We have been receiving calls from licensed marijuana producer-processors in Washington State unhappy with the condition or the quality of marijuana that they purchased from other producers. They want to know whether they have to pay for the product even if they want to reject it, or whether they can send the product back to the seller after accepting delivery.
Due to the Liquor Control Board’s overwhelming presence in these transactions, these questions are more complicated than they seem.
In all fifty states, Article 2 of the Uniform Commercial Code (UCC) governs the sale of goods — tangible movable things. The UCC’s goal is to provide a clear set of rules to govern the millions of commercial product transactions that take place every day.
The UCC gives purchasers the right to inspect goods before payment or acceptance where those goods are tendered or delivered. There is no set time limit, but the time frame, manner, and place of inspection all have to be “reasonable.” The time, manner, and place of inspection can all be explicitly outlined in a contract, but there is typically no written contract with most marijuana purchases, just a purchase order. In those cases, the UCC sets the terms.
Under the UCC, if products do not conform to the explicit or implied agreement between the buyer and the seller, the seller may cure the defect so long as it can do so within the time frame agreed to by the parties. One common way sellers cure product defects is by sending new product. If the seller timely cures the defect, the buyer is required to pay. But if a seller chooses not to cure the defect or cannot cure the defect, the buyer can refuse delivery without having to pay for the product.
This may sound easy in theory, but it is often difficult in practice, especially when sellers and buyers disagree about the quality of the delivered product or when a shipment was time-sensitive enough that it could not be cured. So, if either party has specific requirements, it is a good idea to use a written contract that describes them.
Things get even more challenging with marijuana because its sales are within an all-encompassing seed-to-sale traceability system monitored by state regulators. When marijuana product is scheduled for delivery, the seller must provide the Liquor Control Board with information regarding the product and amount being sold, the price, the buyer, and the delivery schedule. The product then must be shipped with a manifest that bears all of this information and the delivery driver must take the product directly to the buyer.
If the buyer refuses to accept the product, what next? A return shipment would probably work, but it seems to be a shipment contrary to the manifest. Also, there is an excise tax issue. The price will have been entered into the system and that means the Liquor Control Board will be expecting its 25 percent excise tax at the end of the month. So, even if the buyer refuses to pay for the marijuana, the seller may still be liable for the tax based on the reported sales price.
All of these issues are solvable, and the Liquor Control Board’s traceability group is currently devising a method to allow for product to be returned. Until the Liquor Control Board resolves this issue, however, be careful about rejecting and returning product unless your Liquor Control Board inspection officer has approved the method of return.