It’s been more than a year since Maryland flipped a switch, turning the state’s string of medical cannabis stores into retailers open to anyone 21 and older.

Ahead of the rollout made possible by a ballot referendum, lawmakers deftly set regulations and taxes based on what’s worked and what hasn’t worked elsewhere. One goal? Make room for new businesses by attempting to suppress illegal sales.

So far, the already licensed businesses are drawing customers in droves. Month after month revenues and the number of sales transactions have reached new heights, and expectations are that retailers will reach $1 billion in medical and adult-use revenues in future years.

But that commercial boom didn’t make Maryland’s illegal cannabis market disappear. It created a government-regulated competitor.

Underground channels still exist in Maryland and in other states, even those with longstanding regulated markets. What policymakers can do is make laws that carve out enough turf so regulated, tax-paying cannabis businesses can run smoothly while operating alongside shadowy competition.

Low taxes, easy access to retailers and a tested, reasonably priced product can pull illicit cannabis customers over to a legal market, said Amanda Reiman, chief knowledge officer for New Frontier Data, a global marketing and data analytics firm that studies the cannabis industry, including consumer habits and trends.

Maryland lawmakers have set a 9% tax rate, one of the nation’s lowest (medical cannabis purchases remain tax-exempt), and the state plans to have 300-plus retail stores sprinkled throughout Maryland. Those factors should work in the state’s favor, Reiman said.

“You have to make the regulated market be very desirable for people to use, and you have to make the price worth it for people that have other options,” Reiman said.

States like California and New York delayed setting up regulated markets, paving the way for illicit sellers to thrive, Reiman said. Maryland lawmakers may have dodged swarms of gray market activity by racing to set up the legal market on the same day small amounts of cannabis became legal and leveraging its already existing medical retailers, an idea New York rejected.

Another challenge is changing consumer behavior, Reiman said. In states with well-oiled legacy markets, where it’s been easy to buy a trusted-safe, off-the-books product in bulk and on-the-cheap, why go to a dispensary just to pay taxes, Reiman asked. “If you’re going to consume a lot, you want the Costco model.”

Maryland regulators do limit the amount a person is able to buy in one dispensary visit, but even with these limits, sales are growing. So far this year, and on average, retailers have seen more than 900,000 adult-use sales transactions and about $62.6 million in revenues each month, according to state data.

Moderate prices and retail proximity matter when it comes to public health, too, said cannabis law and policy expert Mathew Swinburne. He heads the Cannabis Legal Resource Center at the University of Maryland Francis King Carey School of Law. Swinburne said states’ policies should aim to draw cannabis consumers to a safe and regulated product.

“Legalization is a harm reduction technique,” he said. In exchange for Maryland’s modest sales tax, customers receive safety testing and product tracking. Required labels tell customers what’s in the product, and testing labs scan products for a broad spectrum of contaminants.

Still, licensed Maryland retailers who follow the rules say they have to keep an eye on the shadow market, especially when it comes to pricing. A parallel market of hemp retailers unlicensed through the state have also introduced unintended competition, Weiss, said.

If a state’s tax rate becomes too onerous, it can drive frugal consumers underground, said Darren Weiss, president of multi-state operator Verano Holdings, that runs four Zen Leaf retail stores in Maryland. Weiss’s team monitors the illegal competition and reported the cannabis underground is “alive and well but it is not growing.”

Weiss said he sees unlicensed hemp retailers operating outside Maryland regulations as a looming threat to Maryland’s legal market.

“The speed of progress creates these black and gray market opportunities that really harm industry and ultimately harm the consumer because they’re not getting access to the products with the same safety profile,” Weiss said.

Hemp retailers sued Maryland, saying the law wrongfully restricted their business, and a judge ordered a pause on citing hemp retailers until the case winds through the courts.

Smoke shops and gas stations selling hemp-based products that contain intoxicating levels of various cannabinoids typically fall under the jurisdiction of Alcohol, Tobacco, and Cannabis Commission. Jeff Kelly, the independent agency’s executive director, said his agency continues to visit and inspect the businesses, but cannot cite hemp retailers for not having a cannabis business license.

Kelly’s agency is separate from the Maryland Cannabis Administration, which is responsible for licensing and regulating the industry and does not monitor illegal market activity.

Cannabis trafficking remains steady

Decriminalizing small amounts of cannabis has not halted demand or supply of illegal cannabis in Maryland, according to state and local law enforcement officials, nor has it dampened the fallout from drug deals gone bad.

Cannabis-related robberies and homicides have remained steady, police and prosecutors said. And underage buyers and loyal customer-dealer business will continue to drive underground sales, according to Howard County State’s Attorney Rich Gibson.

“Nothing has changed except for what used to be an illegal amount of marijuana is now recreationally legal,” said Elena Russo, spokesperson for the Maryland State Police.

Russo said state police are still investigating cannabis trafficking operations and partner with local law enforcement to stop criminals.

Financial incentives for illegal deals haven’t disappeared, and off-the-books products are still cheaper and yield wider profit margins, said Anne Arundel County State’s Attorney Anne Colt Leitess, since dealers don’t pay taxes and overhead.

Leitess said illegal product continues to flow into Maryland just as it has for decades. The supply chain generally starts on the West Coast. Traffickers siphon product from large, legal grow operations and ship it to other states, including Maryland, she said. She knows this because prosecutions of cannabis seized at Baltimore-Washington International Thurgood Marshall Airport have fallen under her jurisdiction.

Stopping the flow would require the political will of lawmakers and significant law enforcement resources, she said; as it stands now, “they cannot search every single bag.”

Across the nation, there’s been a sharp decline from 2019-2023 in cannabis trafficking offenses, which amount to about 3% of all drug trafficking offenses, and the majority of offenders, more than 70%, are U.S. citizens, federal sentencing data shows. Two dozen states have legalized cannabis for adult use since 2012.