Arizona Republic: “the [Peoria] council voted unanimously to allow dispensaries in areas zoned for commercial use. That is similar to zoning for pharmacies, medical offices and bars. Cultivation sites would be restricted to industrial areas.”
Eastern Arizona Courier: “To stay abreast of regulating where medical marijuana dispensaries and cultivation centers may locally operate, the city of Safford gave a first reading of its policy at its meeting Feb. 14. City Manager David Kincaid urged the council to begin action to implement the city’s regulations to avoid giving the opportunity for people to open such businesses for lack of city regulation.”
The East Valley Tribune is conducting an online poll on if people are for or against medical marijuana and the total legalization of marijuana. As of February 23, 2011, 53% voted for total legalization, 24% for medical marijuana and 23% opposed to the use of marijuana for any purpose. Take the poll.
ABC 15: “The ABC15 Investigators have discovered some patients currently seeking medical marijuana evaluations are getting the wrong information about our state’s new law. . . . ‘Rather than spend time trying to get a (qualified patient) card, which is really a waste of time right now, (patients) ought to spend time looking at the rules,’ [Arizona Department of Health Services Director Will] Humble said.”
For the week ending at midnight February 20, 2011, this website had 4,744 visitors, a new weekly record.
TriValleyCentral.com: “Nearly six weeks into a four-month window to come up with regulations for the local placement and operation of medical marijuana dispensaries, Pinal County officials presented the Board of Supervisors Wednesday with further details on how and where dispensaries may show up in Pinal.”
Phoenix New Times: “The first time I made brownies, I was living with my mom and nana. My mother had moved in to take care of nana, who had breast cancer, then bone cancer. . . . She didn’t know about the process of making “canna butter,” or oil, or about any other medicinal use for marijuana, so she did what she thought would work best, smashing some cheap marijuana to a powder with a mortar and pestle and putting it in capsules.”
Arizona Republic: “Three doctors have submitted plans for Scottsdale’s first medical-marijuana dispensary, which could be one of nine in the Northeast Valley. The Virtue Center, at 7301 E. Evans Road in the Scottsdale Airpark, is seeking a use permit from the city. . . . The principals have agreed to donate all profits to qualified charities, according to their use-permit application.”
In the Use Permit Application submitted to Scottsdale by the Applicant, the Rose Law Group, pc, repeatedly and incorrectly refers to the nonprofit entity as OF&C Corporation, when its actual legal name is O.F. & C., Inc. Oops! Question for zoning lawyers: If the law firm is the applicant, doesn’t that mean it is the party applying for the permit and the party that will receive the permit if it is issued rather than O.F. & C., Inc.?
The Use Permit Application contains this interesting statement:
“All directors have . . . agreed to donate all profits in excess of usual and customary business expenses to qualified charities in Arizona, including the proposed State fund to assist those in need of medicinal marijuana products who are unable to pay.”
What follows below is the abbreviated text of my letter to Will Humble dated February 18, 2011. You may also read or download a copy of the actual letter.
February 18, 2011
Will Humble, Director
Arizona Department of Health Services
150 N. 18th Avenue
Phoenix, AZ 85007
Re: Comments to the Arizona Department of Health Services’ Proposed Rules to be Promulgated Under Arizona Revised Statutes Section 36-2801, et. Seq., Arizona’s Medical Marijuana Laws
Dear Mr. Humble:
I am the creator of a website called “Arizona Medical Marijuana Law” found on the internet at www.arizonamedicalmarijuanalaw.com. The purpose of this website is to inform the public about the new law created by the voters’ approval of Proposition 203. Although this new website is just shy of seven weeks old, it will have close to 20,000 visitors this month because it contains a treasure trove of information about this new law.
I am an Arizona attorney who has been practicing business law in Arizona since 1980. Since I started counting in 2002, I have formed over 3,000 Arizona limited liability companies, for profit corporations and nonprofit corporations. As of the date of this letter, I have been hired by more than 30 groups that intend to apply for a dispensary registration certificate. What follows are my suggested changes and comments to the proposed Rules.
1. The Lottery. Eliminate the lottery and replace it with a selection system based on the quality of the application and the applicant. Our country has been a country where people succeeded on merit, not on government give-aways. DHS should pick the applicants that are best qualified and most likely to operate a successful business. The people of Arizona deserve the best dispensary owners, not a group of winners who are lucky to have their names drawn out of a hat. The application fee of $5,000 is sufficient to pay for a review and analysis of each application. State in detail the criteria on which applications will be graded. Create a point system and say that dispensary registration certificates will be awarded to the top 124 scores. Provide in the Rules that if any of the 124 applicants selected for a license fails to actually obtain its dispensary license within one year, the dispensary registration certificate will be revoked and a new dispensary registration certificate be offered to the applicant whose total score was 125th and go down the list if other entities fail to open their dispensaries within the designated time period.
I submit to you that selecting dispensary owners by a lottery is the surest way for DHS to get sued and to cost the State of Arizona a large amount of defense money it does not have. The current Rules are totally lacking in any guidance or requirements for conducting a lottery. Here are just a few of the almost unlimited problems with a lottery: (more…)
Draft rules issued by Arizona Department of Health Services contain regulatory requirements over the financial accounting operations of all dispensaries. The draft rules require financial accounting submissions to DHS to be in accordance with Generally Accepted Accounting Principles (GAAP), specifically defined in R17-101 – Definitions. DHS rule R9-17-315 requires an inventory control system and monthly internal audit(s) of the dispensary’s inventory in accordance with GAAP. The draft rules also require an annual financial statement audit in accordance with GAAP and generally accepted auditing standards (GAAS) conducted by an independent Certified Public Accountant. The audit requirements are contained in R9-17-307(3) and (4).
Our goal is to provide general guidance to entities that are anticipating submission of an application and receipt of an Arizona medical marijuana dispensary license. Due to the anticipated changes in rules as a result of the public meetings and comment occurring during February, 2011, the likelihood of additional or amended final rules should be anticipated.
What is a Financial Statement Audit?
The objective of a financial statement audit is to determine whether the financial statements are free of material misstatement. An audit includes examining, on a test basis:
Responsibilities and Functions of the Independent Auditor
The objective of an audit of financial statements by an independent auditor is the expression of an opinion on the fairness with which the following are presented in conformity with generally accepted accounting principles, in all material respects:
The auditor’s report is the medium through which they express their opinion or, if circumstances require, disclaim an opinion. In either case, the auditor states whether his audit has been made in accordance with generally accepted auditing standards. These standards require the auditor to state whether, in their opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current period in relation to those of the preceding period.
Distinction Between Responsibilities of Auditor and Management
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance those misstatements, whether caused by error(s) or fraud, that are not material to the financial statements are detected.
The financial statements are management’s responsibility. Management is responsible for:
The entity’s transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management. The auditor’s knowledge of these matters and internal control is limited to that which is acquired through the audit.
The fair presentation of financial statements in conformity with generally accepted accounting principles is an implicit and integral part of management’s responsibility. The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management during the performance of the audit. However, the auditor’s responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them.
About the Author
Lance Meilech is a Certified Public Accountant practicing with the firm of AddingMachine.com in Phoenix. He has earned a Masters in Taxation. As a licensed professional, he provides a full range of accounting and tax services, including accounting and tax services for Arizona medical marijuana dispensaries. He has more than twenty years experience in all aspects of taxation, accounting and audit, including income tax planning for closely-held businesses and high and middle net worth individuals. Lance has extensive experience with both federal and state tax audits and collection matters including offers in compromise. Lance’s clients include executives, attorneys, physicians, real estate professionals, small business and high net worth individuals.
However, neither this article nor the author purport hereby to offer legal, tax or accounting advice in any form. This article is not a comprehensive assessment of issues that might be experienced in a particular business operation. Each reader’s situation is dependent on his/her facts and circumstances. As a result, each reader should consult his or her own advisor for information concerning his or her specific situation or may contact the author at [email protected]. Call Lance at 602-943-2060 to schedule a free initial consultation or if you have questions about this article.
Answer: Yes unless the third draft of the Arizona Department of Health Services rules provides otherwise.
Arizona Republic: “Today is the last day for the public to respond to the state health department’s proposed medical-marijuana rules. About 150 people gave input at the Arizona Department of Health Services’ public forums this week, and the agency had received more than 1,000 comments as of Thursday afternoon. People can submit online comments until 5 p.m. today. The department will release the final version in about five weeks.”
Background
Voters in State of Arizona passed proposition 203, enacting legislation defined as Arizona’s Medical Marijuana Act. The 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.
Arizona’s Medical Marijuana Act is governed under Title 36, Public Health and Safety, Chapter 28.1 – Arizona Medical Marijuana Act. Arizona’s Department of Health Services (“DHS”) has enacted “draft” rules governing the program which are contained in Title 9, Health Services, Chapter 17, Department of Health Services – Medical Marijuana Program.
Draft rules issued by DHS contain regulatory requirements over the financial accounting operations of all dispensaries. The draft rules require financial accounting submissions to DHS to be in accordance with Generally Accepted Accounting Principles (GAAP), specifically defined in R17-101 – Definitions. DHS rule R9-17-315 requires an inventory control system and monthly internal audit(s) of the dispensary’s inventory in accordance with GAAP. The draft rules also require annual financial statement audit conducted by an independent Certified Public Accountant. The requirements are contained in R9-17-307(3) and (4).
Our goal is to provide general guidance to entities that are anticipating submission of an application and receipt of an Arizona medical marijuana dispensary license. Due to the anticipated changes in the draft rules as a result of the public meetings and comment occurring during February, 2011, the likelihood of additional or amended final rules should be anticipated.
Small Business Accounting System
Many new small business owners and entrepreneurs consider accounting and bookkeeping, a necessary evil; forced upon them by various federal, state and local governments. In this case, an Arizona Medical Marijuana dispensary’s perpetual existence will be closely related to how well the accounting system provides Arizona’s Department of Health Services the financial accounting information they require.
Accounting is an essential component of business, and evil or not, it is a critical business function that cannot be avoided. Remember, noncompliance with statute and regulation will eventually collapse an entity, with an entity’s officers possibly being subjected to civil fine(s), penalties and forfeitures. The accounting system is how a business tracks assets, liabilities, equity, revenues and expenses as a mechanism to evaluate if the company is financially successful. A well designed accounting system is:
Organized set of computerized and manual accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions.
It is an information system that should be embraced by small business owners and entrepreneurs as a means of providing a “snapshot of the business”, through the production and analysis of periodic and timely prepared financial statements. It’s also one of the most important management decision making tools used in any business.
Accounting System – Practical Considerations (more…)
Phoenix New Times posted comments by people reacting to Ray Stern’s two part stories about the Arizona Department of Health Services public hearing on its January 31, 2011, second draft of the rules held at the ASU law school on February 15, 2011. Read Ray’s stories “Medical Marijuana Policy Hearing in Tempe Draws Large Crowd,” “Speakers at Medical Marijuana Hearing Criticize Strong Regulations” and “Live-Blogging Continues at Prop 203 Hearing in Temp.”
Phoenix New Times: “A state lawmaker wants to scratch out the anti-discrimination clause in Arizona’s medical marijuana law and give immunity to employers who fire qualified patients. The callous bill [HB 2541] by State Representative Kimberly Yee, R-Phoenix, also seeks to ban people from using medical weed “in a condominium or planned community common area that is open to use by the public.”
Here’s a portion of HB 2541:
“No cause of action is or may be established for any person against an employer who has established a policy and initiated a testing program in accordance with this article for any of the following:
ACTIONS BASED ON THE EMPLOYER’S GOOD FAITH BELIEF THAT AN EMPLOYEE USED OR POSSESSED ANY DRUG WHILE ON THE EMPLOYER’S PREMISES OR DURING THE HOURS OF EMPLOYMENT
ACTIONS BASED ON THE EMPLOYER’S GOOD FAITH BELIEF THAT AN EMPLOYEE HAD AN IMPAIRMENT WHILE WORKING WHILE ON THE EMPLOYER’S PREMISES OR DURING HOURS OF EMPLOYMENT”
HB 2541 is sponsored only by Representative Kimberly Yee , Republican; [email protected]; phone: 602-926-3024; fax: 602-417-3110.
Answer: Maybe. Arizona Department of Health Services Rule R9-17-304 states:
To apply for a dispensary registration certificate, an entity shall submit to the Department the following
6. Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:
a. There are no local zoning restrictions for the dispensary’s location, or
b. The dispensary’s location is in compliance with any local zoning restrictions;
The rule does not specifically state that a Certificate of Occupancy must accompany the application for a dispensary registration certificate, but the local zoning authority may require the dispensary to get a CO as a condition to getting the documentation required by Rule R9-17-304.
Bottom line: Every would-be dispensary owner needs to consult with a good zoning attorney about this issue and for advice and assistance if making sure that the dispensary’s desired location complies with local zoning requirements. See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012.”
Phoenix New Times: “Most Arizona residents prefer larger cultivation facilities for medical pot and residency requirements for dispensary owners, says a poll commissioned by the folks who brought you Prop 203. Joe Yuhas of the Arizona Medical Marijuana Association spoke of the poll results today at the medical marijuana rules hearing in Tempe, and gave us a handout afterward. Yuhas is a partner of the Riester PR firm, and he and Andrew Myers have been the most visible supporters of the state’s new medical marijuana law.”
From the City of Peoria: “Medical Marijuana Pre-Application Meeting appointments are now being accepted for February 22, 2011 and after. Application and materials must be submitted in person in order to be assigned a Pre-Application Meeting time. Please call 623-773-7601 for further details. Click here for application. Medical Marijuana text amendment proposed final draft, click here to view.”
Verde Independent: “The Sedona City Council became the first Verde Valley community to approve a local Medical Marijuana Ordinance, Feb. 8. While the state initiative was approved by Arizona voters during the last election, local governments are allowed to regulate where the drug may be sold in their communities.”
Read the Sedona medical marijuana zoning ordinance.
Payson Roundup: “With towns and cities across the state amending zoning codes to restrict marijuana dispensaries to certain areas of town, Star Valley will take its first look at the issue tonight. Although the town council is not expected to make any final decisions, it is expected to discuss possible locations for a dispensary and cultivation facilities.”
Ray Stern of the Phoenix New Times has an excellent two part article in which he reports on what he heard at the Arizona Department of Health Services public hearing held on February 15, 2011, at ASU’s Sandra Day O’Connor School of Law, which has little public parking. Ray has names and actual comments made by speakers. Ray was live blogging from the event, which is what I wanted to do, but could not because the law school’s Great Hall was not so great – there were no outlets to plug my laptop into.
See “Medical Marijuana Policy Hearing in Tempe Draws Large Crowd,” “Speakers at Medical Marijuana Hearing Criticize Strong Regulations” and “Live-Blogging Continues at Prop 203 Hearing in Temp.”
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…)
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:
“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“
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.”
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.”
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.
The following text is from the ADHS’ website:
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:
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.”
The number of readers of this website continues to grow. For the week ending February 12, 2011, we had 4,654, a new weekly record for this website that was born only 45 days ago. Thanks to all who visit.
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