The Impact of Illegal Vendors on Nevada’s Cannabis Market

By Chris Kudialis on January 17, 2019

Andrew Jolley spent much time on marketing during four years of operating his legal cannabis business in Las Vegas. The owner of the+source dispensaries purchased online and print ads, radio spots and even billboards across the Las Vegas Valley, totaling hundreds of thousands of dollars to market his two legal cannabis shops.

But to his surprise earlier this year, the cannabis company’s advertising reach didn’t stop there. the+source was being listed on Craigslist, Facebook and even popular mobile apps like Radiate by faux dealers trying to make a quick buck by emulating his company. The illegal cannabis dealers, posing as the dispensary, were offering a 24-hour delivery service at discounted prices that undercut the products on Jolley’s shelves.

“It was very alarming,” Jolley said. “These people were literally using our logo and claiming to have the same address.”

The practice is one of a myriad ways the black market has thrived in Nevada’s highly regulated legal industry. Taxed at least 33 percent—and up to 38 percent in some cities where local duties are higher—adult-use cannabis in Nevada has among the highest-priced legal cannabis across the United States. Medical card-holding buyers in Nevada are taxed 10 percent less.

Nevada’s legal cannabis industry brought in nearly $529 million in taxable sales in the 2018 fiscal year and contributed $989.7 million in contributions to the state’s economy, including auxiliary businesses that supply, outfit and construct buildings for cannabis companies. The industry also produced 8,300 full-time equivalent jobs.

While the legal industry in Nevada has worked to compete with the black market, the stringent quality testing standards mandated by the voter-approved Ballot Question 2 that legalized the plant for adult use after the 2016 elections has made the cost of growing and selling cannabis products significantly higher than on the street. The law also limits the number of dispensary licenses the regulating body Nevada Department of Taxation is allowed to issue across the state, which hampers legal competition for better prices.

Despite this, a Las Vegas Metropolitan Police leader said that more cannabis buyers than ever are turning to the black market.

Sgt. Randy Dockery spent six years in the police department’s narcotics enforcement division, focusing exclusively on busting cannabis grow houses in Las Vegas before briefly exiting the division. He returned as a leader of one of three narcotics teams last year and now oversees the enforcement of drug law. Similar to cannabis DUIs, Dockery said illegal sales and cannabis marketing have also skyrocketed in the 18 months since legal recreational cannabis sales began in July 2017.

Dockery estimated that growth in Las Vegas’ illegal cannabis industry has tripled since legalization, with vendors entering through California for “pop-up party” style sales at rented warehouses or banquet venues. That’s a shift from previous years, where large-scale cannabis dealers peddled their illegal product primarily at popular festivals, like the High Times Cannabis Cup and Las Vegas HempFest staged in Southern Nevada.

“It’s not illegal for adults to buy cannabis, just for them to sell it without a license,” Dockery said. “And a lot of times, people don’t know any better, especially tourists.”

According to Dockery, the new pop-up market trend can include more than 20 cannabis and associated paraphernalia vendors who pose as legal sellers through ads on social media. He estimated that one to four such events still take across the Las Vegas Valley each week, earning the highest-selling vendors up to $15,000 a day before they go out of state for weeks and then return again.

Dockery’s unit has found more than 100 pounds of cannabis flower and concentrates left behind at pop-up events this year, largely because of a surplus of illegal cannabis in the flooded black markets in California, where illegal cannabis has been grown in abundance for decades. Illegal dealers who skirt Nevada taxes and state testing costs for their product can undercut the state’s legal market by up to 50 percent, Dockery said.

“We’ve opened Pandora’s Box, and it has gotten out of control,” he said.

Metropolitan Police Capt. Sean Toman led the department through 2017, when illegal crimes began to rise. Toman, who has since been promoted as an assistant to Clark County Sheriff Joe Lombardo, said posts by illegal vendors on Craigslist and Facebook directed customers to encrypted, hard-to-track mobile apps like Radiate, Whisper and Grindr, allowing the “bad actors” to vet buyers without interference from authorities.

Toman stated that more than 50 illegal cannabis sale and delivery services, some with as many as ten employees, were shut down in 2017. The lion’s share of those shutdowns came in the second half of the year, after adult-use cannabis sales began on July 1.

“They’re rampant operations run by people who know what they’re doing is completely illegal,” Toman said, “but they became better at hiding themselves.”

David Goldwater, owner of Inyo Fine Cannabis Dispensary in Las Vegas, said he, like Jolley, was baffled when he first saw his company’s logo used in a Facebook ad last fall for an illegal delivery service. While Goldwater immediately reported the service to county and state officials, he has since found multiple Facebook ads also using Inyo’s logo.

“I think just about everybody who owns a dispensary here has had to deal with this,” he said. “When they’re using our logo and leveraging our marketing, it really minimizes the legitimacy and respect we’ve worked to attain as an industry.”

Stephanie Klapstein, a spokesperson for the Nevada Department of Taxation, has said the state’s cannabis regulating agency is still figuring out how to curb illegal sales and deliveries.

Whether or not to allow legal delivery services from dispensaries to customers’ homes was a highly controversial issue during negotiations for the state’s final recreational cannabis regulations released in early 2018. The deliveries were ultimately permitted to prevent the illegal market from dominating that sector of the industry, according to Klapstein.

So far, that decision seems to have had a minimal impact. Toman said some unlicensed services were caught after illegally delivering up to 10 pounds of cannabis per day, distributed among dozens of Las Vegas Valley residents and visitors.

While many unlicensed sellers and delivery drivers will find themselves behind bars if caught, Dockery said dozens of illegal delivery services, in addition to pop-up party vendors, continue to operate.

“There’s not one person in our department who doesn’t want to get this fixed,” he said, “but this is a real challenge.”

Blackbird, a popular Nevada licensed cannabis delivery service, handles retail deliveries for more than 30 of the state’s 60 cannabis dispensaries. The company also spearheads wholesale delivery from production and cultivation facilities to dispensaries. After expressing confidence that his business could eventually take over the black market in early 2018, Blackbird CEO Tim Conder declined to comment for this story.

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