What Should I Know for My Cannabis Business?

Posted by Margolin & Lawrence on September 18, 2018

The logistics of running a legal cannabis operation involve many questions that may seem surprising or daunting to both current and aspiring business owners. As a California cannabis law firm, here are a few of the issues that we’ve seen cannabis businesses need answers for. If you’ve found yourself asking any of these questions about your own operation, our lawyers may be able to help.

How much can I expect to spend?

At present, the capital requirements to start a cannabis business are very high; on top of the normal costs of starting a business, like buying real estate and hiring employees, the industry is very tightly regulated, and it’s not possible to get an outside loan. That means your business has to be privately fundraised, so it’s important to figure out exactly how much money you have and how much you’re willing to spend.

The application fees alone for cannabis licensing are often several thousand dollars, and many jurisdictions require both proof of funding and a detailed business plan before they consider a cannabis licensing application complete. A cannabis lawyer can help you find this information in order to start your licensed operation.

Is my property in an eligible location for cannabis business?

Zoning requirements vary widely based on your jurisdiction and which type of cannabis activity you’re interested in, so it’s not always easy to tell whether a given property or address is eligible for a particular activity. In addition to restrictions on which zones a given activity can be located in (for instance, cannabis cultivation might be banned in commercial zones but allowed in industrial ones), many municipalities have setback restrictions that prevent cannabis businesses from being located within a certain distance of schools, parks, residential areas, or other cannabis businesses.

Interpreting the local zoning regulations to determine for what activities your business is eligible is another service that cannabis lawyers can provide.

What information do I need to apply for a cannabis business license?

Applying for a cannabis business license isn’t just a matter of filling out an application form – most state and local licensing authorities will require a large amount of information about the business and its owners, including a complete operating plan describing how your establishment will meet all legal requirements for cannabis business activity.

On top of this information, you’ll also need to have business documents such as a seller’s permit, federal employer ID number, and certificate of good tax standing in order. On top of that, most applications will require you to provide accurate financial information, insurance documentation, and enough personal documentation for each member of your business to pass a full background check.

Finding these documents and preparing them for your final application is just one service that cannabis lawyers can provide for your business.

Should I get a license for medical-use or adult-use cannabis?

At the present moment, many states and municipalities have separate regulatory regimes for medical-use and adult-use cannabis, often with very different legal requirements. For your cannabis business to succeed, you’ll need to decide which license (or combination of licenses) is best for your business, then master the licensing and compliance processes for the type of cannabis business you choose. A cannabis lawyer can help guide you through this process, from choosing the right activity to applying for a license to remaining in compliance with the law once your business is operational.

What cannabis activity should I apply for?

In addition to medical-use and adult-use, cannabis business licenses are broken down into different activities, such as cultivation, manufacturing, and retail. Additionally, many of these categories are split into subcategories such as indoor and outdoor cultivation or storefront and non-storefront retail. As with medical and adult-use cannabis, these different types of cannabis activities often have very different requirements.

Some jurisdictions also offer boutique categories with special requirements such as Microbusiness, impose restrictions on how many licenses can be granted, or limit which types of licenses a single business can hold simultaneously. For your cannabis business to succeed, you’ll need to optimize which activities to apply for – another task that a cannabis lawyer can help with.

How can I ensure that my business is licensed as quickly as possible?

Given that legal cannabis licensing is a complex, highly regulated bureaucracy currently receiving a large number of applications, it can be difficult for a cannabis business owner to predict how long it will take their business license application to be approved, or to optimize their application in order to be licensed and operational as soon as possible.

Some areas offer a fast track to licensing under their Social Equity Program, in order to ensure that business owners who are disadvantaged or disproportionately affected by the War on Drugs have a quicker path to licensed operation than other applicants. Our cannabis lawyers can help you find out whether you qualify for one of these programs.

Whether or not you qualify for a Social Equity Program, the best way to ensure that you’re licensed as soon as possible is to choose the right license for your business and make sure that the information in your application is complete and correct.

What license should I apply for if I plan to expand my operation?

Especially for new cannabis businesses, the size of a cannabis business at the time of initial licensing might not be the same as the size of the business you hope to run in two or three year’s time. However, cannabis license application fees often vary based on the size of the operation in question, and applications often require businesses to provide details that depend on the size of their operation, including what types of equipment they plan to use, their planned hours of operation, and how many employees they’ll hire (including their labor practices and management structure).

Our cannabis lawyers can help you figure out how to reflect your long-term growth plans in your licensing application, including the multi-year pro forma budgeting and income documents that many municipalities require.

Will I need to apply for additional licenses or permits?

For many businesses, the cannabis license itself is only one of a number of licenses you’ll need for a fully licensed operation. To begin with, new cannabis businesses will need to apply for their tax registrations and seller’s permits. Additionally, depending on your activity, you may need to apply for Conditional Use Permit or Land Use Permit from your local planning department before you can apply for a cannabis business license.

For some activities, like outdoor cultivation, this may require further permits, such as for diversion of water, tree removal, or environmental review. On the other hand, businesses located in cities may be required to apply for enrollment in local Social Equity or community benefits programs. Our cannabis lawyers can help you find out what additional permits you need and help you apply for them.

California Cannabis License Fee Calculator

Posted by Margolin & Lawrence on September 6, 2018

The state regulators have released the annual fees for cannabis licensees - manufacturing fees are determined by the CDPH, cultivation by CalCannabis, and testing, microbusiness, retail and delivery fees are set by the BCC. We have compiled all of these fees into a calculator you can use to estimate your costs for the state annual license into one place. 

 

 

https://margolinlawrence.com/california-state-licensing-fee-calculator/

 

Why You Should Consider Hiring an Attorney for Your Cannabis Business

Posted by Jenna Rompel on August 27, 2018

California is well underway in the business of commercial cannabis, and now the state has
opened its golden doors to licensing. The state is actively reviewing applications for annual state
licenses. Those who have successfully triumphed over their local jurisdiction are quickly
realizing that was only half the battle and are in process of applying for a state license. The
industry is experiencing some growing pains as it continues to transition into a regulated market,
and if you’ve felt the hurt, here are some things to consider on whether it’s time to hire a law firm
to represent your cannabis business.

Depending upon the activity applied for, the relevant agency regulating commercial cannabis at
the state level – the Bureau of Cannabis Control (BCC), California Department of Public Health
(CDPH), or California Department of Food and Agriculture (CDFA) – will contact the city or
county to verify the validity of the local license and that the business is in compliance with or exempt from the California Environmental Quality Act (CEQA), as required by state law. This should be an easy
tick off the checklist. However, we are finding the state is returning responsibility to the applicant
to provide evidence of CEQA. The language in the local ordinances, particularly in the smaller,
rural jurisdictions, can be vague and up to interpretation. Failure to provide evidence of
compliance with the CEQA, or with any of the regulations under state law and associated
governmental bodies, is subject to denial of the state license. As a result, all operations will be
forced to cease. Any operations occurring without a valid local and state license are subject to
heavy fines, as recently seen in Humboldt County, and could result in criminal prosecution. An
attorney will advise in navigating through all local and state requirements to protect your
business from shutting down.

A common issue aggravating many are problems arising due to incorrect zoning that can lead to
costly consequences. Before you sign a lease or purchase a property, verify the zoning. For
example, for those in the market for the City of Los Angeles during its second phase of
licensing, you may have noticed the maps to check zoning against sensitive use areas in each
of the 15 districts are no longer available. At the request of the Department of Cannabis
Regulation (DCR), the maps have been removed due to numerous issues arising from incorrect
zoning. Applicants were relying on the maps not realizing there may have been a school, EMMD,
or other sensitive use within the area. The city is allowing applicants the opportunity to find
another location that is in the correct zoning until at least September 13th , when this phase of
licensing closes. Finding a location in the correct zoning is no easy feat. Have the property
professionally mapped and consider hiring an attorney to negotiate the terms of the lease or
purchase contract, ensuring the property complies with all zoning and land use requirements
under the ordinance, and reducing the chance your license is denied.

If you are an investor looking to buy an existing license, beware of fraudulent deals and false
licenses. Does the license comply with CEQA? Is it in the correct zoning? What is the licensing
authority’s policy on transferring of cannabis licenses? Having an attorney do the due diligence
will help reduce the risk of your investment.

As the industry evolves, there is going to be more need for legal protection for entrepreneurs and
investors, so consider a business investment into a law firm well educated in the field of
cannabis law and protect your success.

Do you Want Your Security Guard to Kill or Injure Someone to Protect Your Product or Cash?

Posted by Terry Blevins on July 25, 2018

by Terry Blevins, President/CEO of Armaplex Security

Many businesses are willing to put a security guard in their cannabis business, but don’t often think about the possible consequences (implications) of that decision.


I often ask business owners: Would you want your security guard to kill or injure an intruder in order to prevent him from taking your cannabis product or cash? The answer should be “no,” because the use of force to protect property is not allowed by security officers and would put you and your business in a precarious position from a liability perspective, not to mention causing a potential reputational issue. If the answer is “no,” then I ask: “Have you had that discussion with your security company and/or the guards that work in your business?” The use of physical force is a serious responsibility, especially if it is done by one of your employees or contractors, and at your request, and should not be taken lightly.

Even more serious is the use of a firearm by security guards, which can bring on a series of additional liabilities and concerns. How would you feel personally if one of your security guards killed or injured someone while trying to protect a small amount of product? How would you feel if an innocent bystander was killed during the incident? If you tell your guard not to draw his weapon in case of an attack, then you are defeating the purpose of having an armed guard and may be creating other liabilities with these instructions.

Are you aware that a security guard is the last measure you should put in place and only after you have secured the site with robust physical barriers, employee procedures and security technology? 

You should be suspicious of security companies whose first line of defense is always a security guard. Most shrinkage or loss in the cannabis industry is due to factors that can be controlled by measures other than hiring a security guard. Every cannabis business will suffer some loss of product or cash on a monthly basis and most of the time there is some insider (employee, contractor or partner) involvement in this.

Some examples of measures that can prevent insider theft:

  • Employees should not be allowed to have bags or baggy clothing in areas where product or cash is kept. Employee and contractor lockers should be used.
  • Employee policies and procedures that require two individuals to be present when accessing large amounts of cash and/or product
  • Alarm devices and access control systems that only allow certain employees, into certain areas, during certain hours
  • A requirement that all transactions take place on camera can help to prevent theft and may also serve as verification if someone is wrongfully accused

Are you 100% sure that if one of your security guards injured or killed someone, your insurance would cover you? How about if they just touch someone and that person claims assault? 


All insurance policies have exclusions, and many have “Assault and Battery” or other exclusions that mean the insurance company would not pay a claim if your security guard used physical force (any bodily contact) on a person, even in the course of his duties. Even if you contract with a licensed security company, its policy may have these same exclusions that place you, and them, at risk of not being properly covered. This exclusion may be as subtle as no coverage for providing security for a business that is involved in illegal activity (cannabis is still a Federal offense).


These are steps you can take to protect yourself and your business:


  1. If you hire guards directly, your insurance company must know that you are doing this in order for you to be covered in the case of an incident.
  2. If you contract with a security provider, you should ask this security company to list you as a co-insured on its insurance policy
  3. Have your attorney review both your policy, and the security company policy, to make sure that cannabis businesses are not excluded and insure that there are no other exclusions, such as “Assault and Battery,” that put you at risk.

Are you 100% sure that your security guards are fully licensed and compliant to perform their duties under local and state laws that regulate security companies, as well as cannabis companies?


All security companies are heavily regulated due to the need for trust and accountability as they are entrusted with our most valuable assets, and sometimes with our lives. Cannabis security companies and guards are even more heavily regulated and scrutinized than other security companies. State and local cannabis regulations require that security companies and/or guards that are used by cannabis companies must be properly licensed and insured.


Things you should do:


  1. Have your attorney review the contract with the security company and make sure that it meets the BCC and/or local requirements
  2. Visit, or call, the state and/or city agency that licenses security guard companies to make sure the company is licensed. (In California this site is:  https://search.dca.ca.gov )
  3. Make sure that you have these documents on hand during any compliance check:
    1. A copy of the security company’s license
    2. The security guard’s personal card (city of L.A. also requires first aid card)
    3. Your contract with the security company
    4. The insurance binder from the insurance company that lists you as a co-insured
    5. Any other documents required by law or regulation

Were you aware that in most states you cannot hire security guards directly (even if they have guard cards) without your business being licensed as a Proprietary Private Security Employer?


Out of all the cannabis businesses that hire their guards directly, most have no idea that this is required. The supervision of security guards cannot be performed by someone who is not an expert in security. Any company that hires security guards must have a license to do so and must have a manager on staff who has proven experience in security management and completed a written test and background check (California requires this license). Your insurance company will also want to look at the manager’s qualifications in order to ensure the manager is experienced and doesn’t present a risk to the policy.


This is only a partial list: There are many other things that you should consider when hiring security personnel at your cannabis site, and you should do everything you can to be informed and to protect you and your business.


There are many misconceptions regarding security in the cannabis industry regarding what is required under state and local laws and even some security companies don’t fully understand these. The only way for you to protect your company is to be proactive, to work closely with your attorney and to use a reputable security company.


About Terry Blevins:

Terry Blevins has over 30 years of experience in Law Enforcement and Security and has worked as an Industrial Site Security Subject Matter Expert for the U.S. Department of State. With a master’s degree in Security Management and extensive training in conducting threat and risk assessments from private industry as well as the Federal government, Blevins is considered a qualified physical security expert. 

Additionally, Blevins is considered one of the foremost cannabis security experts in the U.S. He has studied many cannabis businesses in California and other states, learning what works and doesn’t work, including industry better and next practices and has drawn from those to develop the security strategies that he includes in the numerous cannabis security plans he has completed. He has also studied local and state regulations and understand what must be provided with applications in order to successfully compete for a license.


Bureau of Security and Investigative Services

http://www.bsis.ca.gov/about_us/laws/pssact.shtml

Final Release of California Cannabis Regulations

Posted by Margolin & Lawrence on June 7, 2018

After numerous iterations, the final regulations officially went into effect on June 6, 2018 and are set to expire on December 4, 2018. These amended emergency regulations were initially released to the public on May 18, and then filed with the Office of Administrative Law on May 25, 2018. The state’s regulatory agencies proposed changes to certain provisions in order to provide greater clarity to licensees and address issues that have arisen since the emergency regulations went into effect. The re-adoption of the emergency regulations have extended the effective period for an additional 180 days. After the California Office of Administrative Law (OAL) posted the proposed emergency regulations on their website, there was a five-day public comment period on the finding of emergency.

Do Free Samples get Taxed?

Posted by Margolin & Lawrence on May 1, 2018

 

Update: This blog post does not apply to Los Angeles, as the distribution of free samples is non-compliant under the LA Ordinance 185344 Rules and Regulations for Cannabis Procedures, Regulation No. 10. Operational Requirements and Violations. Section D.

 

Since the pot-prohibition era has ended, there has been much ambiguity around the transition from an illegal market to one that is becoming strongly regulated. The cannabis tax rates for California were definitely met with much opposition, with both merchants and customers appalled by the exorbitant tariffs on California’s favorite vice (read more here).

Current Status of San Francisco City Cannabis Licensing

Posted by Margolin & Lawrence on March 29, 2018

The City of San Francisco began its process of licensing retailers to sell adult-use cannabis on January 6, 2018. Any MCD (Medical Cannabis Dispensary) businesses that conducted delivery, cultivation, manufacturing, testing, or any other cannabis activity were required to register the activity with the Office of Cannabis between September 26, 2017 and November 30, 2017. Those that registered were then required to get their temporary permit(s) from the City. To continue each of these activities in 2018, temporary licensing must be obtained from the State. Any applicant who did not register as an existing business before November 30, 2017, must apply for a permit as a new cannabis business. The Transition Provisionof City Ordinance 230-17 declares that existing MCD applicants temporarily permitted to sell cannabis starting January 1, 2018 cannot cultivate cannabis without new licensing as of April 1, 2018.

Beginning in 2018, all applicants must apply to the Equity Program (see eligibility requirements) either as individuals or incubators before applying for cannabis licensing. Since San Francisco was consistently targeted by the War on Drugs, the City is determined to make amends through this initiative, and compliance is mandatory for all cannabis businesses.

All new businesses require a license from the San Francisco Office of Cannabis and the State of California in order to sell cannabis in San Francisco. To be eligible for a temporary permit in the City of San Francisco, applicants must comply with the Citys zoning codes. These can be found on the SF City Planning website - check out the zoning for cannabis retail businesses. The Land Use Regulations for the City are have also been outlined in a table by the San Francisco Office of Cannabis, which provides useful zoning requirements for all retail and non-retail cannabis businesses (including cultivation, manufacturing and distribution). Mobile cannabis dispensaries will not be permitted in San Francisco.

At this time all cannabis licensing is temporary, subject to review by each municipal zones governing body and the State before permanent licensing can be applied for through the Office of Cannabis. According to Section 1605 of Article 16 in San Francisco Citys Ordinance 230-17 Amending the Administrative, Business and Tax Regulations, Health, and Police Codes,all cannabis businesses awarded a temporary license must apply for permanent licensing within 30 days of the date when the Office of Cannabis makes such permits available. Once permanent licensing becomes available, temporary licensing will no longer be offered to new businesses.

In summary, whether you are looking to start a business in cultivation, manufacturing, retail, distribution, a combination of the above (microbusiness), or testing, you will need to obtain temporary licensing from the City of San Franciscos Office of Cannabis. The window for existing MCDs to register with the City has passed, but these businesses can still apply for new licensing along with all other new cannabis business applicants. The Office of Cannabis in San Francisco has not yet announced when permanent licensing will become available to businesses awarded temporary licenses by both the City and the State. More information about the application process and requirements can be found on the San Francisco Office of Cannabis website.

Federal Cannabis Update: 2018 Spending Bill Keeps Rohrabacher-Blumenauer Amendment

Posted by Margolin & Lawrence on March 27, 2018

Last week, despite controversy, criticism from both sides of the aisle, and talk of a veto, President Trump agreed to sign the federal government’s omnibus spending bill for 2018. To the relief of many in the legal cannabis industry, the spending bill retains a provision known as the Rohrabacher-Blumenauer (or Rohrabacher-Farr) amendment, which provides limited protection from federal prosecution for state-level legal cannabis activity.

Given both Trump’s and Attorney General Jeff Sessions’ tough talk on drugs and threats to crack down on the cannabis industry, the continued presence of this amendment is a silver lining for those anxious about the future of legal cannabis. While this won’t mean a change in the federal treatment of marijuana – the amendment has been included in every spending bill since 2014 – it does indicate that the government intends to keep on its current course with regard to cannabis, as the provision has to be renewed every year to remain in effect.

Likewise, though the actual protections afforded by the Rohrabacher-Blumenauer amendment are limited, its being signed into law was, and remains, an important indication of the federal government’s shift in attitude regarding cannabis: as the LA Times reported following the provision’s first inclusion in the spending bill, “Congress for years had resisted calls to allow states to chart their own path on pot. The marijuana measure, which forbids the federal government from using any of its resources to impede state medical marijuana laws, was previously rejected half a dozen times.” In this light, the amendment was a notable pivot from a top-down to a state-level approach to cannabis regulation.

California cannabis consumers and business owners shouldn’t get too comfortable, though: not only does the amendment not change anything about the federal government’s cannabis policy in and of itself, its terms only apply to medical marijuana, not recreational cannabis. So far, the government has rejected proposed amendments that would grant recreational cannabis operations the same protection from federal intervention. For the time being, California cannabis business owners’ best bet is to stay in full compliance with state and local law as the federal situation develops.

I Have My Temporary Distribution License. Now What?

Posted by Margolin & Lawrence on March 13, 2018

The state of California has officially begun to grant temporary licenses for cannabis distribution, pending applications and processing of full state licenses. Temporary licenses are “a conditional license that allows a business to engage in commercial cannabis activity for a period of 120 days.” They can only be granted to businesses which have already received their local licenses, and are intended to allow locally-licensed businesses to operate while waiting for their full state license to be reviewed.

When it comes to record-keeping, in particular, the requirements of temporarily-licensed cannabis distributors are different from those of annually-licensed ones. The reason for this difference is that the track-and-trace system which California will use to record the movements of cannabis products has yet to be fully implemented. While annual license holders will be required to use this system, based on the Franwell METRC software, to keep track of their inventory, CalCannabis states that temporary license holders must manually document their sales using “paper sales invoices or shipping manifests”.

For the temporary distribution licensee, then, keeping in compliance with state regulations is not only about following the operating requirements, but also about keeping track of a relatively complicated set of information for the sake of record-keeping. Distributors need:

  • Local cannabis recordkeeping requirements (usually keeping business, inventory, & patient records for a several-year period)
  • State cannabis record retention requirements (listed in California Code of Regulations, Title 16, Division 42, §5037) – financial, personnel, training, security, etc.
  • The California Board of Equalization’s general record-keeping requirements for businesses (keeping track of the sales & use taxes, receipts, deductions, and purchase prices for 4 years).
  • Paper sales invoices or shipping manifests for all sales
  • A resale certificate for all sales intended for resale

If a distributor plans on reselling cannabis rather than just distributing it, they’ll need to make sure their seller’s permit is in order as well. For more information on resale certificates, check our recent post on the subject.

While all this paperwork may seem daunting at first, a licensed distribution operation should be more than qualified to handle it – and, once the California METRC system is implemented, keeping records of sales and inventory should be streamlined considerably.

Cannabis Taxes: What is a Cannabis Resale Certificate?

Posted by Margolin & Lawrence on February 14, 2018

As recreational “adult-use” cannabis is officially legalized across California, cannabis taxation is more important than ever for legal cannabis operators. Our Los Angeles Cannabis attorneys are often asked about the new state tax system and what is new since January 1, 2018. As of a few months ago, the BOE became the CDTFA. For California, there are three different state-level taxes on cannabis business: the Cultivation Tax, the Cannabis Excise Tax, and the Sales and Use Tax. The new state tax agency has released an educational series to explain the new tax regime. Cannabis manufacturers and distributors need to become familiar with the resale certificate. As its name implies, a resale certificate relates to the Sales and Use tax.

The Sales and Use Tax applies to sales of cannabis or cannabis products (flowers, plants, hash, bud, vape pens, edibles, oils, etc.) to consumers – in other words, the “final sale” of cannabis before the product is used/consumed. However, there are circumstances in the cannabis supply chain where these products are sold to a cannabis business for resale, rather than to a consumer. For instance, if a licensed distributor sells cannabis to a licensed retailer, they’re making a sale, but the purchaser doesn’t intend to use or consume the product themselves. In order to prevent the distributor from being liable for taxation on this type of sale, the retailer can give the distributor a resale certificate. If timely and valid, this certifies that the purchaser intends to resell the product and therefore exempts the distributor from the tax.

Without a resale certificate, both the seller and the purchaser are liable for Sales and Use Tax. In the example above, the distributor would need to pay it for their sale to the retailer, while the retailer would need to pay it for the sale they make to the final consumer. The same goes for other sales of cannabis between licensed cannabis businesses. For instance, when a cultivator sells cannabis flower to a manufacturer, the cultivator is liable for a Sales and Use Tax unless the manufacturer gives them a resale certificate for the purchase.

One important thing for distributors to keep in mind is the distinction between “transport” and “sale”. If one licensed cannabis business purchases cannabis products directly from another, e.g. a retailer buying flowers from a cultivator, the distributor who is contracted to transport the products from the cultivator’s operation to the retailer’s isn’t making a sale, and therefore doesn’t need to pay a Sales and Use Tax, regardless of whether they’re given a resale certificate.

Even if all their business’ sales are for resale and exempt from Sales and Use Tax, all cannabis operators are still responsible for filing a tax return and reporting their activities to the California Department of Tax and Fee Administration. Remember, a resale certificate only applies to the Sales and Use Tax, not the Cultivation or Excise taxes.

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.