Compliance is a top challenge in the cannabis industry for a reason. Seemingly unattainable due to ever-changing laws and regulations, compliance with a bevy of rules requires expertise and resources some businesses may not possess. Regardless of the legislative complexities and the struggle to stay up to date, your business is required to adhere to state and federal laws or face heavy consequences.
How can your business work toward compliance when it seems like a moving target? Keep your business out of harm’s way by keeping an eye on the top cannabis compliance issues.
Each state where medical and recreational cannabis are legal has its own licensing and documentation requirements, depending on the location and type of business. Common licenses include manufacturing, retail, dispensary, and cultivation. Cannabis businesses need to know what’s required in their state and when to get their licenses and permits renewed. Having an expired or illegitimate license or permit can result in hefty fines and a risk of closure.
In many states, cannabis employees also are required to be licensed. Business owners and managers should not only ensure each employee has an active license but also stay up to date on the state’s work requirements. An abrupt official audit could leave a company with unlicensed workers facing a hefty fine or loss of its own license.
Health and safety
The cannabis industry is highly regulated not only because it deals in a federally illegal substance, but also because of safety concerns for both customers and employees. Here are three specific categories of safety every cannabis business should address.
- Worker safety: Biological, chemical, and physical hazards sometimes are present at cannabis operations, especially cultivation sites. To avoid employee injuries and/or violating Occupational Safety and Health Administration (OSHA) rules, work with your legal team to create a workplace safety program and train employees to identify and remedy hazards.
- Packaging and labeling: Packaging and labeling requirements can include health and safety warnings, source information, strain description, dosing directions, volume amount, and lab results. Failure to comply with labeling regulations can result in hefty fines or license issues.
- Storage and sanitation: Storing edibles in an efficient, clean, dry, and pest-free area is essential. Many state cannabis regulations specifically incorporate a section of the federal code known as 21 CFR Part 110, “Current Good Manufacturing Practice in Manufacturing, Packing, or Holding Human Food (GMP),” which prescribes how consumables must be handled and stored. State regulations also typically include mandates regarding maintenance of surfaces, grounds, and equipment, as well as employee hygiene. Implement health and sanitation protocols and train employees to avoid cross-contamination, product loss, and compliance issues.
Zoning-related issues are a major obstacle for all cannabis businesses, but especially for retail. For cannabis and non-cannabis businesses alike, land use (i.e., purpose of business, building size and location, height of structure, number of rooms) is considered when zoning boards discuss applications. However, cannabis businesses often face special zoning restrictions, which may include security, lighting, crowd control, delivery traffic, parking, and drainage. Additionally, jurisdictions usually require cannabis businesses be located a prescribed distance from other cannabis businesses, schools, daycares, and houses of worship.
A word about leasing: Landlords may place strict limitations on interior build-outs. In addition, some are leery of leasing to cannabis enterprises because they fear community reaction or the potential loss of banking and insurance relationships (both of which are subject to increased scrutiny due to cannabis’s federal status). Work with a legal team to review lease provisions and help with lease negotiations.
Hiring and employment
With the cannabis industry experiencing explosive growth, hiring and recruiting new employees is on the rise. In a rush to fill new positions, businesses may be tempted to take shortcuts that bypass employment regulations. Don’t. Cannabis’s legal status at the federal level does not exempt the industry from federal and state employment laws. To maintain compliance, consider the following:
- Make sure job advertisements comply with the Americans with Disabilities Act, Civil Rights Act, and Equal Employment Opportunity Act.
- Ensure employees meet all state requirements for working in cannabis and all federal requirements for working in the United States.
- Ensure background checks comply with the Fair Credit Reporting Act.
- Classify all employees (full-time, part-time, contractor) properly.
The federal government taxes cannabis companies differently from other businesses. While non-cannabis companies are able to deduct from their income expenses such as rent, employee benefits, and other intangible costs of doing business, cannabis businesses are constrained to a small subset of deductions under Internal Revenue Service Code Section 280e. Consult with a tax professional who has significant experience with cannabis clients to ensure you don’t run afoul of the IRS or state taxing authorities.
Security and surveillance
When incidents occur at any cannabis business, authorities typically review the security surveillance system first. Many states require cannabis businesses employ:
- Security cameras.
- Alarm systems.
- Guards inside and outside dispensaries.
- Front desk security for ID verification.
- Security patrols at cultivation facilities.
Security cameras should cover the perimeter of the outside and inside of your operation and connect to a surveillance system that records and archives footage. The system also should create backups and incorporate a failsafe mechanism in case of power outage or system failure.
Sales and reporting
Selling to an underage person, making a sale outside of operating hours, exceeding the daily individual sales limit, and failing to report inventory and sales are all compliance violations. That’s why it’s important to have a sophisticated point-of-sale software system that can help keep your business compliant by:
- Verifying and validating customer identification to avoid illegal sales.
- Preventing regulation violations due to unintentionally selling over the limit.
- Automating and monitoring transactions to minimize staff errors.
- Storing records, inventory, and orders needed for routine audits.
- Reporting daily, weekly, and monthly sales required by state laws.
Collecting sensitive patient and customer information leaves cannabis dispensaries and retail stores vulnerable to security breaches and data loss. Manually documenting transactions or working with outdated software systems can put a business and its customers at significant risk. Work with legal counsel and a qualified cybersecurity team to implement measures that will protect confidential data. Failing to comply with consumer privacy regulations can put a business at risk of civil and/or criminal penalties.
When it comes to dispensary delivery services, several areas must be addressed to avoid compliance violations. State laws determine the requirements for delivery services, but here are the most common:
- All states permitting delivery services require business owners to obtain a license from the proper state authority.
- Every delivery driver must be at least 21 years old and carry a copy of the cannabis business license, their driver’s license, and an employer ID badge.
- Drivers must use an enclosed vehicle. Motorcycles do not qualify as delivery transportation.
- Drivers may not use cannabis while driving and are not allowed to carry more than a specified dollar value of product at any time.
- Drivers must record every transaction via a delivery request receipt that includes both the business’s and customers’ information.
Cannabis businesses that fail to comply with all applicable legislation and regulations face consequences from warnings and citations to license suspensions and revocations—and in extreme cases, criminal charges. Because the stakes are so high, it’s important to avoid working alone and assuming your business can take on compliance issues without expert guidance. Vet potential partners carefully and ally with those who can help keep your business out of trouble and on the path to success.
Jim Valenzuela is founder and CEO at OROleafhr, which provides tailored human-resources services and payroll solutions designed specifically for the cannabis industry. The company also addresses retirement programs, workers compensation, HR technology, and benefits. Valenzuela has been an HR professional since 2008 and was introduced to the cannabis industry in 2014.