This state legalized cannabis. So why does it still have an illegal weed problem?

NEW YORK — Business nearly tripled at Verdi cannabis dispensary, one of dozens of legal weed shops in New York, after state and city officials started cracking down on unlicensed retailers in May.

Then the operator of a nearby competitor cut the fresh padlock on its doors and got right back to selling its unregulated pot. Verdi immediately saw a 10 to 15 percent decline in sales, founder Ellis Soodak said.

“It’s really disheartening to see people flying in the face of the law,” Soodak said in an interview. “People assume these unlicensed stores are mom-and-pop shops. … Most of these stores are owned by conglomerates.”

Cannabis companies have been eyeing the Empire State as a potentially massive market since the state legalized marijuana in 2021. But more than three years later, there are only 182 licensed dispensaries in a state of 20 million people. Michigan, with half the population, has more than 800 dispensaries .

Without enough licensed dispensaries to serve demand, thousands of unlicensed sellers stepped in, often flouting rules by popping up near schools and selling weed in colorful packaging. In response, lawmakers granted state and local authorities more enforcement power earlier this year to close these shops.

The ensuing crackdown is yielding results: The New York State Illicit Cannabis Enforcement Task Force has padlocked at least 345 locations across New York, while New York City authorities have shuttered about 1,000 locations in the city alone.

But New York City was home to an estimated 4,000 unlicensed sellers before the crackdown started, so there are likely thousands more still operating, and legal challenges are threatening to derail enforcement efforts.

Illicit Chains

One reason why enforcement agents don’t immediately punish unlicensed cannabis retailers is because it takes time to investigate connected ownership groups, explained Dan Haughney, the director of enforcement for the state’s Office of Cannabis Management.

“If we know that there’s an operator that has a store on one corner and another one three blocks away, we’ll try to hit those stores that are connected at the same time,” Haughney said in an interview on a recent August afternoon while his team was inspecting stores in Queens.

State enforcement officials are also responding to changing practices of illicit sellers. Some are altering their operating hours — for example, only opening up in the evenings, prompting the state to send investigators out at night. Many storefronts are keeping their inventory elsewhere so that they’re carrying less cannabis that can be seized during an inspection.

The majority of unlicensed cannabis sellers that the task force inspects are also conducting some sort of processing on site. This could be anything from making cannabis pre-rolls to manufacturing weed-infused gummies, Haughney said.

These activities would not be allowed in licensed cannabis dispensaries, since they’re prohibited from holding processing licenses in New York.

Haughney wishes consumers could see the “unsanitary and disgusting” conditions that some of these products are manufactured in.

His other main concern is illicit products with packaging that would appeal to children: bright colors, bubble fonts and cartoon characters.

“When they have the cartoon characters on there, that would entice a kid to grab it,” Haughney said. “When I see this stuff … we’re going to do everything we can to padlock.”

Haughney’s team also frequently sees cannabis products from brands like Stiizy and Jeeter that have seemingly been diverted from California’s regulated market.

Haughney said that Stiizy executives have told him that those products are illicit cannabis in counterfeit packaging. But he believes the Stiizy products he sees are actually sourced from the legal California market, which he has traced back there by collaborating with his counterparts on West Coast investigations.

Stiizy and other California brands are also facing multiple lawsuits about its involvement in the illicit market in California and the rest of the country.

Stiizy did not respond to a request for comment.

But Stiizy’s illicit market presence is certainly helping its brand recognition. It’s the number one request of customers at Mighty Lucky, a licensed dispensary in Lower Manhattan, said founder Beau Allulli.

Mighty Lucky has seen steady revenue growth since its opening in May, and it hasn’t seen a big sales spike coinciding with tougher enforcement in its neighborhood. But the dispensary has seen an increase in customers who seem to come from the unlicensed market because of their brand requests and expectation to be able to pay with a credit card.

Customers who have frequented licensed dispensaries already know that they won’t be able to pay with credit cards, but unlicensed cannabis sellers will simply classify credit card transactions as other items.

Out of Mighty Lucky’s hundreds of five-star reviews on Google, the only three bad reviews were for the high fees surrounding payment processing.

They think “that we’re keeping the fee and upcharging [them],” Allulli said. “We try to explain it’s federally illegal.”

Enforcement Challenges

The crackdown on illicit sellers has had consequences beyond the shops shuttered by city and state officials: The state task force has found that 136 unlicensed retailers closed up shop on their own as a result of the increase in enforcement.

“Particularly in the city, I think people can see the change in the landscape,” Haughney said.

But it’s clear that the enforcement efforts have a long way to go.

Recently, New York City Mayor Eric Adams stood before four tons of cannabis that the city had seized from illicit operators, which was poised to be incinerated.

Out of the thousand dispensaries the city has been able to close, at least a couple dozen have opened back up, including the one near Soodak’s Verdi dispensary.

Soodak reported the reopening. Less than a week later, city officials were padlocking the location again, he said. It was still closed as of Monday.

And despite a state audit that found issues with OCM’s licensing process in May , said Joe Rossi, head of Park Strategies’ cannabis practice, it’s critical that the pace of licensing has not picked up.

“You can’t just have [182 licensed] stores and thousands of illicit shops,” he said.

In addition, New York City is facing legal challenges over the way it has gone about its cannabis crackdown. A judge recently ruled that a convenience store that was shuttered as part of the ongoing enforcement effort must be allowed to reopen because officers did not follow proper procedures when closing the store.

Lance Lazzaro, the attorney who represented the convenience store, has managed to win a few reopening decisions for his clients in court. Now, he’s setting his sights on the state.

Last week, he filed a similar legal challenge against the OCM , alleging that the sealing order against Shopsmart Convenience in Manhattan violated the business’s due process rights.

“It’s unconstitutional,” Lazzaro said of both the state and city’s new enforcement powers.