This article is the fourth part of a six-part series discussing the legal issues, operational challenges, and regulatory hurdles that marijuana-related businesses (MRBs) frequently encounter. Part 1 discussed the various fire, health, and safety risks that MRBs encounter while growing and cultivating marijuana plants inside large, indoor, commercial spaces.
Part 2 discussed the three most common extraction methods that MRBs use when processing cannabis plant material to extract cannabinoids, terpenes and other components from the plant; the fire, health, and safety risks associated with each cannabis extraction method; the National Fire Protection Association’s (“N.F.P.A.”) rules and regulations that govern cannabis extraction; and the Occupational Safety and Health Administration (“OSHA”) rules and regulations that MRBs must comply with in their extraction facilities.
Part 3 discussed the lack of national standards for laboratories that test medical and recreational marijuana products, and how it adversely impacts the public health of consumers, and the marijuana industry. It also discussed the various methodologies, approaches, and equipment that laboratories should be required to use to test marijuana products, and it presented specific, proposed national standards that the federal government should consider implementing to protect consumers who purchase marijuana products.
This article (Part 4) focuses on the legal issues, operational challenges, and regulatory hurdles that marijuana dispensaries frequently encounter. First, it discusses the real estate-related issues that marijuana dispensary owners grapple with as they attempt to secure a location for their business, including state, county, and local-mandated geographic restrictions on where dispensaries can be located. It also discusses the various terms of commercial lease agreements that could affect a marijuana dispensary’s operations including, among other things, payment of rent, computation of rent, licensing contingency, zoning and land use restrictions, landlord inspection rights, renter’s insurance, and subleasing. It also discusses the various operational issues that marijuana dispensaries frequently encounter including the challenge of securing even basic banking services and insurance coverage, complying with restrictions on advertising marijuana and marijuana-derived products, utilizing Point-of-Sale and Seed-to-Sale Tracking Software, and paying federal and state taxes. Finally, it presents specific, proposed strategies that marijuana dispensary owners should consider implementing to help protect their businesses.
I. THE BURGEONING MARIJUANA INDUSTRY PRESENTS UNIQUE OPPORTUNITIES AND UNIQUE CHALLENGES FOR MARIJUANA DISPENSARIES
It’s no secret that the marijuana industry has experienced tremendous, sustained growth. Currently, 33 states, the District of Columbia, Guam and Puerto Rico have passed legislation legalizing medical marijuana, and 11 of those states have also legalized marijuana for recreational use. In 2019, the total number of registered U.S. medical marijuana patients is projected to reach 2.4 million, up 26% from 1.9 million patients in 2018. And, in 2019, recreational marijuana sales were up 45% at $8.9 billion across the U.S. Medical marijuana sales were up even more, rising 54% year-over-year to $6.2 billion.
The U.S. may be dominating global marijuana sales right now, but over the coming years, the sector will become more balanced, as markets like Canada mature, and as Europe and other international markets either open up or mature. As a result, global cannabis sales will experience massive growth. In 2019, for example, global cannabis sales increased by almost 50%, and the marijuana industry is still in its infancy. By 2024, global marijuana sales are projected to cross the $43.0 billion mark. That represents a compound annual growth rate of 23.5%.
The explosive growth of the marijuana industry in the U.S. and around the world presents a unique opportunity for marijuana dispensary operators, but marijuana’s continued status as an illegal drug under federal law also presents a unique set of challenges for all MRBs, including marijuana dispensaries.
II. LOCATION, LOCATION, LOCATION: Real Estate Issues that Could Impact Marijuana Dispensaries
In real estate, it is commonly stated that there are three things that matter most when selecting a location for a home or business: (1) Location; (2) Location; and (3) Location. This old adage is particularly true when selecting a location for a marijuana dispensary because the location not only has to comport with the operator’s overall business objectives, but it must also comply with state and local law.
Each of the 11 states that have legalized marijuana for both recreational and medicinal use, and each of the other 22 states that have legalized marijuana solely for medicinal use (33 states in all), have drafted and passed legislation regulating the marijuana industry in each of their respective states. These state laws typically contain similar provisions that are designed to protect the public by creating and implementing protocols to monitor and control access to the marijuana plants grown in the state, to ensure the efficacy, purity and quality of the marijuana-derived products that are sold in the state, and most relevant to this article, to allow local communities the autonomy to control the number, location, and operation of MRBs, such as marijuana dispensaries, in their local jurisdiction.
A. Geographic Restrictions
Regarding marijuana dispensaries, the marijuana legislation in each of the 33 states that have legalized marijuana typically contain geographic restrictions that limit where marijuana dispensaries can be located. For instance, in Michigan (a state that allows both recreational and medicinal use), cannabis retail businesses may not be located in areas zoned exclusively for residential use or within 1,000 feet of any school for grades K-12. Local municipalities are allowed to reduce the distance requirement or impose additional location requirements for cannabis retailers. In Illinois (another state that allows both recreational and medicinal marijuana use), the state government opted to divide the available cannabis retail licenses between 17 regions identified by the Bureau of Labor Statistics (BLS). So, marijuana dispensaries in Illinois must be located within the BLS region noted on the operator’s cannabis retail license application. Illinois law also requires that marijuana dispensary locations must be suitable for public access; have a layout that promotes the safe dispensing of cannabis; and be sufficient in size, power allocation, lighting, parking, handicapped accessible parking spaces, accessible entry and exits as required by the Americans with Disabilities Act, product handling, and storage. Additionally, the location must not be within 1,500 feet of an existing marijuana dispensing location. In Minnesota (a state that only allows medicinal use), marijuana dispensaries may not be located within 1,000 feet of an elementary or secondary school, daycare, or church. However, local governments may increase or decrease the allowed proximities to schools, daycares, and churches. Finally, in Georgia (a state that only allows medicinal use), marijuana dispensaries may not be located within a 1,000 foot radius of a public or private school; an early care and education program as defined in O.C.G.A. § 20-1A-2; or a church, synagogue, or other place of public religious worship, in existence prior to the date on which the dispensary license was issued.
In addition, most states that have legalized cannabis have left it up to local governments, either at the county or municipal level, to decide whether they’ll allow MRBs, such as marijuana dispensaries, to operate within their jurisdictions. Marijuana dispensary operators should therefore verify that the county, city, or town in which you want to do business allows marijuana dispensaries to operate there. Then, they should research the local jurisdiction’s zoning code, which you should be able to find through their county, city, or town’s planning and zoning department, to determine which areas are designated for light and heavy commercial use, and/or commercial residential use. This information will help operators narrow down their location search to areas where they can lawfully open and operate a marijuana dispensary within a specific jurisdiction.
B. Commercial Lease Agreements
Leasing commercial retail space to sell products derived from marijuana entails a myriad of legal issues that both property owners and tenants must consider before entering into a lease agreement. The negotiation of any lease agreement concerning a property owner and a MRB such as a marijuana dispensary must contemplate the fact that the use, possession, sale or processing of marijuana is still illegal under the Controlled Substances Act. Also, under the federal law known as the Crack House Statute, it is a felony to knowingly open, lease, rent, use or maintain any place for the purpose of manufacturing, distributing, or using any controlled substance. Despite these federal laws, hundreds of property owners lease or operate property for the growing, processing, and sale of marijuana and marijuana-related products. The following is a discussion of some of the legal issues that property owners and tenants will have to deal with when negotiating lease agreements for marijuana dispensaries.
- Banking and Payment of Rent
Assuming a property owner is willing to consider leasing space to a marijuana dispensary operator, one of the first issues that the property owner must consider is whether there is a mortgage on the property securing bank or other institutional financing. If there is, most bank loan agreements contain a provision requiring the borrower, the property, and its use comply with “all applicable laws, rules and regulations.” If so, most property owners will refuse to lease their property to a marijuana dispensary operator because doing so would violate federal law, and very few, if any, banks are willing to allow a borrower to lease space secured by a bank loan to a business that violates federal law. Moreover, if a property owner leases space to a marijuana dispensary, it will likely be unable to obtain conventional financing on the property from a bank as long as that lease is in existence.
An additional area of concern involves the financial covenants contained in the property owner’s loan documents. Financial covenants outline the financial metrics designed to measure things such as a borrower’s cash flow, leverage, liquidity, or net worth. Commercial financing loans are secured primarily by real estate and related assets owned by the property owner (debtor). Accordingly, sophisticated lenders recognize that leases that support financial covenants such as those relating to loan-to-value ratio, debt service coverage ratio and the like in their loan documents may be at risk where a property owner’s (debtor’s) tenants are in the legalized marijuana business. And, lenders are wise to focus on this risk as regulators conducting loan reviews have been known to fully excluded income from marijuana-related businesses from cash flow calculations, thereby effectively throwing a borrower into immediate covenant breach, and thereby creating a loan default.
On the other hand, if a property owner does not have a mortgage on their property and are still willing to lease space to a marijuana dispensary operator, there are still several issues for the landlord and the tenant to consider. First, the parties must consider whether the dispensary operator intends to pay their rent in cash. As discussed below, most banks refuse to provide banking services to MRBs, including marijuana dispensaries, because marijuana is still considered an illegal drug under federal law and any money derived from the sale of marijuana is therefore still considered proceeds from an illegal activity. If the dispensary operator pays their rent in cash, this may raise questions with the property owner’s bank. In fact, banks have been known to “fire” customers who have any connection to marijuana businesses, whether the customers, themselves, are in the business.
- Computation of Rent
Another issue that the parties must consider is whether the rent will be fixed or a percentage rent. If the latter, the bank may view the landlord’s acceptance of percentage rent as the functional equivalent of being “in the business” of selling marijuana, which may increase the risk that the bank will “fire” the property owner, or that the bank will subject the property owner’s bank account to greater federal scrutiny.
- Licensing Contingency
Depending on applicable state law, the parties may also have to consider whether the prospective tenant has obtained the necessary state or local license to operate its marijuana dispensary in the area where the subject property is located. In many jurisdictions, an applicant for a marijuana dispensary license must secure a location before applying for the license. Prospective marijuana dispensary tenants should seek to secure a lease that contains contingency provision allowing the tenant the option to exit the lease if they fail to obtain a dispensary license. Property owners should be familiar with local and state laws to determine whether to agree to enter into such a contingent lease agreement, and if so, how must time is appropriate for any such contingency period. The landlord should include a liquidated damages clause to reimburse the landlord for any applicable tenant improvement and leasing costs incurred by the landlord up to that milestone date. Finally, consideration should be given as well to continuous operation covenants, continuing liability for rent and other covenants that are reliant upon the MRB’s ability to continuous generate revenue in light of the possibility that an MRB tenant could lose its license (or fail to obtain a license renewal) during the term of the lease.
Another critical issues for both property owners and tenants to consider is whether the prospective tenant’s marijuana dispensary complies with local zoning laws. Given the controversial nature of MRBs, local jurisdictions often strictly regulate where marijuana dispensaries may be located (as discussed above). A property owner must therefore be certain that its property is within a zoning classification that allows MRBs, such as marijuana dispensaries, and what specific geographic restricts apply to such businesses to confirm that the subject property complies.
- Inspection Rights
Leases typically allow a landlord the right to inspect the premises at any time. While this is a standard contract provision is most commercial leases, in the case of MRBs such as marijuana dispensaries, the landlord’s access rights must be consistent with local cannabis laws. For instance, local cannabis law may impose restrictions on third party access to the business that are not typical for most commercial uses given the highly sensitive nature of the production and sale of marijuana and marijuana-derived products. A property owner must therefore be certain that the inspection rights provision in its lease agreement with a marijuana dispensary comports with local cannabis law.
- Availability of Insurance
Both the property owner and the marijuana dispensary tenant must consult with their insurance brokers before signing a lease to make sure that there is appropriate insurance available consistent with the lease, and that the insurance companies are aware that the insurance is for a marijuana-related business. While insurance for the marijuana industry is becoming more widely available, an insurance company may deny an insurance claim if it determines that the claim arises out of an illegal use and is therefore not covered by the insurance policy.
- Subleasing and Assignment of Lease
Many lease agreements contain provisions allowing a tenant to sublease the premises or assign its lease, but these provisions typically only allow the tenant to enter into a sublease with the landlord’s consent. These provisions also provide that the landlord agrees not to unreasonably withhold its consent. This language, of course, begs the question what constitutes an unreasonable withholding of consent in the context of a MRB such as a marijuana dispensary? Given the fact that marijuana dispensaries are a relatively new industry, the rules are still being written, so if a property owner enters into a lease with an MRB and is willing to allow subleasing or assignment, the lease should be very specific about the conditions pursuant to which the landlord will gives its consent to a sublease request.
The challenges that a MRB faces to begin and then sustain a successful operation, including with respect to licensing, supply regulation and accessing operating capital are not insignificant. Hence, the instability of marijuana-related tenancies are an issue for landlords as well. marijuana-related tenant with a struggling business and subsequent “midnight move-out” or eviction after lease default could leave a landlord with abandoned marijuana-related products left behind in their properties.
Therefore, strong abandonment clauses in leases are potentially more important in the marijuana situation because it is unsettled under applicable laws what landlords should do with abandoned marijuana products. In fact, in the absence of clarity from state statute or regulations, the best practice for now is likely notification to the authorities to take possession of abandoned marijuana products and inventory.
- Compliance with Law
Virtually all lease forms require that the landlord and tenant comply with applicable law. Based on federal law, if this provision were included in a lease with an MRB, both the landlord and tenant would automatically be in breach of these terms. Consequently, from a landlord’s perspective, compliance with law provisions should expressly place the burden of compliance strictly on the MRB. Further, the lease provisions that addresses compliance with law should also include an acknowledgement that under federal law, the sale, distribution and production of cannabis is a violation of the Controlled Substances Act, and the risk of enforcement of such federal law rests solely with the MRB. The risk of enforcement should expressly encompass all federal, state, and local laws and regulations, including zoning ordinances that are effective before and become effective during the term of the lease, regardless of the cost of compliance. Should the MRB breach this lease section, the landlord should again be granted an early termination right.
- Increased Operating Expenses
Indoor cannabis cultivation facilities often require enormous amounts of water and electricity to sustain their cannabis crops and operations. Additionally, licensed MRBs require supplementary security measures beyond those required of a traditional commercial tenant. These include security measures which may require increased utility maintenance and servicing beyond that required by a traditional commercial tenant. At multi-tenant facilities, the landlord and MRB should appropriately address the manner in which these excess utility and service charges pass through to the MRB as an operating expense. When a single tenant occupies the property, it will be easier for the landlord pass these operating costs directly to the tenant.
- Termination Rights; Security Deposit
Due to the constant evolution of laws related to cannabis operations and the uncertainty of federal enforcement, early landlord termination rights are a critical issue to address when drafting a lease with a an MRB. In addition to the typical landlord termination rights, a landlord should also have the right to terminate the lease if the MRB receives any notice from federal, state, and/or local authorities that it is being investigated or legal action is being pursued against it. The lease should require the MRB to covenant that it shall, within a specified time after receipt of said notice, forward to the landlord copies of all permits and any notices from federal state and local authorities related to the MRB’s operations at the premises. If the MRB falls out of compliance with any applicable state or local laws necessary to continue legally using the space as a marijuana related business, the landlord should again have the right to terminate the lease.
Practically all landlord lease forms require the tenant to furnish a security deposit or some other form of collateral that secures the tenant’s performance of its obligations under the lease. Due to an evolving legal landscape and the uncertainty of annual license renewals, MRBs pose a higher credit risk than a typical commercial tenant. Security deposits related to lease agreements with MRBs can be particularly critical should an MRB fail to restore the premises to an acceptable condition once a lease term expires. Landlords may consider including language that allows the landlord to retain the security deposit or such other forms of collateral for a specified period of time after the lease expires until the landlord has inspected the premises to confirm that the tenant has conducted a proper clean-up, disposal and removal of alterations at the premises, including if applicable, the removal of all cannabis products and cannabis residue.
- Lease Guaranty
The risk that an MRB may lose (or fail to successfully renew) its state license, or may have issues with law enforcement, creates a much greater potential for abandonment of the premises and a lease default. Of course, there is the threshold legal question as to whether the “illegality” of the underlying business that is the subject of the tenant’s operation from the premises would impair the enforceability of a lease guaranty. However, the lease guaranty is very important to the landlord with respect to an MRB. Guaranties are intended to reduce the risk of the creditor and increase the likelihood of payment and performance. The landlord’s scrutiny of a lease guarantor’s financial wherewithal is all the more critical.
These issues are only some of the legal issues that both property owners and tenants much address when negotiating lease agreements involving marijuana dispensaries.
III. RETAIL OPERATIONAL ISSUES THAT MARIJUANA DISPENSARIES MAY ENCOUNTER
A. Banking Issues
Because the U.S. federal government still views cannabis as a Schedule I narcotic, most banks refuse to provide banking services to cannabis businesses, even if marijuana is legal in the state. Without access to banking services, cannabis businesses are left without the ability to process credit card payments, deposit cash, write checks to suppliers, and much more. In addition to the logistical challenges and inconvenience associated with operating a business on a cash-only basis, businesses run entirely on cash are vulnerable to internal and external theft and major accounting errors.
Most banks most banks refuse to handle financial transactions for MRBs such as marijuana dispensaries because federal anti-money laundering (“AML”) laws make it a crime for banks to conduct a financial transaction with proceeds that they know were derived from “specified unlawful activity,” and they make it a crime for banks to transport, transmit, or transfer funds, including internationally, for the purpose of promoting a specified unlawful activity, even if the funds are derived from a legitimate source. In addition, the unlicensed money-remitter statute makes it a crime for banks to transport or transmit funds that they know derived from a criminal activity or that they know are intended to be used to promote or support unlawful activity.
The U.S. government is working on a fix to the cannabis banking problem. On Wednesday, September 25, 2019, the U.S. House of Representatives passed legislation, the Secure And Fair Enforcement Banking Act of 2019 (SAFE Banking Act) (H.R. 1595), to protect financial institutions that serve marijuana businesses in states where the substance is legal. The bill passed in the House by a vote of 321-103. Under current federal law, federally insured depository institutions are prohibited from offering financial services to such businesses because pot is illegal under federal law, forcing the companies to deal primarily in cash. The SAFE Act would, in part, prevent federal regulators from penalizing institutions that issued loans to or otherwise transacted with legitimate cannabis businesses.
On Wednesday, November 20, 2019, the House Judiciary Committee approved a bill, the Marijuana Opportunity, Reinvestment, and Expungement (MORE Act) (H.R. 3884 / S. 2227), that legalizes marijuana on the federal level, removing it from Schedule 1 of the Controlled Substances Act. The MORE Act is a bipartisan legislation that removes marijuana from the Controlled Substances Act, thus decriminalizing the substance at the federal level and enabling states to set their own policies. The Act would also make several other important changes. For example, it permits physicians affiliated with the Veterans Administration to make medical marijuana recommendations to qualifying veterans who reside in legal states and it incentivizes states to move ahead with expungement policies that will end the stigma and lost opportunities suffered by those with past, low-level cannabis convictions. If approved, the MORE Act also allows the Small Business Administration to support entrepreneurs and businesses as they seek to gain a foothold in this emerging industry.
The MORE Act passed 24 to 10, and it has a high chance of approval in the full House where Democrats control the chamber with 234 seats. The bill’s lead sponsor, Rep. Jerrold Nadler, D-N.Y., described the legislation as “long overdue” and “the right thing to do.” The National Cannabis Industry Association (NCIA), advocates for cannabis businesses, said the vote was “an unmistakable sign that the debate over legalization is moving from ‘if’ to ‘how.’” NORML, the National Organization for the Reform of Marijuana Laws, described the Wednesday vote as “the biggest marijuana news of the year.”
Until the federal government changes federal banking law to make it easier and less risky for banks to provide banking services to MRBs such as marijuana dispensaries, dispensary operators should implement business practices that help address and alleviate some of the issues caused by the lack of access to banking services. For instance, they should provide cash-only reminders on their websites, on social media, and in local listings, so potential customers are aware of the policy. Also, they should include provide an on-site ATM to give customers instant access to cash, if necessary. Then, with any luck, after the first couple of trips to an operator’s marijuana dispensary, customers should be well accustomed to bring and using cash to make their purchases. Marijuana dispensary operators also should establish a secure, off-site location to store their cash, preferably inside a metal safe. To transport the cash to this secure, off-site location, operators should use bonded cash transportation services that service the legal cannabis industry to transport the cash at different times, on different days, using different vehicles and routes to get your cash to their safe storage site. Also, while big, national and regional banks typically refuse to provide banking services to MRBs such as marijuana dispensaries, smaller banks (particularly local credit unions) are frequently more willing to take on the risk. Speak with other marijuana dispensary operators to find out which banks, if any, that they use for their banking services. Also, keep in mind that some of these cannabis-friendly banks (including some of the local credit unions) charge high monthly, annual, and/or transaction-based fees and can have other legally significant fine print in their banking agreements.
Like the banking industry, most insurance companies refuse to provide insurance coverage to MRBs such as marijuana dispensaries because marijuana is still illegal under federal law. According to a report by A.M. Best’s titled, “Cannabis: New Opportunities for Insurers, But with Burgeoning Risks,” approximately 25 insurance carriers (mostly non-admitted) provide coverage for MRBs in both the U.S. and Canada. For instance, the Lloyd’s Market offers coverage in Canada but doesn’t offer coverage to MRBs in the U.S., because the federal government still considers marijuana illegal. Insurance carriers in the U.S. that have entered the market are typically partnering with “agencies and producers that have a better understanding of the industry and the needs of cannabis businesses.” For instance, Topa Insurance Group insures Cannasure, an Ohio-based MGA and wholesale brokerage solely focused on the cannabis industry.
In the U.S., insurance carriers that have entered the market offer basic policies that typically cover the following risks: commercial general liability, with limits of $1 million per occurrence/$2 million aggregate; property liability and product liability, both with limits of $1 million per occurrence/$2 million aggregate. Depending on the size of an operator’s marijuana dispensary, these policy limits may not be sufficient to adequately cover the company’s risks.
Generally speaking, state laws require marijuana dispensaries to keep their marketing efforts within their state borders. They typically also require that marijuana dispensary ads avoid targeting children. For instance, in Illinois, marijuana dispensaries may not engage in advertising that:
- Is false or misleading;
- Promotes overconsumption of cannabis;
- Depicts the actual consumption of cannabis;
- Makes any health, medicinal, or therapeutic claims about cannabis;
- Includes the image of a cannabis leaf or bud; or
- Includes any image designed or likely to appeal to minors, including cartoons, toys, animals, or children.
Additionally, in Illinois, marijuana dispensaries may not advertise marijuana or marijuana-derived products in any form:
- Within 1,000 feet of a school, playground, recreation center, child care center, public park or library, or game arcade which allows persons under the age of 21;
- On or in a public transit vehicle or public transit shelter; or
- On or in publicly owned or publicly operated property.
Finally, under Illinois law, marijuana dispensaries are also prohibited from promoting the sale of cannabis products by giving away products, conducting games or competitions related to consumption, or by providing promotional materials or activities that would be appealing to children.
Under Michigan law, marijuana dispensaries may not advertise their products in a manner that is visible to members of the public from streets, sidewalks, parks, or any public place. They also may not market or advertise their products to minors aged 17 years or younger. Further, marijuana dispensaries in Michigan may not advertise their products on any television program, radio program, internet website, or print publication unless there is reliable evidence that 70% of the audience is reasonably expected to be 18 years or older. Moreover, any such marijuana products advertised in this manner must bear a state-approved warning label. Also, marijuana dispensaries in Michigan must market their products as “medical marijuana” for use only by registered qualifying patients or registered primary caregivers. Finally, Michigan-based marijuana dispensaries may not refer to themselves as a “dispensary” and may not use the word “dispensary” in their advertising.
Under Minnesota law, marijuana dispensaries are allowed to their business name and logo on medical cannabis labels, signs, website, and informational material provided to patients. The business name or logo must not include: (1) images of cannabis or cannabis-smoking paraphernalia; (2) colloquial references to cannabis; (3) names of cannabis plant strains; or (4) medical symbols that bear a reasonable resemblance to established medical associations, including, for example, the American Medical Association or the American Academy of Pediatrics. Also, marijuana dispensaries in Minnesota are allowed to display signs on their facilities, and they are allowed to maintain a business website that contains the following information: (1) the medical cannabis manufacturer name; (2) the distribution facility location; (3) the contact information; (4) the distribution facility’s hours of operation; (5) the medical cannabis products provided;
(6) product pricing; and (7) other information as approved by the commissioner. Finally, Minnesota-based marijuana dispensary operators must arrange their displays of merchandise, interior signs, and other exhibits to prevent public viewing from outside their facilities.
Under Georgia law, marijuana dispensaries are prohibited from advertising or marketing their products to registered patients or the public, but they are authorized to provide information regarding their products directly to physicians.
D. Other Key Operational Resources and Issues
- Point-of-Sale Software
Every state has its own set of marijuana laws and regulations, and marijuana dispensaries should fully and consistently comply with them. Installing and utilizing marijuana Point-of-Sale (“POS”) software that can be customized to meet the specific standard of your particular state is a key step in the compliance process. As a preliminary matter, any dispensary software that marijuana dispensary operators choose should seamlessly integrate with their state’s online reporting software. Indeed, a well-designed marijuana POS software can automatically send sales and expense reports daily, weekly, or monthly. Another important feature to look for when purchasing marijuana POS software is an automated sales tax tool. Inputting the sales tax percentages in the backend adds the appropriate amount of sales tax to each transaction subtotal.
Marijuana POS software that can track the plant from seed-to-sale is an integral part of maintaining state compliance and accurate reporting. Most seed-to-sale tracking platforms use barcodes that are assigned as soon as the seed enters the soil. This barcode can be scanned at every step of the process to identify the strain, batch, grower and other relevant information about the plant. Once the flower is cured, more information such as bulk weight and lab results can be added to the assigned barcode. A quick scan of the barcode can instantly integrate all this information into an operator’s marijuana POS software. Tracking the plant in this manner will provide a complete history if state authorities audit your storefront.
In addition, to increase efficiency, marijuana dispensary operators can a implement paperless check-in process for their customers simply by selecting the right marijuana POS software. Using touch screen tablets for customers to sign-in will automatically generate a patient profile for first-time customers and valuable information on how they found your dispensary, which will save valuable time, money, and resources.
- Seed-to-Sale Tracking Software
Most states that have legalized marijuana require MRBs, including marijuana dispensaries, to utilize a state-approved seed-to-sale tracking software, which monitors the marijuana plant during its entire life cycle. Industry-leading seed-to-sale tracking software includes METRC, BioTrackTHC, and Akerna’s Leaf Data Systems which track millions of plants from thousands of clients across many states as well as Washington D.C., Puerto Rico, Jamaica, Canada, and Australia. With respect to the operation of marijuana dispensaries, BioTrackTHC’s seed-to-sale tracking software is useful in the following four categories: (1) Transportation of the plants; (2) Point-of-Sale (discussed above); (3) Patient Identification and Verification; and (4) Real-Time Data Analytics.
Regarding transportation of the plants, seed-to-sale tracking software creates a detailed manifest prior to transporting the plants, which displays the shipment’s origin, a detailed contents list including quantity, destination and driver credentials, displaying the entire chain of custody. Manifest reports are available for law enforcement in real-time. Regarding Point-of-Sale, in addition to linking products to plant origin, each sale of a marijuana product at a marijuana dispensary is tracked to the specific patient or customer that purchased it, which effectively completes the unbroken chain of custody from seed-to-sale. Regarding Patient Identification and Verification, the seed-to-sale tracking software utilizes a Traceability System that generates a unique ID number for every patient, which can also be used to integrate with hardware for patient ID card printing. Consequently, marijuana dispensaries can easily and quickly validate patient information and sales limitations in real-time. Finally, regarding Real-Time Data, the seed-to-sale tracking software’s traceability portal is a secure, online, data hub that provides detailed analytics for regulatory agencies and law enforcement. This data allows law enforcement to track the transportation of marijuana plants and marijuana inventory in real-time. In addition, detailed financial reports are available for the Department of Revenue or other state agencies, which ensures compliance and adherence to industry standards and state laws.
- Federal and State Taxes
As the old saying goes, there are two things in life that are certain—death and taxes. MRBs, including marijuana dispensaries, face a daunting task attempting to comply with state and federal tax laws concerning revenue generated from the sale of marijuana and marijuana-derived products. In 1982, the U.S. Congress enacted Internal Revenue Code Section 280E, which 280E prohibits taxpayers from deducting trade or business expenses incurred in the trafficking of controlled substances.
Because marijuana is considered a controlled substance under federal law, Section 280E prevents businesses that sell marijuana or marijuana-derived products from deducting ordinary and necessary business expenses, even where the sale of marijuana is legal under state law. Although Section 280E is a provision in the Internal Revenue Code, many states conform to the provisions of the Internal Revenue Code for personal income taxes, corporate income taxes, or both. Consequently, Section 280E often applies in determining state taxable income. A few states (such as Colorado and Oregon) have enacted a provision that allows MRBs, including marijuana dispensaries, to deduct business expenses that would otherwise be nondeductible because of Section 280E.
Marijuana dispensary operators must be familiar with applicable federal and state tax law, and retain skilled tax professionals who are experienced with the various tax-related issues that relate to revenue generated from the sale of marijuana and marijuana-derived products.
While it is undeniable that the explosive growth of the marijuana industry in the U.S. and around the world presents a unique opportunity for marijuana dispensary operators, marijuana’s continued status as an illegal drug under federal law also presents a unique set of legal, operational and regulatory challenges for all MRBs, including marijuana dispensaries.
Marijuana dispensaries face an assortment of real estate-related issues including geographic restrictions established under state, county, and local law and complicated commercial lease agreements. To address these geographic restrictions, marijuana dispensary operators should verify that the county, city, or town in which you want to do business allows marijuana dispensaries to operate there. Then, they should research the local jurisdiction’s zoning code to determine which areas are designated for light and heavy commercial use, and/or commercial residential use, which will help them narrow down their location search to areas where they can lawfully open and operate a marijuana dispensary within a specific jurisdiction.
Both property owners and marijuana dispensary operators will face a myriad of legal issues negotiating the various terms of commercial lease agreements for marijuana dispensaries. As a first step, both parties should retain experienced real estate legal counsel to negotiate favorable lease terms on their behalf. Then, property owners should confirm that they will not violate the terms of any bank loans that they have on their property if they enter into a lease agreement with a marijuana dispensary. They should also confirm that and banks that they have a banking relationship with are aware that one of their tenants is a marijuana dispensary and that the funds that they dispensary uses to pay its rent stems from the sale of marijuana and marijuana-derived products, and that the banks do not have any objection to handling such funds. In addition property owners should refrain from taking any actions that their bank could constitutes participating in the business of selling marijuana or marijuana-derived products.
Marijuana dispensary operators should take steps to protect their interests in negotiating commercial lease agreements. For instance, in states that require dispensary operators to secure a location before obtaining a dispensary license, marijuana dispensary operators should seek to negotiate licensing contingency provisions that allow them to break the lease if they fail to secure a dispensary license. They should also confirm that the dispensary’s proposed location does not violate county or municipal zoning or land use laws. They should also ensure that the lease specifically outlines the property owner’s rights, if any, to inspect the premises. Also, before opening their business, marijuana dispensary operators should locate an insurance carrier that is willing to insure the premises as well as all of the company’s products against loss due to theft or natural disaster such as fire or severe weather-related events. In this regard, marijuana dispensary operators should confer with other MRBs to determine which insurance carriers are willing to write insurance policies that cover their risks. They should then purchase an insurance policy with policy limit amounts that are sufficient to adequately protect the company’s assets and to provide substantial liability coverage.
Marijuana dispensary operators should also be prepared to deal with several other operational issues that could adversely impact their business. For instance, large national and regional banks still refuse to provide banking services to MRBs because marijuana remains an illegal drug under federal law. However, the SAFE Banking Act and the MORE Act, which are both currently pending in the U.S. Senate, contain language that seeks to address the lack of banking services available to MRBs such as marijuana dispensaries. In the interim, to secure banking services, dispensary operators should confer with other MRBs to determine which banks they currently use and/or which banks are willing to provide banking services to MRBs. If a marijuana dispensary is unable to identify a bank that is willing to provide it banking services, the dispensary should implement procedures and protocols that will allow it to efficiently and effectively operate on a cash basis, including notifying their customers in advance that they are cash only.
Regarding advertising their businesses, marijuana dispensaries must understand and comply with state, county, and local law, which differs from state-to-state. Typically, marijuana dispensaries should keep their marketing efforts within their state borders, and they should ensure that their ads avoid targeting children.
Marijuana dispensaries should purchase and utilize Point-of-Sale Software and Seed-to-Sale Tracking Software, which are two of the key operational resources that most states that have legalized marijuana require all marijuana dispensaries to purchase and use. These software systems work in tandem to save valuable time, money, and resources. For instance, among other things, POS software can automatically send sales and expense reports on a daily, weekly, or monthly basis. POS software can also be used to implement a paperless check-in process by using touch screen tablets that not only allow customers to sign-in when they arrive, but also automatically generates a patient profile for first-time customers and valuable information on how they found your dispensary.
Seed-to-Sale Tracking Software can track marijuana plants throughout the plants entire life cycle by using barcodes that are assigned as soon as the seed enters the soil. This barcode can be scanned at every step of the process to identify the strain, batch, grower and other relevant information about the plant. Once the flower is cured, more information such as bulk weight and lab results can be added to the assigned barcode. A quick scan of the barcode can instantly integrate all this information into an operator’s marijuana POS software. Tracking the plant in this manner will provide a complete history if state authorities audit a dispensary operator’s storefront.
Lastly, marijuana dispensaries must ensure that they comply with the complex array of federal and state tax laws concerning revenue generated from the sale of marijuana and marijuana-derived products. In this regard, marijuana dispensaries must retain tax professionals who are familiar with federal and state tax law to ensure that the companies pay the correct amount of federal and state taxes and avoid violating federal and state tax law.
In summary, while operating a marijuana dispensary is a potentially lucrative business enterprise, it’s also a highly regulated business that’s fraught with many traps for the unwary and uninformed. This article addresses many of the most pertinent issues that dispensary operators will likely encounter, but there are numerous other issues that may arise. Consequently, retaining and consulting with legal counsel and tax professionals experienced in handling these issues is critical to avoiding most, if not all, of the various legal issues, operational challenges, and regulatory hurdles that marijuana dispensaries frequently encounter, and addressing them quickly if they occur.
Clinton E. Dye, III, a partner in the Atlanta office of Taylor English Duma LLP, coauthored this article with Reggie Snyder. Dye is an experienced commercial real estate lawyer with more than two decades of experience handling a variety of commercial real estate transactions for corporate and governmental clients in Georgia.
 See “Global Cannabis Sales Grow 48% to $15 Billion in 2019,” Business Wire, January 16, 2020.
 See O.C.G.A. § 16-12-215(a) (2019).
 See 21 U.S.C. § 801, et seq.
 See 21 U.S.C. § 856.
 See 18 U.S.C. §§ 1956 and 1957; 18 U.S.C. § 1960.
 See McVey, Eli, Chart: Startup Costs for Wholesale Marijuana Cultivators, Marijuana Business Daily, May 22, 2017, available at https://mjbizdaily.com/chart-startup-costs-wholesalemarijuana-cultivators/.
 See https://www.covasoftware.com/blog/how-to-manage-cash-at-a-cannabis-retail-store.
 See 18 U.S.C. §§ 1956 and 1957.
 See 18 U.S.C. § 1960.
 See https://www.covasoftware.com/blog/how-to-manage-cash-at-a-cannabis-retail-store.
 Id. According to the U.S. Treasury Department, nearly 500 financial institutions across the country are cannabis-friendly, up from zero in 2014.
 See https://www.insurancejournal.com/news/national/2019/03/14/520607.htm.
 See https://www.mantisadnetwork.com/weedmaps-vs-leafly-vs-mantis-market-dispensary-cannabis-company/
 See https://www.covasoftware.com/us-dispensary-licensing-laws/illinois
 See https://www.michigan.gov/documents/lara/05-30-2019_Marketing_and_Advertising_656574_7.pdf.
 Id. “For use by registered qualifying patients only. Keep out of reach of children. It is illegal to drive a motor vehicle while under the influence of marijuana. National Poison Control Center 1-800-222-1222.”
 See MINN. STAT. 4770.0800 (2018).
 See O.C.G.A. § 16-12-215(b).
 See https://indicaonline.com/blog/marijuana-pos-software-cannabis-retailer/
 See https://mjobserver.com/business/seed-to-sale-tracking-101/
 See https://www.foxrothschild.com/content/uploads/2019/06/Cannabis-Tax-E-book-June-v22019.pdf.
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