This article originally appeared in the June 2018 issue of Cannabis Dispensary. To subscribe, click here.
According to several attorneys, it’s not that cannabis dispensary owners are prone to more mistakes than the average retail business owner—but the often murky business of cannabis does lend itself to more pitfalls and confusion, which can easily lead to unnecessary errors.
For starters, “The conflict between federal, state and then sometimes state and local laws can be challenging for a start-up entrepreneur,” says Lance Rogers, partner at Greenspoon Marder law firm, which has locations throughout the country.
Of course, there are many reasons this industry might face more legal pitfalls. Here, according to expert attorneys, are the top 11 mistakes your business could make—and how you can avoid them.
Mistake #1: Not knowing cannabis law.
There are many, ever-changing rules dispensary operators must follow, and understanding them isn’t always easy. But, “operators must take the time to understand the [laws’] scope and meaning, because ‘I didn’t know’ isn’t an excuse that will hold up with regulators or in a court,” warns Ariel Clark, partner at Clark Neubert LLP in California. “Taxes are a great example. Taxation around cannabis is incredibly complex in California, the rates vary city to city, and there are many filing deadlines. We urge clients to get professional support to ensure compliance. It can be the difference between keeping or losing a license.”
Mistake #2: Not knowing other applicable laws.
In addition to knowing cannabis-specific laws, “dispensary owners must also follow a host of non-cannabis laws, codes and regulations, which define everything from labor practices to building codes,” says Nicole Howell Neubert, partner at Clark Neubert LLP. “We’ve seen dispensaries do full remodels—without pulling a license from the city. That kind of mistake is an immediate red flag for inspectors when they arrive.” What’s more, Neubert adds, “it’s also a surefire way to have inspectors scrutinizing every other aspect of your business.” So, study up on what laws apply to you as a business owner—not just a dispensary owner.
Mistake #3: Thinking some compliance with the law is good enough.
Partial compliance with laws that govern cannabis sales is not enough, cautions Rachel Gillette, partner at Greenspoon Marder Law in Denver, Colo. “When your license to operate depends on strict compliance, even substantially complying can leave a business in a very precarious situation,” she says. “One slip-up could mean the loss of your business license, and thus the loss of everything you’ve invested in.” So, follow any applicable laws in full, Gillette advises. It will keep you out of trouble and benefit your dispensary. “Strict compliance with state and local laws is also your business’s best defense against federal interference.”
Mistake #4: Not understanding local, state and federal tax codes—including IRC § 280E.
Those tax codes mentioned earlier could be the undoing of your dispensary if you don’t understand them—so prepare for a worst-case scenario, Gillette says. “Plan to be audited,” she advises, before adding that “it’s not if you will be audited by a local, state or federal tax authority, but when.”
How could taxes get you into trouble? “A significant deficiency assessment [from your cannabis business] for a previous tax year could cause severe financial distress for a licensed cannabis business,” Gillette says. So, before you open a cannabis business, “you should fully understand how and when to collect and remit sales tax, use tax, excise tax, income tax and business personal property tax,” Gillette says.
On the federal level, you should study up on § 280E. However, be wary of what you read, and make sure you are learning from a reliable source. “There is an abundance of misinformation and bad advice on the internet regarding § 280E,” Gillette warns, “and cannabis business owners should have at least an understanding of the IRS’s position and likely application of § 280E.”
If the business is a flow through—where income is passed “through” to the owners, and the owners are taxed instead of the business—Gillette adds that owners should be paying the company’s estimated tax payments on a quarterly basis, taking into account disallowed tax expenses based on § 280E. “It’s essential for your business to keep good books.”
To read the full article in Cannabis Dispensary's June 2018 issue, click here.
Top graphic: Cannabis Dispensary
