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Medical Marijuana Dispensaries; the Federal Income Tax Deductibility Nightmare

Given the recent enactment of the Arizona Medical Marijuana Act, we anticipate a number of new business enterprises in the Arizona market attempting to comply with its “dispensary” provisions. Thoughtful entrepreneurs engaged in this fledgling industry will be wondering whether they will be permitted to deduct the expenses incurred in their business operations. This article will consider relevant tax provisions and attempt to provide a meaningful “rule of thumb” that these businesspersons, or their tax preparers, may find useful.

Background

The Arizona Medical Marijuana Act authorizes the establishment of nonprofit medical marijuana dispensaries (“dispensaries”). These dispensaries are to be licensed, tightly regulated, and inspected and are intended to provide medical marijuana to qualified patients, with their doctor’s approval, or their designated caregivers. Although, under Arizona Revised Statutes Section 36-2806, these dispensaries are to be nonprofit entities (but they need not be tax-exempt organizations for IRS purposes), they are clearly authorized by Arizona Revised Statutes Section 36-2801 to receive payment for all expenses incurred in their operations. As a result of receiving such revenue, they will undoubtedly be required to file income tax returns. Before considering these tax returns, however, an important legal issue must be dealt with. Is this business legal or illegal?

Although this may seem like a strange question to be asking, given that we are able to review specific Arizona statutes that authorize the business and provide detailed rules on numerous aspects of the creation and operation of such dispensaries, we would be remiss if we failed to do so. Since, however, the focus of this article is not the legality of a dispensary, we will rely on existing analysis of the issue as it has arisen in connection with California statutes, which have been around for the past decade and a half.

Since the passage of the Compassionate Use Act of 1996 and the California Medical Marijuana Program Act, California businesses have been wrestling with a number of legal issues and have had the opportunity to create a growing base of case law that will undoubtedly provide precedence as these same issues arise under Arizona law. The most important issue is whether the creation of these state statutes that authorize the possession and use of marijuana for medical purposes provides some protection, some defense, from Federal prosecution for the possession or use of illegal drugs.

A number of cases make it clear that the possession and use of marijuana, even for medical purposes, is still illegal under Federal law. See, for example, Footnote 10 of the California Supreme Court case, People v. Kelly (2010). According to the Controlled Substances Act, marijuana remains a Schedule I drug and, state statutes authorizing medical use to the contrary, Federal law does not contain any exception for “medical use”. Furthermore, Federal law still supersedes state law (Gonzalez v. Raich US Sup. Ct (2005)). In short, except perhaps for certain, specific research purposes, no use of marijuana is legal.

Thus, it would appear that any person or business possessing marijuana, even if in compliance with state medical use laws, is involved in an illegal business activity. This fact explains the many legal conundrums arising in advice given in the industry. Should a doctor merely “approve” of a patient’s medical use of marijuana or may she “recommend” it? May the product be “sold” or must it be given away (in exchange for a donation)? What is the difference between distribution by a “dispensary” and a “collective”? It should be noted that these issues arise, not necessarily as a result of any ambiguity in the state statutes, but because of concern over exposure to legal liability at the Federal level.

One may find some comfort (but, perhaps, not much) in statements issued by/on behalf of the Department of Justice (DOJ). In 2009, the Attorney General indicated that even though the DOJ does not condone any possession or use of marijuana, in an effort to use its resources efficiently, it would limit its prosecution efforts and target only dispensaries being used as a front for dealers of illegal drugs. However, in the DOJ guidelines issued in October 2009, I believe it expressed its intention more broadly, that is, it intended to prosecute “for profit” enterprises. Its statements have also indicated that it will not require its agents to prove any violation of specific state (Medical Use) statutes during such prosecutions (that is, such statutes do not matter and, even if followed precisely, offer no defense).

Thus, although AS 36-2811(B) clearly states that those complying with the provisions of the Arizona Medical Marijuana Act are not subject to arrest, prosecution or penalty for their possession or use of marijuana, this statute should not provide much comfort for anyone using or possessing marijuana for medical purposes. It may serve to give guidance to state police on the proper use of their resources but will apparently not affect Federal law enforcement officials. For further analysis of this issue, and others, you may wish to consider the White Paper on Marijuana Dispensaries, issued by the California Police Chief Association’s Task Force in April 2009 (www.counties.org. , under the CSAC Advocacy tab), as a possible starting point.

We will leave the resolution of this issue to the interested lawyers among you. For the remainder of this article, we will assume that a medical marijuana dispensary is an “illegal” business activity for Federal tax purposes.

Tax Guidelines (more…)

By |2011-02-17T07:56:34-07:00February 16th, 2011|Tax Issues|1 Comment
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Clauses to Include in a Contract between a Medical Director & a Dispensary

Question:  Are there any special clauses my dispensary should include in its contract with its medical director?

Answer:  Yes.  The contract should be an independent contractor agreement, not an employment agreement.  The contract should contain the standard clauses found in a good lawyer drafted independent contractor agreement plus the following clauses unique to this agreement:

  • The medical director will provide the specific duties of the medical director set forth in the rules.
  • The medical director must obtain and maintain at all times a dispensary agent registration from the Arizona Department of Health Services.  See R9-17-309.A.4.b., which states:

“A dispensary shall . . . Not allow an individual who does not possess a dispensary agent registry identification card issued under the dispensary registration certificate to: . . . Serve as the medical director for the dispensary“

  • The medical director will comply with the applicable laws contained in Arizona Revised Statutes Section 36-2801 et.seq (Arizona’s medical marijuana statutes), and all applicable DHS rules in effect as of the date of the agreement and during the term of the agreement.
  • The doctor represents and warrants that he or she satisfies all of DHS’ requirements to be a medical director not later than April 1, 2012.
  • The doctor will obtain a license from Arizona Department of Health Services to be a medical director not later than April 1, 2012.
  • If at any time the medical director ceases to be eligible to be a dispensary agent or if he or she cannot perform his or her duties for any reason, the contract must terminate without prior notice to the medical director.
  • The contract terminates if the dispensary loses its dispensary registration certificate or ceases to operate.
  • The medical director must grant a license to the dispensary to copy and use the copyrighted content the medical director gives to the dispensary as required under the rules.
  • The medical director must represent and warrant that all content he or she gives to the dispensary does not infringe on anybody’s copyrights.
  • The medical director must maintain at all times the types of insurance appropriate for the position in amounts not less than $500,000 or what is recommended by the medical director’s insurance agent.
  • The medical director must give to the dispensary proof of insurance satisfactory to the dispensary.
  • The medical director’s insurance company must be instructed to notify the dispensary of any change to or cancellation of any insurance policy.
  • The compensation payable to the medical director will be reduced by X percent for every additional dispensary the doctor acts as the medical director, but the compensation will not ever be less than Y percent of the compensation payable if the doctor is a medical director for only the dispensary.  If I’m representing a dispensary, I’ll try to put this clause in because the duties of the medical director are nonexistent once he or she does the initial set up so why should a doctor who is a medical director for multiple dispensaries get paid the same as a doctor who is the medical director for a single dispensary?
By |2012-08-18T09:20:26-07:00February 15th, 2011|DHS Rules, Legal Issues, Medical Directors, Questions People Ask|Comments Off on Clauses to Include in a Contract between a Medical Director & a Dispensary
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Infamous Arizona Sheriff Arpaio Targets New Medical Marijuana Law

Norml:  “Maricopa County Sheriff Joe Arpaio, already infamous for his treatment of immigrants and prisoners, has now set his sights on Arizona’s new medical marijuana patients following the passage of Proposition 203 by voters last November.”

By |2017-02-11T17:31:45-07:00February 15th, 2011|Marijuana Crimes, Stories & Articles|Comments Off on Infamous Arizona Sheriff Arpaio Targets New Medical Marijuana Law
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Rules for Medical Marijuana Need More Tweaking, Some Say; Two Public Meetings on Prop 203 Scheduled in Valley This Week

Phoenix New Times:  “Dr. Ed Suter, a Mesa-based physician, says a physical exam should not be required before a doctor provides someone with a recommendation for medical marijuana. Andrew Myers, spokesman for the Prop 203 campaign, thinks that hopeful owners of marijuana dispensaries should have to prove they have at least $200,000 in the bank before the state grants them an operating license.”

Read Doctor Suter’s comments to ADHS in Word format. The letter starts with:

“Mr. Humble, Director of the Arizona Department of Heath Services has paid much lip service to his supposed concern for the law, but he is setting a poor example. In nearly 100 instances, his draft regulations on medical marijuana violate the law.”

By |2011-02-15T06:52:20-07:00February 15th, 2011|Stories & Articles|Comments Off on Rules for Medical Marijuana Need More Tweaking, Some Say; Two Public Meetings on Prop 203 Scheduled in Valley This Week
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Arizona Department of Health Services Public Hearings on the Rules

If you are interested in telling Arizona Department of Health Services how you fee about its medical marijuana rules, I suggest you attend one or more of the public hearings Arizona Department of Health Services is holding this week.  ADHS says that the public hearings are not intended for people who want to get a dispensary registration certificate.  Here’s the schedule.

  • Phoenix: Thursday, February 17, 2011, at 9:00 am – 12:00 pm, ASU Sandra Day O’Connor College of Law, The Great Hall, 1100 S. McAllister Ave

The following text is from the ADHS’ website:

  1. Each meeting will consist of Department staff listening to comments, concerns, and suggestions for improvements or solutions related to the Medical Marijuana Program draft rules.
  2. When giving an oral comment at a meeting please limit the comment to the substance and form of the draft rules. Do not hesitate to express support or opposition to earlier comments but please try to avoid repetition. Department staff may ask questions while an individual is talking in order to clarify the individual’s position.
  3. An individual may also submit written comments using the Comment Form that will be available at each meeting.
  4. There will be a marked container to put Comment Forms in at any time during each meeting or after each meeting concludes.
  5. Please submit all written comments by 5:00 pm on Friday, February 18, 2011.
  6. All input will be considered when finalizing the Medical Marijuana Program rules.
By |2011-02-16T18:33:34-07:00February 15th, 2011|DHS Rules|Comments Off on Arizona Department of Health Services Public Hearings on the Rules
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Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation

Question:  I know my Arizona medical marijuana dispensary must be operated on a not for profit basis, but does not have to be an Arizona nonprofit corporation.  Why would I want to form an Arizona nonprofit corporation that is also a tax-exempt organization under the Internal Revenue Code?

Answer:  Neither the Arizona medical marijuana law nor the Arizona Department of Health Services proposed rules require that an Arizona medical marijuana dispensary be a nonprofit corporation.  My recommendation is that all Arizona medical marijuana dispensaries be an Arizona limited liability company.  See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?“

One of the best ways to help satisfy the requirement that the dispensary be operated on a not for profit basis is for the dispensary to make substantial donations of profits to a tax-exempt charitable organization such as the American Red Cross, the Arizona Humane Society or any one or more of the many tax-exempt charities that have purposes consistent with those of the dispensary’s owners.  Donations to local tax-exempt charities that give to the local community are especially good choices.  The dispensary should have a regular policy of publicizing its charitable donations such as handouts given away at the dispensary or signs on the walls of the dispensary.

Dispensary owners should also consider creating an Arizona nonprofit corporation that applies for and becomes an IRS approved tax-exempt charitable organization.  One or more of the owners could be on the board of directors of the charity.  The charity’s purpose would not involve the growing, possession or sale of marijuana.  Instead, the charity’s purpose could be picked by the founders of the nonprofit corporation.  I recommend its purpose be to engage in charitable activities in which the dispensary owners have an interest and that the money donated to the charity be spent in the local community.  The tax-exempt organization must not  have a purpose that is related to marijuana, including medical marijuana.

Here are some potential charitable purposes for a tax-exempt organization founded by an Arizona medical marijuana dispensary:

  • Provide monetary assistance to people who are in a terminal condition or who cannot afford medical treatment
  • Pay the cost for low income people to live in a care home
  • Pay for nursing care for low income people
  • Pay for legal drugs for low income people

The tax-exempt organization cannot be a subsidiary of the dispensary entity.  It must be a separate stand-alone corporation governed by its board of directors.

Caveat:  The dispensary owners and insiders cannot control the tax-exempt organization.  The IRS will not grant tax-exempt status to a nonprofit corporation that is controlled by a person or a group of people.  The board of directors of the tax-exempt organization can have one or more owners or insiders of the dispensary on its board of directors as long as the board of directors has enough independent members who could out vote the dispensary’s owners and insiders.

I would love to form your Arizona nonprofit corporation that you intend to become a federal tax-exempt organization.  To learn more about forming an Arizona nonprofit corporation read “How to Form an Arizona Nonprofit Corporation” and “Arizona Nonprofit Corporation Formation Service.”

By |2011-02-14T08:23:31-07:00February 14th, 2011|Legal Issues, Questions People Ask|Comments Off on Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation
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Subscribe to Get Email Updates of Arizona Medical Marijuana Law

As of February 12, 2011, our visitors can subscribe to get daily email messages that keep subscribers up to date on the latest articles and posts added to Arizona Medical Marijuana Law.  Please subscribe to get our free daily email updates.

By |2011-02-13T10:23:47-07:00February 13th, 2011|Miscellaneous|Comments Off on Subscribe to Get Email Updates of Arizona Medical Marijuana Law
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Considerations on Signing a Personal Guaranty of an Arizona Medical Marijuana Dispensary Lease

Question:  My landlord wants the owners of my Arizona medical marijuana dispensary nonprofit entity to sign a Personal Guaranty.  What is it and should the owners sign the guaranty?

Answer:  A Personal Guaranty is a promise by the guarantor to pay the debt of a third party or to satisfy an obligation of a third party.  If an entity such as a corporation or a limited liability company signs a lease for real property, the general rule of Arizona law is that the owners of the entity are not liable for the debts or obligations of the entity, including the rent.  Landlords understand the law so a prudent landlord will require the owners of the entity to sign a Personal Guaranty by which the signer becomes legally obligated to pay to the landlord any amounts due under the lease that are not paid by the tenant and to satisfy any obligations of the tenant under the lease that are not satisfied.  The landlord usually wants all of the owners of the tenant entity to sign a Personal Guaranty.

Personal Guarantees of leases are not required by Arizona law.  Whether or not the owners give a personal guaranty is negotiable with the landlord.  In economic times that favor landlords, they almost always require the owners of the tenant entity to sign a Personal Guaranty unless the entity has a satisfactory financial statement.  During economic times that favor tenants, i.e., now, the owners of the entity may refuse to sign a Personal Guaranty and a desperate landlord may nevertheless enter into the lease without any Personal Guarantees because the landlord needs the rental income.

Personal Guaranty Negotiating Advice

Here are some negotiating tips for owners of an entity that may reduce their liability for the entity’s defaults under the lease when the landlord insists that the owners sign a Personal Guaranty:

  • Reduce the term of the Personal Guaranty.  Just because the lease is for five years does not mean the Personal Guaranty must last the same period of time.  Try to shorten the term of the Personal Guaranty to some period less than the full term of the lease.
  • Don’t guaranty extensions of the lease.  If the original term of the lease expires and the entity exercises an option to extend the term of the lease, include language in the Personal Guaranty that it does not apply with respect to any extensions of the lease.
  • Limit the maximum dollar amount of the signer’s liability.  State in the Personal Guaranty that the maximum amount for which the signer is liable is $50,000 or $100,000 or whatever is the lowest number the landlord will agree to.  If the landlord spends the landlord’s money for tenant improvements or for other items required of the landlord, the landlord will almost always want the landlord’s total out-of-pocket expenses to be the signer’s minimum liability.
  • If the landlord will agree to limit the signer’s liability to a stated amount, provide in the Personal Guaranty that the amount of the liability goes down each month.  For example, if the signer’s maximum liability is $120,000 and the term of the Personal Guaranty is two years, provide in the Personal Guaranty that the signer’s liability goes down $5,000 every month.
  • State in the Personal Guaranty that the signer’s obligations terminate as of the date the entity loses its license to operate an Arizona medical marijuana dispensary.
  • State in the Personal Guaranty that the signer’s liability terminates if the signer were to die.
  • State in the Personal Guaranty that the signer’s total liability is equal to the total liability thereunder divided by the number of other owners who sign a Personal Guaranty.  For example, if the entity has four owners who will sign guarantees, state that the signer’s total liability under the Personal Guaranty equals 25% of the total liability.
  • State in the Personal Guaranty that if the Arizona Cardinals with the Superbowl, the Personal Guaranty will terminate.  A knowledgeable landlord should not have a problem with this because the landlord knows there is almost no chance this will ever happen.

Important Fact About Personal Guarantees & Arizona Community Property

Arizona law provides that a Personal Guaranty signed only by one spouse is not effect against the assets of the non-signer spouse.  If the landlord requires that both spouses sign the Personal Guaranty, try telling the landlord that the spouse who is not active in the business refuses to sign a guaranty.

By |2012-08-18T09:03:27-07:00February 13th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off on Considerations on Signing a Personal Guaranty of an Arizona Medical Marijuana Dispensary Lease
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Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store

Question:  I know that in 2007 the U.S. Tax Court ruled in the CHAMPS case that Section 280E of the Internal Revenue Code prohibits deducting from gross income any business expenses that are paid or incurred in connection with trafficking in marijuana.  Is there a way that my nonprofit entity that operates an Arizona medical marijuana dispensary can deduct any of its expenses from its gross income on the dispensary’s federal income tax return?

Answer:  Yes.  In the CHAMPS case, the IRS conceded that the taxpayer could deduct its cost of goods sold, which included $575,317 paid for marijuana.  The fight in the CHAMPS case was over what business expenses the taxpayer could deduct.  The IRS argued that the taxpayer had only one business – trafficking in marijuana – and therefore none of its business expenses other than its cost of goods sold were deductible.  The taxpayer successfully argued that it operated two businesses – its medical marijuana sales business and its care-giver business.  The Tax Court agreed with the taxpayer and allowed the taxpayer to allocate its expenses to its two separate businesses and deduct expenses attributable to the care-giver business.

If your Arizona medical marijuana dispensary wants to be able to deduct anything from its gross income above and beyond its cost of goods sold, the dispensary must engage in one or more trades or businesses that do not  involve medical marijuana.  Every would-be dispensary should carefully study the CHAMPS case and learn how CHAMPS operated its care-giver business, which was very extensive and real.  The case illustrates that the sale of medical marijuana was in fact a small portion of everything that the dispensary offered to its patients.  Note also that the salaries paid to management and staff were very nominal – $14,914 paid to officers and directors and $44,799 salaries paid to 25 employees of a dispensary that collected just over $1,000,000 in gross revenue.

Example 1:  Dispensary 1 operates a 2,000 square foot retail dispensary in Phoenix where its sole activity is displaying its products and selling products to patients over the counter.  This dispensary’s entire business involves trafficking in marijuana so it cannot deduct any of its expenses from its federal income tax return.

Example 2:  Dispensary 2 operates a 2,000 square foot retail dispensary in Phoenix, but next door to the dispensary it has an additional 2,000 square feet of space where it provides other services and products to the public such as:

  • yoga classes
  • acupuncture
  • massage therapy
  • classroom instruction on the use of medical marijuana and other pain medications
  • classroom instruction on health care related topics
  • library of books, DVDs and other materials about medical marijuana that patients of the dispensary can use for reading on the premises or to check out and view at home.
  • coffee bar with pastries where people can congregate and relax

Dispensary 2 can now:

  1. allocate occupancy expenses to retail and nonretail
  2. allocate payroll expenses to retail and nonretail
  3. apply a transactional factor

Consider this simple allocation of dispensary 2’s expenses:

  1. Since 1/2 of the leased space is not used for the sale of marijuana, fifty percent of the total rent expense is deductible.  This includes ancillary expenses such as security for the premises, utilities, landscaping, common area expenses and maintenance, janitorial service and premises maintenance.
  2. Dispensary 2 can deduct its payroll expenses attributable to personnel who work solely in the non-marijuana side of the business.  For personnel that work in both aspects of the business, the dispensary must have a method for allocating their payroll to the marijuana related services and the non-marijuana related services.

For more on this important topic, see “IRS is in the Early Stages of a War to Kill Medical Marijuana Dispensaries.”

Although I have a masters degree in income tax law from New York University Law School, I am  no longer a practicing tax lawyer.  I recommend that every dispensary hire a good experienced tax CPA or tax lawyer to advise the dispensary on the federal and state income tax issues arising from the operation of a medical marijuana dispensary.

Circular 230 Notice:  Pursuant to recently-enacted U.S. Treasury Department regulations, I am required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including websites linked to, is not intended or written to be used, and  may not be used, for the purpose of  (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

By |2014-05-21T19:42:45-07:00February 12th, 2011|Dispensary Leases, Real Estate Issues, Tax Issues|Comments Off on Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store
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Will Humble Explains the Purpose of the Public Hearings on the DHS Rules

From Will Humble’s blog on February 11, 2011:

We’ll be holding four public comment meetings for the Medical Marijuana Rules next week.  Public comment meetings are the part of the Rulemaking process whereby “an agency shall afford persons the opportunity to submit in writing statements, arguments, data and views on the proposed rule, with or without the opportunity to present them orally”.  We technically aren’t required to conduct these meetings because the Medical Marijuana Rulemaking is exempt from the normal process- but we’re doing it anyway because we think it’s a good practice that sometimes helps us make better decisions.

The objective is to listen to comments, concerns, and suggestions for improvements or solutions related to our draft rules. Public comment meetings don’t use a question and answer format- rather they provide a way for people to make suggestions in person.  We take notes and record the sessions- but we don’t answer questions.  Please note that the meetings next week aren’t intended to answer questions about how to open a dispensary.  Here’s the format:

  • Each meeting will consist of Department staff listening to comments, concerns, and suggestions for improvements or solutions related to the Medical Marijuana Program draft rules.
  • Please limit oral comments to the substance and form of the draft rules. Don’t hesitate to express support or opposition to earlier comments but please try to avoid repetition.
  • An individual may also submit written comments using the Comments Form that will be available at each meeting. There will be a marked container to put Comments Forms in at any time during each meeting or after each meeting concludes.
  • Please submit all written comments by 5:00 pm, on Friday, February 18, 2011. All input will be considered when finalizing the Medical Marijuana Program rules.
By |2011-02-12T09:32:44-07:00February 12th, 2011|Will Humble Speaks|Comments Off on Will Humble Explains the Purpose of the Public Hearings on the DHS Rules
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Arizona Medical Marijuana FAQ

Yahoo News:  “In the 2010 fall elections, Arizona passed a law legalizing medical marijuana in the state. Though the new law passed by a slim margin and some residents weren’t pleased by its passing, many considered it a victory and step in the right direction.  Despite the public’s opinion, though, police officers throughout Arizona must study up on the new medical marijuana laws in order to best regulate the substance. Here’s everything you need to know regarding Proposition 203’s medical marijuana law in the state of Arizona.”

By |2015-04-06T18:50:18-07:00February 12th, 2011|Stories & Articles|Comments Off on Arizona Medical Marijuana FAQ
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Medical Marijuana Ordinance Passes in Sedona, Arizona

Yahoo News:  “This northern Arizona city, known for its beautiful scenery and metaphysical qualities, has taken a proactive approach to the coming authorization of medical marijuana use and distribution in the state.  On Feb. 8, the Sedona City Council approved a medical marijuana ordinance that will allow medical marijuana dispensaries and the cultivation of marijuana dispensaries within the city limits.”

By |2015-04-06T18:50:18-07:00February 12th, 2011|Stories & Articles, Zoning|Comments Off on Medical Marijuana Ordinance Passes in Sedona, Arizona
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Bill Montgomery and Sheila Polk Probed Whether Prop 203 was Constitutional

Phoenix New Times:  “Back in December, medical marijuana foes Bill Montgomery and Sheila Polk, county attorneys for Maricopa and Yavapai, respectively, quietly explored whether or not Proposition 203 could be declared unconstitutional.”  See the letter from Montgomery and Polk to Arizona Department of Health Services Director Will Humble and his response.

By |2011-02-12T06:08:00-07:00February 12th, 2011|Stories & Articles|Comments Off on Bill Montgomery and Sheila Polk Probed Whether Prop 203 was Constitutional
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Participate in Our New Message Forum

We added a message forum to this website.  Its purpose is to create an on-going dialogue among people who are interested in obtaining a license to operate a medical marijuana dispensary, prospective medical directors and others who are interested in Arizona’s newest industry.

The forum is new so we need your help to get it going.  We hope that the forum will be a place that people can discuss industry issues, including various aspects of the proposed Arizona Department of Health Services rules.  Please leave one or more messages.  The more people who participate the more we will all learn.  Please take a minute or two to leave a message by clicking on the Message Forum link on the far right of the top menu.  If nobody uses the forum, I’ll kill it.

By |2015-04-06T18:50:18-07:00February 11th, 2011|Miscellaneous|Comments Off on Participate in Our New Message Forum
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Advice to Landlords With Premises Zoned for Medical Marijuana Dispensaries

Question:  I own real property that is zoned for an Arizona medical marijuana dispensary or cultivation site.  How can I increase the chances of obtaining a tenant that will actually obtain a dispensary registration certificate and become a long term paying tenant?

Answer:  Easy.  Lease your property to more than one prospective dispensary owner.  Consider the following two scenarios:

Scenario 1:  You lease to prospective dispensary owner number 1.  The prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license.  The tenant does not obtain a license.  Long term rental income = $0.

Scenario 2:  You lease the same site to 20 prospective dispensary owners.  Each prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license.  One of the 20 prospective tenants obtains a license to operate an Arizona medical marijuana dispensary.  Nineteen prospective tenants leases are canceled.  Long term rental income = big $$.  Of course, each lease should have appropriate language in the lease that notifies each prospective tenant that its lease only becomes effective if the tenant actually obtains the dispensary registration certificate.

Update:  A visitor to this website sent me the following message:

“I thought of this a couple of weeks ago and checked with the AZ Department of Health Services. The first person I spoke with was an employee of the department. She told me that multiple license applications with the same address would all be rejected. I then spoke with Laura Oxley the head of the department. She said it was a good idea, but I should speak with Tom Salow the department  attorney for medical marijuana. Tom said that what I was proposing was currently acceptable under the guidelines, but he expected the guidelines to change making it unacceptable in the next revision.”

If Tom Salow’s statement about is true, why would the Arizona Department of Health Services reject multiple applications for the same location?  It would not make any sense.  The only purpose behind such a rule would be to make it more difficult for prospective dispensaries to find a suitably zoned location and to cause a lot of landlords to waste time entering into leases with tenants that will never get a dispensary registration certificate.  If DHS changes the rules to reject applications for the same location, it would be another instance of the Arizona Department of Health Services bureaucrats/desk jockeys being the problem, not part of the solution.

By |2012-08-18T09:11:36-07:00February 11th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off on Advice to Landlords With Premises Zoned for Medical Marijuana Dispensaries
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Chandler City Council Passes Tough Medical Marijuana Zoning

Arizona Republic:  “A divided Chandler City Council approved medical marijuana zoning regulations that are among the Valley’s most restrictive and leave few locations for potential dispensaries. . . . So many commercial areas are close to subdivisions that this reduces potential Chandler dispensary locations to a handful of sites along Interstate 10, Price Road and the Santan Freeway.”

By |2012-08-18T09:28:53-07:00February 11th, 2011|Zoning|Comments Off on Chandler City Council Passes Tough Medical Marijuana Zoning
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Glendale Works on Medical-marijuana Ordinance

Arizona Republic:  “A Glendale City Council majority this week pushed to extend hours for merchants to sell cannabis beyond what staff proposed. However, council wants to limit the size of cultivation facilities for growers.  Glendale is trying to enact a zoning ordinance before March 1.”

By |2012-08-18T09:37:27-07:00February 11th, 2011|Stories & Articles, Zoning|Comments Off on Glendale Works on Medical-marijuana Ordinance
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Florence Prepares for Arrival of Prescription Pot

Blade Tribune:  “Preparing for the arrival of legal medical marijuana, the Town Council [of Florence] held public hearings and heard the first readings of three measures to provide local control for where dispensaries may locate and how they may operate at Monday’s regular meeting.  The council might not vote until March 21”

By |2015-04-06T18:50:18-07:00February 11th, 2011|Stories & Articles, Zoning|Comments Off on Florence Prepares for Arrival of Prescription Pot
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Medical Marijuana from the Patient’s Perspective

azfamily.com:  “One of the many people keeping a close eye on what the Arizona Department of Health Services will do in developing medical marijuana’s rules is Eric Franks.  Franks, 27, was diagnosed at birth with cerebral palsy and has been battling muscle spasms his whole life.”

By |2015-04-06T18:50:18-07:00February 11th, 2011|Stories & Articles, Video|Comments Off on Medical Marijuana from the Patient’s Perspective
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In-depth look at Medical Marijuana in Arizona

azfamily.com:  “Cannabis, weed, reefer, marijuana, however you refer to it, it is now legal medicine in Arizona. By a 5,000-vote margin, Arizona voters said yes to medical marijuana, but the battle over legalization doesn’t end there.  As the state starts to write the rules, everyone seems to have an opinion. From law enforcement, to those who are ill, to the people writing the rules and those who support it, every side has a hand in how Arizona will implement the medical marijuana law.”

In the video, Will Humble says:

  • Our primary goal is to make sure this ends up as a medical use, not recreational use like what has happened in other states.
  • DHS is beging distracted by this medical marijuana law
  • Concerned about leakage from care givers to the street
  • Loop holes with caregivers and grow your own create the risk of recreational use
By |2015-04-06T18:50:17-07:00February 10th, 2011|Stories & Articles, Video, Will Humble Speaks|Comments Off on In-depth look at Medical Marijuana in Arizona
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Arizona Police Study Medical Marijuana Law

Arizona Republic:  “Arpaio already building special unit to target those who abuse statute.  The plants that will ultimately produce medical marijuana in Arizona are not legally in the ground, but police agencies are already planning how their officers will try to enforce state pot laws while respecting a sick resident’s right to possess the herb.”

See “Arpaio on lookout for abusers of Arizona medical marijuana law” and “MCSO Sheriff creates Special Enforcement Unit to combat medical marijuana fraud.”

By |2017-02-11T17:31:43-07:00February 10th, 2011|Marijuana Crimes, Stories & Articles|Comments Off on Arizona Police Study Medical Marijuana Law
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Pinal May Allow Pot Dispensaries in Strip Malls

Arizona Republic:  “Pinal County supervisors are expected to vote later this month on a medical marijuana ordinance that would allow dispensaries to operate in strip malls.  A draft plan discussed Wednesday by county supervisors would put medicinal pot outlets in the same zoning category as general business, amusement or recreational enterprises.”

By |2012-08-18T10:04:19-07:00February 9th, 2011|Stories & Articles, Zoning|Comments Off on Pinal May Allow Pot Dispensaries in Strip Malls
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Will any Arizona Doctor Agree to be the Medical Director of an Arizona Medical Marijuana Dispensary?

The Arizona Department of Health Services’ January 31, 2011, second draft of the rules require that every Arizona medical marijuana dispensary have a medical director on the premises or on call.  Proposition 203 contains no such requirement.  Why DHS put the medical director requirement in the rules is beyond me.  I do not understand the purpose of the medical director unless it is to increase the cost of the products sold by the dispensary.  Most doctors are not willing to act as a medical director for a pot clinic and of those that are, not many are willing to do so for free.

I wonder if any doctor will actually take the position as medical director of an Arizona medical marijuana dispensary.  The big unknown at this time is whether a doctor who is the medical director of a dispensary can purchase malpractice insurance and products liability insurance.  I’m guessing that medical malpractice insurance would not cover the doctor because the doctor’s activities as a medical director do not involve the practice of medicine.  The medical director does not see patients.  The rules state,”A medical director shall not establish a physician-patient relationship with . . . a qualifying patient.”  If the medical director cannot purchase appropriate insurance, why would any doctor be the medical director of an Arizona medical marijuana dispensary?

We all know that litigators love to sue anybody within 100 miles of an incident.  Consider what might happen if a patient were to buy a THC laced brownie that caused permanent bodily harm or that killed the patient.  Who do you think will be sued?  I submit that the defendants in the lawsuit will be the dispensary, the medical director, the infusion company that made the brownie, the cook who actually cooked the brownie and possibly the officers and directors who failed to adopt an product inspection system that would have detected the harmful brownie.  The plaintiff may sue the medical director for medical malpractice and for products liability.  Can the medical director purchase malpractice insurance and products liability insurance?

I am not a litigator.  I don’t sue people.  Maybe I am completely off base.  If I am wrong, please let me know.  I’d love to publish an article from somebody in the know that can explain the potential liability of the medical director and what types of insurance the medical director will need and if it is possible for the medical director and/or the dispensary to purchase the insurance.

Suggestion to Arizona Department of Health Services:  You have a medical director.  If you think dispensaries should have a medical director why not require your medical director to be the medical director of all dispensaries and charge each dispensary $500 a month?  Your medical director can then prepare the literature and patient brochures the medical director thinks is appropriate and DHS can sell them to the dispensaries for distribution to patients.

See Will Humble’s unconvincing and nonsensical blog post on why a medical director is necessary and my comments about his reasoning.

An Arizona Physician’s Comments to the Above Article

I was intrigued by your recent post. I am not a attorney, but as a physician with my own medical-legal consulting firm, I do not see much risk of a dispensary’s medical director being sued for medical malpractice. The primary reason for this is that there is no physician-patient relationship – not even contact – between a dispensary customer and the medical director, so by definition, there can be no medical malpractice. (more…)

By |2011-02-11T18:37:01-07:00February 9th, 2011|Medical Directors, Stories & Articles|Comments Off on Will any Arizona Doctor Agree to be the Medical Director of an Arizona Medical Marijuana Dispensary?
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Holland, Michigan, Medical Marijuana Dispensary Raided by Police

WZZM ABC TV 13:  “Allegan county prosecutors will now decide whether to bring criminal charges against the owners of a medical marijuana dispensary in Holland.  Police raided The Mix, a storefront on S. Washington last Thursday, based on what they believe was evidence that marijuana was being illegally sold.”

By |2019-06-14T08:24:52-07:00February 9th, 2011|Marijuana Crimes|Comments Off on Holland, Michigan, Medical Marijuana Dispensary Raided by Police
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HB 2557 to be Amended to Tax Medical Marijuana 100%

I heard a news report on the radio yesterday that quoted Arizona state legislator Steve Farley as saying that HB 2557 will be modified to tax sales of medical marijuana a a mere 100%.  Whoopee!  See Ray Stern’s story called “Medical Marijuana Tax Proponent Aims Lower; State Rep. Steve Farley Now Wants 100 Percent Tax, Not 300 Percent.”

The following is the text of a February 7, 2011, report from the House Ways & Means committee about HB 2557.  The Bill is now sponsored by only three legislators – Farley, Ash, Chabin:

Overview

HB 2557 creates a nonprofit medical marijuana dispensary transaction privilege tax classification and imposes a transaction privilege tax (TPT) and a use tax on dispensaries.

History

Approved by the voters at the November 2, 2010 general election, Proposition 203, known as the Arizona Medical Marijuana Act, allows qualifying patients with debilitating medical conditions to obtain certain amounts of marijuana from nonprofit medical marijuana dispensaries.

TPT is Arizona’s version of sales tax. Under this tax, the seller is responsible for remitting to the state the entire amount of tax due based on the gross proceeds or gross income of the business. While the tax is commonly passed on to the consumer at the point of sale, it is ultimately the seller’s responsibility to remit the tax. Currently, there are 16 different transaction privilege tax classifications that are mostly taxed at a rate of 6.6 percent (except the mining classification) of their respective tax bases.

Use tax is paid by persons who use, store or consume any tangible personal property upon which tax has not been collected by a retailer. Scenarios in which use tax is collected include out-of-state retailers or utility businesses making sales to Arizona purchasers, Arizona purchasers buying goods using a resale certificate where the goods are used, stored or consumed in Arizona contrary to the purpose stated on the certificate, or where a purchase is made in another state and the sales tax or excise tax imposed is less than the Arizona use tax rate.

fiscal impact

A fiscal note prepared in 2010 by the Joint Legislative Budget Committee for SB 1222 (medical marijuana; transaction privilege tax) estimated that annual reported medical marijuana sales in Arizona would be $25,500,000.

Provisions

  • Establishes a transaction privilege tax classification for nonprofit medical marijuana dispensaries, comprised of the business of selling or dispensing medical marijuana to qualified patients.
  • States that the tax base for the nonprofit medical marijuana dispensary classification is the gross proceeds or gross income derived from the business.
  • Sets the tax rate for the tax base at 300 percent.
  • Stipulates that anyone engaged in business as a nonprofit medical marijuana dispensary who sells other tangible personal property at retail must separately account for those sales.
  • Specifies that if separate records of sales of other tangible personal property are not kept, the tax shall apply to the person’s entire gross proceeds or gross income from the business.
  • Excludes the tax revenues collected under the nonprofit medical marijuana dispensary classification from being designated for the statutory distribution base of TPT revenues (A.R.S. § 42-5029).
  • Exempts medical marijuana dispensed by a registered nonprofit medical marijuana dispensary from the TPT imposed under the retail transaction privilege classification.
  • Levies an excise (use) tax on the storage, use or consumption of tangible personal property purchased from a nonprofit medical marijuana dispensary at a tax rate of 300 percent of the sales price.
  • Specifies that for manufactured buildings used in the state but purchased outside Arizona, the tax rate is a percentage of 65 percent of the sales price.
  • Makes technical and conforming changes.

Watch the video of the portion of the February 8, 2011, Ways & Means committee hearing dealing with HB 2557.  Click on the last link on the bottom left.

By |2011-02-10T07:42:30-07:00February 9th, 2011|AZ Legislation, Tax Issues|Comments Off on HB 2557 to be Amended to Tax Medical Marijuana 100%
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Insuring Arizona Medical Marijuana Dispensary Business Buildings for Property and Liability

Developing your business plan in anticipation of filing an application with Arizona Department of Health Services ? If so, you’re likely scrambling to find the perfect location(s) for your new Arizona medical marijuana business.  Whether you’re seeking a storefront or a warehouse, there are three things about insuring building(s) for dispensaries, grows or other medical marijuana business uses you should know going in:

  • “Admitted carriers” such as Progressive or Farmers will not insure medical marijuana businesses – period. They have made a business decision to not serve specialty markets.
  • A few other carriers might insure your leased or owned buildings, depending upon the specific circumstances. They are willing to take on more risk, but the medical marijuana industry is not their specialty.
  • Comprehensive coverage for your medical marijuana business, written with A-rated carriers, IS available from agents and insurers who have made a commitment to the medical marijuana industry.

Let’s keep these few facts in mind as we discuss the best way to protect yourself and your future business through the uncertainties of the current pre-DHS application period.

Getting Into the Building

Many landlords require proof of property and liability insurance before giving their new tenants access to the building. This is prudent, and generally required under the terms of the building owner’s “lessor’s risk” policy.

Your future landlord needs to know that claims against that policy resulting from MEDICAL MARIJUANA business activities aren’t likely to pay out, however, as suggested in the first bullet point. While it’s their responsibility to discuss any tenant changes with their agent, I always advise my clients to bring the topic up so that everyone is on the same page, helping all parties to avoid any nasty surprises later.

Insuring Appropriately Now While Planning for Later

While waiting to find out if you’ll receive a dispensary license from DHS, you need only insure yourself against liability, any damage to your newly leased property and loss or damage to property you may have in the building. Simply put, basic coverage is sufficient for this stage.

Many carriers will write a policy for empty office or warehouse space, but offer only a one year term – and given that it will be just a few months before you receive your dispensary license (or not) this doesn’t make a whole lot of sense, especially as they will charge you a short-rate penalty for cancelling before the end of the term.

A better approach is to obtain your basic policy now from a carrier that won’t penalize you later, when you’re ready to begin insuring your new MEDICAL MARIJUANA operation with industry-specific coverage. You can either get a basic six-month policy that can be “flipped” to another carrier (under the same parent company) to one that specifically includes coverage for MEDICAL MARIJUANA businesses, or get a pared down policy from a company specializing in MEDICAL MARIJUANA policies and simply add additional coverage as needed. Either approach will help you to avoid unnecessary penalties or fees while ensuring that your new venture is appropriately covered.

Such flexibility in coverage costs a bit more, but provides several significant benefits – no risk of denied claims due to undeclared MEDICAL MARIJUANA operations, eliminating the danger of coverage gaps or lapses, and simplying the whole insurance process – all far outweigh the small additional costs.

The majority of carriers serve the majority of the market. If your business is out of the ordinary, however, your insurance needs likely are as well. Specialty brokers meet those needs.

Doug Banfelder is a Commercial Insurance Specialist.  Reach him to insure your Arizona medical marijuana dispensary at 480-315-9051 or www.PremierDispensaryInsurance.com

By |2011-10-02T18:14:18-07:00February 9th, 2011|Dispensary Insurance, Dispensary Leases, Stories & Articles|Comments Off on Insuring Arizona Medical Marijuana Dispensary Business Buildings for Property and Liability
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Medical Marijuana Unversity Opening in Arizona!

Funkmaster Flex:  “The first and only state-approved medical marijuana institution for higher education is coming to Arizona. Gus Escamilla, CEO and founder of Greenway University, has already established a campus in Denver and plans to open a second one in Phoenix.”

By |2011-02-09T07:20:36-07:00February 9th, 2011|Stories & Articles|Comments Off on Medical Marijuana Unversity Opening in Arizona!
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Marijuana Use & Earlier Onset of Psychosis?

Will Humble’s blog:  “A number of published studies have found that using marijuana (and other psychoactive substances) is associated with an earlier onset of psychotic illness (notice I said “is associated with” rather than “causes”).  National mental health surveys have repeatedly found more substance use, especially cannabis use, among people with a diagnosis of a psychotic disorder.

The blog post contains this very strange statement:

“it makes sense to have some professional medical oversight at dispensaries to help protect the health status of the patients with debilitating medical conditions that will be using the dispensaries.”

Has Will Humble read his own rules?  The medical director is a figurehead with no real involvement with the dispensary or its patients.  The medical director who will rarely be present in a dispensary is not hired to provide professional medical oversight for dispensaries.  How can a doctor who will not see, examine, communicate with or have anything to do with a dispensary’s patients possibly “protect the health status of the patients?”

Under the  Arizona Department of Health Services rules, the duties of the medical director are almost exclusively to provide pamphlets, brochures and informational materials for use by the dispensary and/or distribution to patients.  The medical director is more like the librarian of a medical library that recommends reading materials related to medical marijuana.

By |2011-02-10T07:17:20-07:00February 8th, 2011|Medical Directors, Will Humble Speaks|Comments Off on Marijuana Use & Earlier Onset of Psychosis?
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Chandler Police Find Large Pot Growing Operation

Arizona Republic:  “What started out as a routine traffic stop Sunday night led patrol officers to seize 332 potted marijuana plants worth up to $1 million, making it the largest marijuana grow operation bust in Chandler history“

By |2011-02-08T20:38:28-07:00February 8th, 2011|Marijuana Crimes, Stories & Articles|Comments Off on Chandler Police Find Large Pot Growing Operation
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