The 6 Essential Compliance Issues Affecting the Cannabis Industry

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What strategy are you adopting to meet regulatory compliance in the cannabis industry? As a player in the cannabis sector, you could face hefty fines or even closure of business for lack of compliance. Meeting compliance in the cannabis sector is a challenge with each state passing its own laws and regulations.

How can you meet regulatory requirements and compliance with the ever-shifting laws and regulations in each state you conduct business?   Rest assured, as the cannabis industry grows and matures, meeting these regulations is becoming more of a challenge. Most if not all Cannabis enterprises seek expert services and deploy technology to stay updated with the current laws and regulations.

Here are the most common  compliance issues affecting the cannabis sector today.

1.    Licensing

States that have legalized recreational or medical cannabis have different  requirements regarding licensing.  Generally, a business must address licensing for business formation including tax ID number

general business license, DBA filing, sales tax permit, etc.  Also, licensing can be required different type and or location of the business.   Some common licenses could be required for cultivation, processing, distribution, dispensing and employee. 

Regarding employee licensing there are also restrictions related to residency and background (those with previous convictions may not be eligible), which can apply to owners, contractors, and employees.  Also, a business needs to identify which government agency in each state is responsible for licensing.  In some states you may need to file your organizational paperwork with the Secretary of State’s office, but in many cases, you will need to work with local licensing agencies.

Finally, the cannabis industry has more responsibility to social equity than other industries.  In the past, the prohibition of cannabis disproportionately impacted people of color. To counter this, many states and cities have implemented social equity programs in connection with the legalization of medical or adult-use cannabis. Social equity deals with justice and fairness within social policy. These programs attempt to ensure that people of color, be afforded an opportunity to participate in the cannabis and it is important for Cannabis companies to adhere to these programs.   

2.    Sales and Reporting                                  

For Cannabis companies, reporting sales is not only beneficial to the organization to monitor key metrics and use data analytics to measure performance and make more informed strategic decisions but, it is imperative for reporting to government agencies.  Cannabis/marijuana businesses have additional considerations under the law, creating unique challenges for members of the industry.  Specifically, these businesses are often cash intensive since many can’t use traditional banks to deposit their earnings.  It also creates unique challenges for the state governments on how to support these new business owners and still promote tax compliance.

3.    Taxes

Cannabis enterprises are taxed differently from other businesses especially by the federal government.  The tax code prohibits business deductions for any business that directly handles a Schedule I or Schedule II drug. That includes every cannabis business that directly handles the product including growers, processors, and dispensaries.  The federal governments code (Section 280E) does not necessarily mean that you are excluded from operation tax deductions. In fact, there is already some precedent for a practical approach to operating under 280E conditions. The method is to split your business down the middle, separating

your cannabis handling operations from all other operations.  To be on the safe side with the taxing state authorities or IRS, most organizations seek the services of a tax professional.

Another consideration are the state and local taxes levied on legal purchases of marijuana for recreational use.  Some states allow and tax (at low rates) the purchase of marijuana for medical use, but these taxes are not considered a cannabis tax.  Nineteen states have enacted some type of tax on recreational cannabis, but different states use different taxes—percentage-of-price taxes, weight-based taxes, and potency-based taxes—and some even levy multiple taxes on cannabis.

4.    Consumer Privacy

Collecting sensitive customer and patient data exposes cannabis companies to data loss and security breaches.  Manual data collection or outdated software systems pose significant risks to cannabis businesses.  The State medical cannabis programs focus on tracking of purchases by individuals enrolled as registered patients, following a certification by a health professional.   Adult use operators are less likely to have health information regarding consumers, however, will gather personal information about consumers which could be regulated, (ex: individuals entering a dispensary to produce proof of identification and age (generally via a driver’s license), and require the company to verify the consumer’s identification. Those same regulations prohibit a dispensary from retaining information on a government-issued identification without consumer permission.  All that said, nothing exempts cannabis companies from adhering to state data privacy laws.  For many companies in the cannabis industry the Federal Health Insurance Portability and Accountability Act (“HIPAA”) serves as a useful frame of reference and starting point for thinking about protecting customer information.

5.    Real Estate

When it comes to the Cannabis industry, the real estate industry, like other ancillary industry servicing the Cannabis sector needs to adapt to local laws and regulations. Because of the constant changes in the legal status of both medical and recreational marijuana, there have been direct changes to real estate from these laws and related businesses.  Cannabis enterprises continue to encounter significant obstacles from zoning issues facing companies operating in the Cannabis industry. Cannabis companies are affected by special zoning restrictions like location, building size, lighting, crowd control, drainage, and parking.  Different states have jurisdictions distance that limits cannabis enterprises from competitors, schools, places of worship, and government institutions.  

6.    Health and Safety

Cannabis is highly regulated at the state level not only because it’s an illegal substance at the federal level but also because of employee and customer safety concerns.  Here are the three areas a cannabis enterprise must address to meet compliance;

•    Worker’s Safety: Cannabis operations are prone to chemical, biological, and physical hazards. Train your employees on safety measures to avoid violating the Occupational Safety and Health Administration (OSHA) rules and employee injuries. Also, let your legal team develop an employee safety policy on the dos and don’ts to curb potential hazards.

•    Packaging and Labeling: Cannabis enterprises must meet all the packaging and labeling requirements set forth by their state including but not limited to source and strain information, safety and health warnings, lab results, volume amount, and dosage.

   Sanitization and Storage: One form of Cannabis is an edible that must be stored in a clean, dry, and pest-free area. According to the federal code 21 CFR Part 110, “Current Good Manufacturing Practice in Manufacturing, Packing, or Holding Human Food (GMP), consumables must meet specific storage and handling standards.

Do you want to overcome tax, regulatory, and compliance challenges in your cannabis business enterprise? Do you want to partner with a tried and tested business service provider to grow your business? Schedule a call or request a free demo today. We have comprehensive solutions to streamline your business operations and generate more revenue.

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