Unlicensed marijuana delivery companies are operating across Sacramento County, drawing the ire of legal pot retailers and warnings from state and local regulators.
Regulators cite concerns about the delivery companies not paying fees and taxes and selling weed that hasn’t been tested for pesticides or other possible toxins. They say the companies are threatening the financial viability of legal retailers who must pay those costs in a new legal marijuana market that started in California on Jan. 1.
In Sacramento County, about 200 marijuana delivery services were advertising Friday on the website Weedmaps.com. Only one jurisdiction in the county, the city of Sacramento, has plans to allow cannabis delivery services, and it has yet to issue permits. In the interim, city pot czar Joe Devlin has told delivery companies to register with city, and eight have done so.
State law allows delivery companies licensed in one jurisdiction to deliver to another jurisdiction that allows deliveries, Devlin said. That allows some Bay Area companies to currently deliver in Sacramento, but they must store products where they’re licensed.
Sign Up and Save
Get six months of free digital access to The Sacramento Bee
But Devlin said he believes many of the unlicensed delivery services are intentionally skirting the law, and he is working with the Sacramento Police Department to develop an enforcement strategy.
“The vast majority of these companies are totally illegal,” he said. “This is a cover for the black market.”
Devlin estimates that up to one-third of Sacramento cannabis sales are made through illegal delivery companies.
Delivery companies are among the hundreds of cannabis businesses across California that recently have received warning letters from the state Bureau of Cannabis Control, said bureau chief Lori Ajax.
The letters state that the bureau “has reason to believe that you may be engaging in unlicensed commercial cannabis activity,” and that such activity must cease “until you obtain a valid state license.”
As of Friday, the bureau had issued 50 temporary licenses to delivery companies. On Weedmaps.com, hundreds of delivery services are shown providing service across the state.
Ajax said the bureau learned about illegal activity by looking at Weedmaps and advertisements on other media. She said illegal delivery companies create numerous problems.
“The legal businesses in the regulated commercial cannabis industry face higher costs than those who do not comply with the law,” she said. “Unlicensed businesses are openly advertising on technology platforms and print media. Further, unlicensed activity puts the public at risk as the health and safety provisions, such as testing, are not in place.”
Testing statewide won’t be required for regulated businesses until July 1.
Ajax said the letters are part of a “first phase” of enforcement and that the bureau “will further ramp up our efforts from there.” Continued violations will lead to civil and criminal penalties, she said.
Several delivery companies did not return messages seeking comment. Based on language on some of their websites, it appears that some of the services are trying to use a provision that gives “collectives” until January to operate without state permits. As defined under the state’s medical marijuana laws, a collective is a nonprofit organization that functions solely to produce cannabis for members who pay “contributions.”
But Devlin said the delivery services’ advertisements show they are not operating as nonprofits.
The sunset provision for collectives also requires them to register with the state Department of Tax and Fee Administration, which is the case for all cannabis businesses making sales. The department has issued 49 sales permits in Sacramento County, and presumably some of the city’s 25 licensed dispensaries are included among those.
Owners of legal cannabis businesses say they want regulators to take action against illegal competitors.
Dean Homayouni, a California lawyer and accountant, has been trying to attract investors to his plan to create delivery services across the state. He said he can’t move forward because of all the illegal competition.
“They need to lower the boom on these guys,” he said. “These operators are so brazen they’re advertising on Weedmaps.”
Devlin said he has asked Weedmaps to stop allowing illegal delivery companies to advertise. He said state law only allows cannabis advertising from permitted businesses.
He sent a letter to the Irvine-based company last week stating that the illegal activity “puts the public at risk when facilities are not inspected and there is no guarantee that cannabis products have been properly tested.”
Weedmaps did not respond to requests from The Bee for comment.
Nasser Azimi, a partner in Ohana Gardens delivery service, said his company received a little more business after legalization, but underground operators still are flooding the market. Ohana Gardens is one of three delivery services in Sacramento with a state delivery license.
“Those underground operators are not charging or paying taxes and, quite honestly, they might be cutting corners on not testing products to keep their prices super low,” he said.
Licensed retailers across the state have complained about the difficulty of competing against a black market. Legal retailers must collect taxes that can run as high as 45 percent on gross sales and pay state and local license fees that cost tens of thousands of dollars.
Most jurisdictions in Sacramento County, including Citrus Heights, Elk Grove and Folsom, do not allow deliveries within their boundaries.
“This creates a complex patchwork of policies that are difficult to track and understand,” said Caity Maple, a lobbyist working on legislation to allow deliveries in jurisdictions with total bans. “Both businesses and patients are left confused on what’s allowed and what’s not.”
The delivery industry has sought to open up the market, pointing to figures showing that about half of all cannabis sales are made through delivery services. Industry reps also point out that medical marijuana patients sometimes can’t physically travel to storefront dispensaries.
Bee reporter Ellen Garrison contributed to this report.