June 04, 2020 Articles

The Haze Surrounding Compliance for Cannabis Businesses

Running a cash-only business comes mostly with headaches.

By David Benkert
Dispensaries find numerous challenges in running a cash-only business.

Dispensaries find numerous challenges in running a cash-only business.

During the hippie countercultural movement, it involved simply handing a street dealer a five-dollar bill in exchange for a nickel bag.

Today, there are several legal marijuana dispensaries in or near the Haight-Ashbury District, but the transaction is a bit more complicated. Customers at California’s recreational cannabis dispensaries need to be 21 and show a valid government ID. Purchases are limited to one ounce of loose flower, or eight grams of concentrates found in edibles such as gummies and brownies. And for today’s legal state dealer—the cannabis dispensary operator—running such a business involves numerous compliance issues.

All sales are cash in dispensaries because while individual states have legalized marijuana sales, the federal government still classifies cannabis as an illegal drug; this prohibits banks and credit card companies from doing business with dispensaries. Dispensaries find numerous challenges in running a cash-only business, including the need to keep copious records, establish sound control and tracking policies, and employ strong security measures.

Furthermore, there are complications related to taxes. Because of marijuana’s “illegal” classification, a cannabis dispensary does not enjoy the same federal income tax write-offs as other businesses. And the Internal Revenue Service (IRS) is more likely to scrutinize the filings of a cash-only business.

Then there are the legal and insurance issues. Conflicting state and federal regulations make cannabis businesses vulnerable to legal challenges that include issues related to directors and officers’ coverage and employment-related matters. Also, without proper record keeping and tracking of cash, dispensaries are susceptible to theft, fraud, and other crimes, potentially resulting in lawsuits from shareholders, partners, suppliers, and landlords. In addition, cannabis businesses or their landlords may have trouble obtaining insurance coverage. Traditional policies may exclude coverage for criminal activities or public policy violations.

Complicating matters, some of the laws and regulations apply to unsuspecting businesses that are not directly in cannabis distribution but are in the cannabis supply chain. When dealing in cash, the same federal banking laws apply to the growers, manufacturers who cut the buds and extract the oils, distributors, shippers, marketing firms, and even landlords.

It is critical for attorneys representing dispensaries and cannabis-related businesses to understand the intricacies of the industry so that they can best advise their clients on how to comply with the rules and regulations and avoid costly litigation.

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