When it comes to doing business, Leaf isn’t discrete. The friendly 25-year-old saunters around Dolores Park in San Francisco with a big teddy bear on his shoulder and a ring of plastic marijuana leaves around his neck. You can’t miss him.

Selling cannabis is his trade, one he won’t quit anytime soon. Yes, recreational marijuana was just legalized in California on Nov. 8, heralding a new era of pot consumption in America’s most populated state. But he’s not worried.

“I’ll still be out here, because what happens when you don’t want to go out to the club?” Leaf said of recreational dispensaries. “It’s about convenience, and I always have stuff on me. I’m right here.”

Many Bay Area dealers like Leaf – whose full name has been withheld to protect his identity – are confident that they can compete with the onslaught of pot clubs that will open in the wake of Proposition 64’s passing. That’s because their informally sold, tax-free goods are cheaper than anything that will be sold legally.

This has proven true in other places that have legalized marijuana. Experts say the black market is alive and well in Colorado and Washington, and there’s little reason to believe that California will be any different. If there’s still money to be made underground – and as long as it costs upwards of $500,000 to open a pot club – it’s likely that dealers will keep up the hustle.

“Typically, dealers are not looking at legalization and saying, ‘Where do we go next?,’ said Francisco Gallardo, who helps young men of color escape gang violence in Denver. “They’re thinking, ‘I’m going to make the most money I can until the market don’t bear it anymore.’”

Still, there are some dealers who want to go legal, even with the odds stacked against them. And then there are those who might leave for states with greener pastures; states that haven’t legalized, that is.

The excise tax and the black market

According to Prop. 64, recreational — or as some weed gurus call it, “inspirational” — cannabis products at state-licensed shops will carry a 15 percent excise tax on top of regular sales tax; municipalities can charge additional taxes. A levy will also be imposed on licensed cultivators.

This is all to say that legal weed, because of its hefty taxation, will be pricier than what you can buy off the so-called black market. In Colorado and Washington, the price differential has motivated many weed consumers – especially those who can’t afford dispensary premiums – to stick with the illegal stuff, even if it puts them at risk of arrest.

“A lot of your traditional pot smokers say, ‘I already have a guy’ when it’s legalized. They trust their dealers,” said Brian Yauger, president of Front Runner, a business intelligence company for the legalized cannabis industry.

To some extent, you get what you pay for, Gallardo said. You can peruse strains with varying potencies and effects at a dispensary. Yet price reigns supreme.
“They could care less what it is,” Gallardo said of those in Colorado who continue to buy from dealers. “If it fires them up, they’re all good.”

In a report released by Front Runner in July, economists estimated that 34 percent of the pot sold in Washington is illegal. “Although the average consumer would prefer to purchase legally, given the price sensitivity, there is little to no incentive to convert away from the black market,” economist Beau Whitney writes in the report.

Without local and sales taxes figured in, Washington’s excise tax on marijuana sits at 37 percent, more than double California’s proposed rate. Learning from other states’ mistakes, ballot initiatives across the United States now propose rates between 10 and 25 percent.

Still, experts say the black markets in California and Washington have weakened since legalization. As larger grows have come online, pot club prices have dropped a bit, making them more competitive with dealers, Gallardo said.

It remains to be seen how California’s tax on marijuana – which is expected to generate an annual revenue of $1 billion – will influence underground sales. And it is still unknown how much towns and cities will tack onto the price with local taxes. But it’s clear that the closer California’s pot clubs can get to street prices, the more the black market will shrink, Yauger explained.

“People will pay the extra dollar or two for something that is tested or proved,” Yauger said of regulated marijuana. “But they won’t pay double.”

Still money to be made

Some California dealers are paying attention to Prop. 64, and what has played out in other states. Others are hanging on and hoping for the best.

And then there are those who want to go legal, but find the paperwork, regulation and costs daunting.

Two dealers in San Francisco – Leaf, and another called Rolando – expect their cash flow to remain strong if recreational marijuana is legalized. Leaf said he makes about $5,000 a month, half of which goes to his mom. Rolando, 30, would only say that he brings in “quite enough.”

Although both are willing to bet that they will stay afloat, Rolando and Leaf have different views on legalization. Rolando, who also grows, said he never intends to go. He knows what pot goes for at the clubs, and he knows he can compete on the street with much lower overhead costs.

“A registered retailer has no way to sell the product for a good price. And I know how to sell it out here, ” he said, later adding, “I don’t want to pay taxes, or pay the monthly rent.”

Rolando also sells cocaine, LSD and MDMA providing some extra financial security. And those under 21 will still want weed after legalization, he said. He’ll hook them up.

Leaf, on the other hand, seesaws between wanting to open his own shop and using legalization to his advantage on the street. Because he mainly sells at Dolores Park — often to tourists – he expects his business will take some sort of hit once recreational dispensaries open up.

But Leaf still fully supports legalization, in part because he’s been busted by police several times for selling. He keeps at the game because that’s what he knows. But his real passion is Hip Hop, and his weed sales finance his fledgling music career.

Leaf expects police will pay less attention to him once cannabis is legal, even though his enterprise isn’t licensed. “Making less money for a little less hassle by the cops – man, I’m down for that,” he said.

Photo by Laura Newberry

Photo by Laura Newberry

But Gallardo said for minorities like Leaf, that may not be the case. In Denver, weed is still being used to target people of color, he explained. Police can still employ probable cause to search inner cities for illegal cannabis grows and sales, Gallardo said, and at disproportionate rates.

A related problem is that weed dispensaries tend to be owned by affluent white people, Gallardo added. So Leaf’s goal of opening a pot club one day might be, well, a pipe dream. He brings in around $60,000 a year right now, but that’s not nearly enough. It costs about $500,000 to $1 million to start up a pot club, Yauger said.

“I almost feel bad for the black market growers and dealers who fought and fought and fought for legalization,” he went on. “Then it becomes legal, and because they didn’t have the backing or the money for the facilities they don’t stand a chance.”

Another dealer, who goes by Keith, also wants to go legal. After years of selling in North Carolina, the 30-year-old moved to Oakland when he realized most of his supply was coming from the Bay Area. He decided to cut out the middleman.
Keith’s goal was to grow, farm, and sell to medical marijuana dispensaries here. But the associated costs and regulatory hoops overwhelmed him.
He also tried to get an Oakland permit for extracting and selling cannabis concentrates, but the process was too complicated, he said.

Then Keith was convicted of two felonies after being caught with three pounds of marijuana in his car. He says he was transporting the goods between a legal grow operation and a dispensary. Now, most of Keith’s money is made from buying marijuana in bulk from Northern California’s “Emerald Triangle” and shipping it to other states. North Carolina and Florida are his big ones.

Keith says he could make $20,000 on a good month. Until weed is legalized across the United States, he can count on that business.
But the out-of-state money isn’t worth the risk, Keith said, and he will keep trying to go legal. His goal is to produce cannabidiol, or CBD, pills for cancer patients. The capsules won’t get you high, but do treat pain and nausea. “I want to have a company where I hire people, pay taxes,” Keith said. “Something I can be proud of, you know?”

Theo, a 64-year-old, has a much smaller sales radius than Keith. The veteran deals only at San Francisco’s Hippie Hill, as he has done for 15 years. He’s against legalization, as he thinks it will cause his business to dry up.

But Theo isn’t stressing. If his sales go south, he says, so will he – to states where his product isn’t regulated.

“I’ll go someplace else. There are more states in the world that I can go to,” he said as he pet his beard, his eyes shining beneath weathered eyelids. “And everybody on Earth smokes weed.”

Liliana Michelena also contributed to this story.