10 MIN READ
Will more licensed dispensaries solve New York's illegal market?
Acknowledgments: Nick Congleton: Report Author, Researcher & Writer at NuggMD | Tyler Elson: Report Analyst & Editor, Content Marketing Manager at NuggMD | Deb Tharp : Report Analyst & Fact Checker, Legal Researcher at NuggMD
The Empire State first legalized recreational cannabis back in 2021, paving the way for what could be one of the largest adult-use cannabis markets in the nation. Yet, two years later, New York’s recreational market is barely a shadow of its potential, and a thriving illegal market, sometimes referred to as a gray market due to it operating in a legal gray area in the state, has sprung up in its place.
While the illegal market provides access to cannabis for thousands of New Yorkers, it’s rife with problems that undermine many of the reasons the state moved to legalize cannabis in the first place.
According to Forbes, the State of New York is missing out on a potential $2.6 billion over the next seven years by not adequately supporting the growth of a healthy legal recreational cannabis market. Instead, the state created the perfect environment for unlicensed operators to cash in. In doing so, New York is setting itself up for possible program cuts, underfunding, and increased taxes, all of which were meant to be remedied by the influx of revenue from the legal cannabis market.
Entrepreneurs looking to participate in the state’s legal market are suffering as well. There are high costs associated with the licensing process, which already keep many from participating. Add competition from businesses that bypass the process–and the costs–and you have a recipe for disaster. Far fewer legal shops ever get licensed, and the ones that do are forced to charge higher prices due to supply issues and state taxes, making them both more expensive and less convenient for consumers, leading to a near inability to compete with unlicensed shops.
The state’s failure to establish an accessible legal market has put both cannabis consumers and businesses at risk while jeopardizing the young program’s future. Meanwhile, otherwise legitimate businesses are placed in a precarious legal position for participating in a market they otherwise wouldn’t have access to. The entire situation is unsustainable and calls for a rapid course-correct of the state’s adult-use cannabis program.
Methodology
In order to gain a clearer picture of New York’s gray market and the impact it’s having on cannabis consumers, we surveyed 354 New York cannabis consumers from age 18 to over 75.
The individuals surveyed had a range of consumption habits, from less than once a day to more than three times a day. Respondents reported using cannabis from less than a year to more than ten years. Those surveyed were also asked whether they were medical cannabis card holders or recreational consumers.
Respondents were questioned on their shopping behaviors: whether they shop at one of New York’s unlicensed cannabis shops, how frequently they purchase cannabis, and which types of products they were more likely to consume.
Of the 354 surveyed, 172 claimed to shop at the unlicensed bodegas or weren’t sure whether the shops where they purchased cannabis were licensed or not. No incentives were offered to those participating in the survey, and all responses were anonymous. Further surveys and studies are recommended to expand on our findings with a larger sample size.
What is NYC’s Illegal “Gray Market”?
A little background on the state’s cannabis laws is needed in order to understand exactly what New York’s illegal “gray market” is and how it sprang up so rapidly.
When New York legalized adult-use cannabis back in 2021, the state included a provision that allows adults over 21 to give each other up to 3 ounces of cannabis as a gift, without being compensated for it. At the same time, it remains illegal to sell high-THC cannabis (marijuana) in New York without a license from the state.
“Gray market” shops don’t sell cannabis. They sell all sorts of items, like stickers, t-shirts, and even cannabis containers. When someone purchases one of these wildly overpriced items, they’ll receive a free gift of cannabis proportional to how much they spent on the item. The process uses the gifting provision to circumvent the law, landing the shop firmly in a legal “gray area,” thus coining the term “gray market.”
There is some debate on the issue, though. New York’s Office of Cannabis Management (OCM) claims that the practice is entirely illegal. However, state prosecutors are hesitant to take action, claiming that no law is actually being broken.
The gray market isn’t exclusive to New York. Other states with gifting provisions in their laws and underdeveloped adult-use cannabis markets find themselves in nearly the same position. Just across the Hudson, a thriving gray market exists in New Jersey. Even the nation’s capital is home to a flourishing gray market. Washington D.C.’s gifting market is the only way for recreational cannabis consumers to access cannabis products because the federal government continues to block the legal market from opening (even though the District legalized adult-use cannabis back in 2015).
The main driving force behind the illegal market boom appears to be a lack of access. As of the writing of this article in May 2023, there are only 10 state-licensed recreational cannabis dispensaries in the entirety of New York State, 6 of which are located in New York City, including one in Jamaica, Queens. To put that into perspective, that’s 6 dispensaries to serve the city’s nearly 8.5 million residents, a situation that works out to one dispensary for every 1.4 million New Yorkers. It’s no wonder that some estimates project there are more than 1400 unlicensed dispensaries operating in the city.
Why Are Consumers Using the Illegal Market?
Convenience (72% of respondents) and price (70% of respondents) were far and away the two most common reasons respondents cited when choosing where to buy cannabis. Those figures jump to 77% and 76% for price and convenience, respectively, for respondents who knowingly shop at unlicensed dispensaries.
Illegal, unlicensed shops are exponentially more prevalent than licensed dispensaries in New York. For many New Yorkers, buying from a licensed store can be a 40-minute round trip, while there may be multiple gray market shops within a few blocks.
The lack of regulations for illegal operators also allows them to sell product at a lower price. Licensed dispensaries are subject to far greater operating costs–like product testing and cannabis-specific taxes–than their unlicensed gray market counterparts, allowing the unlicensed shops to consistently undercut the legal market’s prices.
Clearly, many of the people opting for unlicensed dispensaries are doing so because the licensed ones cannot compete on price and convenience.
The frequency of cannabis use is also closely linked to the likelihood of an individual shopping at an unlicensed shop. Approximately 64% of people surveyed who use cannabis three or more times a day admitted to shopping at unlicensed dispensaries, compared to just 29% of people surveyed who only use cannabis once per day.
According to our survey results, roughly 50% of New York cannabis consumers shop at gray market dispensaries, but that number is likely much higher. Remember, there are only 6 licensed dispensaries in the city, meaning a good percentage of the people buying cannabis in New York are probably shopping at one of the 1400+ unlicensed shops, whether they know it or not.
Many of these shops look just like a legitimate licensed dispensary, and unless you investigate, there will be no clear indication that they are not. As a result, many consumers may be unaware of exactly where they’re shopping. Others might be reluctant to admit shopping at these places, due to their hazy legal status. And some likely trust that the state would shut down unlicensed dispensaries. The thinking is that if they’re able to buy cannabis from a shop, it must be approved by the state.
As the illegal market is allowed to keep operating, the state continues to lose possible tax revenues. While many of these unlicensed businesses do pay their sales taxes, they aren’t paying cannabis-specific taxes, since they aren’t technically selling cannabis–a simple technicality that, according to Forbes, could cost the State of New York up to $1 billion in annual tax revenue.
3 Measurable Ways NYC’s Illicit Cannabis Market is Hurting Consumers (and the State)
It can be difficult to quantify the full impact of an illicit market, both on consumers and the overall ecosystem surrounding it. But there are clear indications of just how New York’s illegal market is affecting both consumers and the state.
When it comes to the illegal market, consumer safety is a top priority.
Unlike state-licensed dispensaries, gray market shops don’t need to meet any of the state’s product testing and safety requirements. Common contaminants, like pesticides and mold can go completely unchecked. Tests have even confirmed the presence of E. coli and salmonella in New York’s unlicensed cannabis products. And when cannabis consumers use these products, there’s potential to get seriously ill.
There’s also concern over the accuracy of the labels placed on cannabis products at illicit shops. Since there are no testing or
purity standards for these unregulated shops to maintain, there’s no telling if they’re advertising their products truthfully. This means that consumers can easily purchase cannabis products labeled with concentrations of THC or CBD that are far from their actual levels.
Among the 172 survey respondents who reported shopping at unlicensed cannabis retailers, 40% claimed that products didn’t get them as high as they expected. On the opposite end, 18% of respondents reported getting higher than they thought they would after consuming a product purchased from an illicit shop.
Sometimes, the consequences are more concerning. Nearly one in five respondents (19%) noted that the products they purchased at unlicensed shops looked, smelled, or tasted odd. On a more severe note, 8% of bodega-shopping respondents reported feeling physically unwell after using products from an unlicensed shop. But a majority of them stated that there was nowhere else for them to purchase cannabis, putting these consumers at continued risk.
It’s not just a matter of convenience for everyone, either. There are people who are physically unable to make the 30-60 minute trip to purchase cannabis from a licensed dispensary.
It should immediately raise alarms that people are risking return visits to unlicensed shops despite feeling physically unwell after using their products.
Reduced Consumer Trust
Fool me once… Or so the saying goes. The fact is as cannabis consumers in New York have negative experiences with the unlicensed market, their trust in the cannabis industry as a whole continues to wane.
The unlicensed reality of New York’s illegal market creates an environment that ultimately leave cannabis consumers in the dark.
Unreliable concentration labeling plays a significant role in eroding trust of recreational consumers and medical patients alike. Additionally, inaccurate labels could be a factor in emergency room visits for overconsumption.
Say someone purchases cannabis gummies labeled inaccurately as 10 mg of THC per gummy despite only containing 5 mg per dose. The first time they use one, the effects they experience are minimal. They start doubling up to get the effect they want. Then, the next time they purchase gummies — even the same product — they assume that they need 20 mg to get the effects they want. So they take two gummies, like they did before. Except this time the labels are accurate, so they become overly intoxicated, to the point of feeling ill and paranoid.
Without lab testing, there is no clear reason for the consumer to know why the gummies didn’t work as they expected. All they know is that they tried cannabis twice without getting the positive experience they expected. This forces many consumers to consider alternatives that are more reliable, even though they may also have more severe side effects or a greater risk of dependency.
Budtenders in most legal markets receive training centered around the cannabis plant, its active ingredients, their effects, and proper dosing. These cannabis professionals are there to provide guidance and expertise to new and experienced cannabis consumers alike. However, with the gray market, there’s no telling exactly who’s behind the counter and whether or not they know anything about cannabis.
With so much uncertainty, it’s not a stretch to see why consumers would lose faith in both the illegal market and the cannabis industry as a whole. By eroding consumer confidence, the state’s illegal shops are jeopardizing public perception of the legal market as well. Worse, people are forming their opinions of cannabis itself based on experiences with unlicensed and unregulated products. When people base their entire impression of cannabis on these experiences and spread that impression as fact, it’s detrimental to the state’s legal market (along with the tax revenues), the legalization effort on the national scale, and the cannabis industry as a whole.
Use of Other Means (At Greater Risk) to Find Relief
Many people prefer cannabis as a treatment option. It’s natural, effective, and has much fewer and milder side effects than many pharmaceutical options. For some consumers, it’s the only option, as other medications have failed to deliver much-needed symptom relief.
When consumers can no longer trust cannabis to find relief, they’re likely to try elsewhere. In this case, elsewhere often means more dangerous and potentially addictive options, like alcohol and opioids. This is especially true when it comes to pain management.
In a related survey, we asked 603 neuropathy patients which form of pain treatment they would use if cannabis was no longer available. Nineteen percent said they would turn to opiates to manage their neuropathy symptoms. Another 35% said they’d seek out other prescription medications. But more than 1 in 4 respondents said they would either replace cannabis with alcohol (6%) or they live with their symptoms (21%) rather than using one of the more dangerous alternatives.
What is the solution to New York’s Illegal Market?
Solving the gray market issue is more complicated than it might appear. There are multiple factors at play fueling the unlicensed cannabis market, and trying to use law enforcement to bring the issue under control will look just like the days of cannabis prohibition.
The state is currently looking to expand its strategy of using fines to curb the illegal market. Under the new plan, fines can be as high as $20,000 per day, and the state may file criminal charges for the illegal sale of cannabis. However, these measures are unlikely to succeed. With over 1400 unlicensed shops operating in the city alone, it would be impossible to police them all consistently. At best, the state would be playing whack-a-mole.
At the same time, most of these businesses are relying on the gifting loophole, so actually prosecuting anyone for selling cannabis illegally would be difficult.
Fines have proven ineffective in the past and likely will continue to be ineffective. For some unlicensed shops, paying fines is simply part of the cost of doing business. According to NY attorney David Feder, ”I have spoken to people that are operating these types of businesses, and what was said was, they’ll get raided, get $30,000 worth of product confiscated, they’ll receive a ticket, and then the very next day they’ll restock the shelves with another $30,000 worth of product.”
Other places have also tried fines as a way to control the unlicensed market. Canada, a country with a healthy legal cannabis market, has also struggled to control the remaining unlicensed cannabis sellers. According to NY cannabis attorney Lauren Rudick, “Fines, they don’t work… They don’t work up in Canada. You see illicit operators, they pay the fines, they pay their taxes, and they’re happy to stay operating.”
In order for any solution to work, it needs to address the multiple factors driving the illegal market:
lack of access to legal cannabis,
difference in prices,
and misinformation.
The largest and most obvious problem is access. If New Yorkers simply can’t access legal cannabis, they’re going to turn to unlicensed alternatives. With only 10 licensed dispensaries in the East Coast’s most populous state, it’s obvious why the illicit market has risen to meet consumer demand and flourished.
Of those surveyed, 26% admitted that they do not trust the labeling of gray market products, but they have nowhere else to go to purchase cannabis.
The gap between medical patients and recreational users highlights the issue even better. Only 40% of medical patients shop at unlicensed dispensaries, while 75% of recreational users do. When you consider that, at the time of this article, there are 40 medical dispensaries in New York, as opposed to the 10 recreational dispensaries, it becomes clear that access to legal cannabis is a major factor in the choice to shop the illegal market.
In order to make legal cannabis more available, the state needs to expedite the licensing process to allow legal retailers to open more quickly. They’ll also need to make the licensing requirements more accessible. Financial hurdles and red tape are major roadblocks to entrepreneurs opening legitimate cannabis businesses. The cost of getting started is simply out of reach for many people.
Prices also need to be lower in order to compete with the illegal market. The price of legal cannabis can be up to 2-3 times as much as the products sold at unlicensed shops. Licensing, testing, and meeting state guidelines are expensive. Additionally, the state imposes a 13% tax on retail sales of cannabis on top of the state sales tax. In order to compete with unlicensed shops, the legal market is going to need to either cut taxes, reduce operating costs, or increase competition.
In order to make prices more even, the state will need to 1) increase the costs to operate unlicensed dispensaries by shutting them down and implementing higher fines, and 2) increase the amount of legal dispensaries to generate both higher revenues and more competition.
Prices will only fall if the market is large enough, with healthy competition. It’s a trend that’s played out over and again in cannabis markets across the country. Cannabis prices in well-established markets, like Colorado, are low, and therefore easily accessible. Even relatively new, medical-only markets like Ohio have seen prices fall in recent years. In 2023 Ohio’s medical patients are paying 14% less than they did just two years ago in 2021.
Finally, most cannabis consumers are undereducated on the cannabis market and the distinction between legal, state-licensed dispensaries and the illegal “gray” market. In order to drive sales — and therefore revenue — away from these shops and toward licensed dispensaries, consumers need to know the differences and the risks.
When surveyed, 74% of bodega shoppers said they trusted the labeling of products sold at gray market shops, even though 58% of those who purchased cannabis at an unlicensed dispensary experienced unexpected levels of intoxication.
In terms of safety, 66% of people surveyed believe that they can trust that products from unlicensed shops are safe to use. At the same time, 27% of bodega shoppers claimed they either felt ill after consuming their products or that they received products that smelled, looked, or tasted unusual.
There’s evidence to suggest that education and access go hand-in-hand. Of those surveyed, medical cannabis patients were much less likely to shop at unlicensed shops. Only 25% of survey respondents who did not have a medical cannabis card claimed they would never shop at an unlicensed dispensary. Meanwhile, 60% of medical patients surveyed said they would not purchase their cannabis from an unlicensed shop.
Medical patients both have more access to cannabis and are more informed on the properties of cannabis and the potential dangers of unregulated products. The combination of factors clearly illustrates that people who are both informed and have access to legal cannabis are much less likely to participate in the illegal market.
Are Owners of Illicit Shops to Blame?
It’d be easy to point the finger at unlicensed shop owners, but it’s impossible to place blame for New York’s illicit cannabis shops on a single source. Are these shop owners selling products of questionable safety and undermining the legal market? Definitely. Are they to blame for the situation? No. They’re simply working within a legal gray area to fill a demand that’s otherwise going completely unmet. The state should have recognized the situation a long time ago and taken meaningful action to correct the legal market, rendering the illegal market unnecessary. The shop owners do still carry some of the responsibility, though.
Both consumer experience and lab testing have demonstrated that a large percentage of the products being sold in unlicensed shops are at the very least mislabeled, and some of these products are downright unsafe and contain harmful contaminants. By selling them, these shop owners are putting people at risk.
This, of course, is a generalization, and some shop owners likely do take pride in what they sell. It’s also safe to assume that some would get licensed if they had the means. Still, the consumer has no real way to differentiate between the shop owner who genuinely cares but can’t get licensed and the unscrupulous shop owner just trying to cash in.
Regardless of their motivations, many unlicensed dispensaries and bodegas are still selling untested and potentially unsafe products — products that are actively undermining consumer confidence in cannabis as a whole. Their unlicensed operations are also disrupting efforts to establish and strengthen the legal market, making it difficult for the state and its residents to recap many of the benefits of legalization.
The state bears more of the burden here, though. After all, the illegal market would never have gained the strength it has if the state hadn't created a situation where legal cannabis was inaccessible to many people, either because of price or lack of available dispensaries.
There is no good reason that, two years after legalization, there are only 10 licensed recreational cannabis dispensaries operating in the state. The state can crack down on unlicensed dispensaries, but doing so will only set the state back to the days of prohibition unless New York moves to make getting licensed dispensaries quicker, more efficient, and less costly.
The high cost and difficult legal and procedural landscape for getting a legal dispensary up and running in New York combined with the now stiff competition from illicit shops has made getting licensed either impossible or impractical for many would-be cannabis entrepreneurs. New York needs to take two steps:
make getting a licensed dispensary running much more accessible
make running an unlicensed one prohibitively impractical.
Cannabis consumers aren’t entirely blameless in this equation either. After all, they’re the ones fueling the illegal market, even if they don’t have much of a choice. It is possible for recreational cannabis users to shop at unlicensed dispensaries less frequently or take the time to travel to a licensed dispensary and stock up on products.
However, even this isn’t necessarily financially viable for all cannabis consumers. Then there are the individuals who simply don’t have the time or means to travel to a licensed dispensary. After all, a five-minute walk down the block to the bodega is a lot more convenient than a subway ride halfway across the city to visit one of the few licensed dispensaries currently in operation. For some, such a trip isn’t just inconvenient, it’s physically impossible.
Finally, there will always be those people who trust their government to do the right thing. They may not be aware of the risks associated with unlicensed dispensaries or even that the dispensary isn’t licensed by the state in the first place. They’re trusting that the state wouldn’t allow anything unsafe or illegal to persist.
Fines have proven ineffective in the past and likely will continue to be ineffective. For some unlicensed shops, paying fines is simply part of the cost of doing business. According to NY attorney David Feder, ”I have spoken to people that are operating these types of businesses, and what was said was, they’ll get raided, get $30,000 worth of product confiscated, they’ll receive a ticket, and then the very next day they’ll restock the shelves with another $30,000 worth of product.”
Final Thoughts
There isn’t a single, all-encompassing solution to New York’s illegal “gray” market. However, ignoring it and taking half measures has only allowed it to flourish. If left unchecked, the gray market will subvert many of the goals of legalization, including drawing funding from community programs set to be kept running with cannabis tax revenue. More importantly, as our data shows, untested and unregulated products are putting NY cannabis consumers at risk.
Toppling the illegal market won’t happen overnight, and unless the state steps in and supports the rapid growth of the legal cannabis market — driving prices down and making cannabis convenient and accessible — the problem will only grow. With the correct strategy, New York can reverse course and cultivate a legal cannabis market that meets and even exceeds expectations.