, his prices have stayed higher than when he sold medical marijuana for, at its cheapest, $80 per half ounce and $125 per ounce. High demand and low supply have led to higher retail prices, he said.

Experts, however, say they believe retail prices will drop closer to that of medical marijuana once production increases and customer demand slows.

“This is pure transition,´ said Mark Kleiman, professor of public policy at the University of California at Los Angeles. “The high (retail) prices are a mark of success. There are a lot of people who want the stuff even at much higher prices.”

Medical marijuana is taxed at a rate of 2.9 percent while retail marijuana is taxed at 10 percent on top of the 2.9-percent tax. A 15-percent retail excise tax is levied on the first sale or transfer of marijuana from a cultivation facility to a retail store.

Retailers do not directly charge that 15-percent excise tax to consumers, but instead indirectly include it in their marijuana prices.

Kleiman said retail marijuana’s higher tax rate will not make a difference: What’s a $5 gram vs. a $6 gram of weed?

Phyllis Resnick, lead economist for Colorado State University’s Colorado Futures Center, recalled stories of stores running out of marijuana when they first opened. Lower supplies can push prices higher.

If more shops open, she said, competition will increase and prices will decline. But economists need more time to research marijuana markets before they can fully grasp price shifts.

“It’s not an industry that’s sustainable if the price stays where it is,” she said. “It’s too easy to get it, apparently, from black-market dealers and… the medical system.”

She noted, however, that medical marijuana prices were high when dispensaries first opened, but have since dropped.

Despite having higher weed prices at his store, Donaldson said he caters to a different market of marijuana users: those without black-market connections who want the convenience of choosing from multiple kinds of weed as well as marijuana edibles.

At the same time, he has seen black-market growers lose customers to legal retail businesses. Donaldson said his use of organic pesticides and his mold-free weed give him a slight edge on black market operators.

“With the black market, you have no idea what he’s putting in it, what he’s spraying on it, what he’s using,” he said. “No one’s regulating that.”

The lack of oversight may aid the lower black-market price, but Donaldson believes his prices will drop when production catches up. He and other retailers grow most of their own marijuana, and he plans to add more capacity soon.

“We’re going to be expanding our grow,” he said, “to be able to keep up with the demand and get that price more competitive.”

Steve Lynn can be reached at 970-232-3147 or slynn@ncbr.com. Follow him on Twitter at @SteveLynnBW.

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