LCB washington marijuana cannabis
Some LCB policies make hurdles tough to clear.

Regulatory challenges can be substantive or procedural. Substantive challenges include things like Washington’s ban on out of state ownership and its view that licensee royalty payment constitute profit-sharing. These types of rules and interpretations are challenging because, as a policy matter, businesses aren’t allowed to pursue certain strategies that they otherwise would. Procedural challenges, on the other hand, are challenges that arise in dealing with a regulatory agency. The Washington Liquor and Cannabis Board (LCB) requires that it approve of retail packaging for infused products before that packaging can be used, and the LCB also requires that a person submit a signed criminal history statement before that person can be a true party of interest in a licensed marijuana business. These types of procedural hurdles exist for a reason – the LCB requires them to pursue its legitimate goals of enforcing its substantive regulations.

But there is another type of procedural hurdle that arises in dealing with regulatory agencies (specifically the Washington LCB). These procedural hurldes present challenges to regulated businesses, but they have no relationship with the LCB’s enforcement of its regulatory goals. Here’s one example that has been frustrating us to no end recently: the Washington LCB will not process a change of ownership and a change of location for a marijuana license at the same time. Let’s say that an entrepreneur in Tacoma finds a perfect location for a marijuana retail store and leases that space. The entrepreneur can’t apply for a new license because the state isn’t accepting applications, so the entrepreneur has to find a marijuana retail license allotted to Tacoma on the market. Once the entrepreneur finds that business and negotiates a purchase, the entrepreneur has to make some tough choices.

Because the LCB will not process a change in location and a change of ownership request at the same time, buyers have to determine the order of applications. Both orders have drawbacks. If you apply for a location change first, you will have a marijuana retail store at your location within, hopefully, a few months. However, you run the risk that, in the intervening period, the business’s sellers that still own and control the business do something to put the business at risk. They could commit regulatory violations that risk license cancellation. They could take on business debt, putting the businesses assets at risk. The buyer would be powerless to stop these actions, because the LCB does not want to see any party exert control over a licensed business until that party has been approved by the LCB to do so.

If you instead apply for the ownership change first, you are less at risk of the bad acts of the selling party. Instead, you have to deal with getting a lease that would be in place for the time between when the ownership change is approved and the time when the new location is approved. The LCB wants to see landlord consent, and landlords often try to gouge buyers in this situation because they understand how much leverage they have. You also have to go through a sham process with the LCB when you do the ownership change application. The LCB asks for operating plan information, but you aren’t allowed to say that you don’t really plan on operating in the existing space, even if that is your plan. Instead, you are in a situation where you are just saying what you need to in order to get approved so that you can move on to the next step. LCB investigators understand this, but they still require the minimums so that they can check all the boxes off their checklists.

This type of procedural challenge is so frustrating because it isn’t tied to any policy. The LCB allows location changes, and it allows ownership changes. There is no reason that it shouldn’t be able to run both changes at the same time. But somewhere within the LCB archives, someone wrote down a policy that says investigators can’t do two things at once, and so far no one there is willing to do what it takes to change that policy. That policy has wasted enormous amounts of time and money and created enormous amounts of stress for parties on all sides, and it is part of why Washington has a reputation for being a hard state to do business. It invites actual regulatory violations, where people exert control over businesses that they haven’t been approved for, because the alternative can feel ridiculous.

For those of you with regulatory lobbyists out there, we encourage you to push the LCB on issues like this, in addition to substantive lobbying. There can and should be legitimate debate on whether businesses are allowed to sell marijuana-infused gummy bears. But for procedural challenges that have no basis in enforcing substantive rules, it’s important to keep pushing back. We want to see regulatory compliance, and the more logistically challenging the state makes it for businesses to comply with regulations, the more likely that businesses will ignore those regulations.

california bcc cannabis rules
Huge changes ahead. Get your comments in by Nov. 5!

Last Friday, we wrote about the amended proposed permanent cannabis regulations that are now in a 15-day notice-and-comment period for each California agency—the Bureau of Cannabis Control (“BCC”), Department of Public Health (“DPH”), and Department of Food and Agriculture (“DFA”). Each of the proposed rules can be found here, here, and here. The next round of written public comments is due to each agency by November 5, 2018. It’s important then for California cannabis businesses to get a handle on the proposed regulations as quickly as possible to determine whether to provide written comments since some impactful changes are coming.

Here are the key proposed changes from the BCC regulations:

Intellectual Property Licenses: Yesterday, we explained the threat that the BCC’s regulations pose to cannabis intellectual property licensing in California. Our California cannabis lawyers are regularly involved in intellectual property licensing deals and we think it’s critical for cannabis businesses to speak up in opposition to this proposed rule. California would be the only state in the cannabis union to bar third-party IP-licensing deals for cannabis licensees, which will certainly undercut the business growth of a good amount of operators if this rule passes.

“Owners”: The BCC modified the definition of “owner” (as well as “financial interest holder”; see below), which now includes “[a]n individual entitled to a share of at least 20 percent of the profits of the commercial cannabis business.” This is much broader than the existing 20 percent aggregate ownership threshold (which also still stands). To illustrate, the current ownership threshold definition expressly states that it does not apply where that interest holder holds “solely a security, lien, or encumbrance.” This new addition to the rules seems to capture a mere security holder—so long as that security holder is entitled to 20 percent of the profits.

The BCC also expanded upon the form of “ownership” that requires disclosure based on assumption of responsibility for the license, by specifying certain kinds of persons or entities who qualify (note that this list is not exhaustive or complete, so it likely will be read even more broadly), as:

  • Persons who manage or direct the licensed business in exchange for a portion of the profits. Note, there is no minimum threshold for profit entitlements here, so this could include persons who expect less than 20 percent of the profits.
  • Persons who assume responsibility for the licensed business’ debts. Here too, there is no threshold for debt assumption.
  • Persons who determine how “a portion” of the licensed business is run. This includes things such as “non-plant-touching portions of the commercial cannabis business such as branding or marketing”, but it too could include much more broad categories of business operations.
  • Persons who determine what cannabis goods will be cultivated, manufactured, distributed, purchased, or sold.

Notably too, these modifications now take the position that if an “owner” is an entity, all entities and individuals with a financial interest in that entity must be disclosed to the BCC and may be considered owners of the commercial cannabis business. The BCC emphasized that each entity and person in the corporate chain must be disclosed until the applicant can identify actual persons.

The takeaway from these changes is that the BCC now wants full identification of any person who has anything to do with an applicant entity—even if that person simply owns a company multiple steps away in a corporate chain. That is not dissimilar to what our cannabis business lawyers have seen in Oregon and Washington.

“Financial Interest Holder”: Like before, the BCC considers a financial interest to include an agreement to receive a portion of the profits of a licensed entity. Now, however, the BCC gives a number of examples of what qualifies as such an agreement:

  • An employee who enters into a profit-share plan with a licensee.
  • A landlord who enters into a lease agreement with a licensee for a share of the profits.
  • A consultant who provides services to a licensee for a share of the profits.
  • A person who acts as an agent, such as an accountant or attorney, for the licensee for a share of the profits.
  • A broker who engages in activities for the licensee for a share of the profits.
  • A salesperson who earns a commission.

The BCC will now also require the identification of all persons in the corporate hierarchy for interest holders, similar to the rules regarding owners. Meaning, if a financial interest holder is an entity, everyone in that entity is getting disclosed .

Annual License Fees: The BCC scrapped its previous test for determining the amount of appropriate fees for the annual licenses—estimating the maximum dollar value of planned operations—and now has created a new formula: “To determine the appropriate license fee due, the applicant or licensee shall first estimate the gross revenue for the 12-month license period of the license.”

Changes in Ownership: The BCC is also expanding its prohibition on changes of ownership over a licensed entity. If any new person is added as an “owner” by virtue of a change in ownership of a licensed entity, that person will need to provide the vast categories of information required by section 5002(c)(20) within 14 calendar days of the transfer. This will obviously have an impact on California cannabis M&A. The business can still operate pending the change so long as one previous owner remains on; otherwise, operations will need to cease pending the BCC’s review of the new owner. The BCC is also now requiring 14 calendar days’ notification of changes in any of the following:

  • Any changes to the contact information that was provided to the BCC in the original application;
  • Any change in legal name, business name, trade name, or fictitious business name of the licensee;
  • Any change to financial information, including funds, loans, investments, and gifts required in the original application;
  • Any change in the required bond; or
  • Any change or lapse in a distributor’s insurance coverage.

Annual License Applications and Requirements: As to annual licenses, the BCC made tweaks to the information that it will require for submission, which signals its desire to place more scrutiny on applicants and ensure compliance with California law. We won’t explain every change here, but here are the essential ones:

  • First, the BCC changed the requirement to provide it with “The business-formation documents” for the licenses business to “All business-formation documents”.
  • Second, the BCC is requiring that applicants provide it with state employeridentification numbers (“SEIN”), which the BCC explains in its notice of modification as being “necessary to ensure that all applicants that are required to obtain such a number have obtained it and are thus, in compliance with California law.”
  • Finally, licensees with more than one employee must attest that within one year of receiving their license, the licensee will have employees who have undergone certain Cal-OSHA safety training.

The BCC is also beefing up its requirements for renewal of licenses to require documentation of any change to any item listed in the original application. So, chances are that if a cannabis business obtains an annual license before these proposed changes become effective (and assuming they do), that business will need to provide these additional disclosures later.

Premises: There are a number of modifications to the proposed rules concerning licensed premises, but here are the highlights:

  • While it’s been routine for multiple licensees to operate on the same premises, the proposed modifications now expressly state that they do not “prohibit two or more licensed premises from occupying separate portions of the same parcel of land or sharing common use areas, such as a bathroom, breakroom, hallway, or building entrance.”
  • The premises must consist of permanent structures—shipping containers, modular buildings, or anything on wheels are a no-go—that are affixed to the ground and not capable of movement.
  • There is now a form (BCC-LIC-027) to submit to the BCC to request to make a physical change or alteration to the premises.

Marketing and Promotions: Licensees will be prohibited from selling or transporting goods that are identified as any kind of alcoholic product (and they cannot refer to anything as containing or being an alcoholic product). There are also now definitions for promotional goods and branded goods. If licensees want to sell branded goods that are not listed in the definition, they will need to seek BCC approval first. The proposed modifications also clarify that licensees can provide customers with promotional non-cannabis goods—and it looks like these goods could be provided at the premises or via delivery, too.

Packaging: The proposed modifications set up a time tier for cannabis packaging, whereby until January 1, 2020, cannabis packaging needs to be tamper-evident, in some cases re-sealable, and must not look like packaging that is marketed to children. Until January 1, 2020, retailers and microbusinesses can satisfy this rule by providing opaque exit packaging that meets the foregoing standards.

Testing and Quality Assurance: The proposed regulations include prohibitions on re-sampling previously tested batches, new requirements for remediation plans for failed batches, and new requirements for quality assurance testing for the level of THC, CBD, and terpenoids, among other things. If goods have undergone testing and haven’t been sold in 12 months, they now  have to be destroyed.

Retailer Packaging: Similar to the revised distribution rules, the proposed modifications set up a time table that require tamper-evident packaging until January 1, 2020, and re-sealable, tamper evident, and child-resistant packaging thereafter. There are opposite requirements for retailer exit packaging—it must be child-resistant, re-sealable and opaque until 2020, and then just opaque thereafter.

Deliveries: The rules now more heavily regulate a retailer’s use of tech platforms for delivery (i.e., the platform can’t share profits and can’t be the one doing the delivery, presumably unless it too is licensed). Delivery vehicles cannot contain any exterior markings that indicate that they are delivering cannabis goods. Delivery vehicles may now carry only $5,000 in cannabis goods at once. And the biggest change of all, per the modified section 5416(d), deliveries can be made into any jurisdiction in the state, so long as they comply with the BCC’s delivery rules. Currently, localities can and do prohibit deliveries from other jurisdictions. The BCC’s proposed regulations, however, now open the floodgates to previously “dark” delivery jurisdictions.

For the next few days, we’ll be writing on the proposed rules issued by DPH and DFA. We cannot emphasize enough how licensee stakeholders need to speak up and provide public comment for the rules they like and don’t like so that industry can better shape the regulatory playing field. So, get those comments in by November 5!

california cannabis marijuana
Get your comments in by Nov. 5 and help us fix this.

On Friday, the California Bureau of Cannabis Control, California Department of Public Health, and California Department of Food and Agriculture issued 15-day notices of modification to the texts of their respective proposed regulations. The California Cannabis Portal has published links to each notice and the modified texts of the proposed regulations. For each set, the respective Department will accept written comments submitted by November 5, 2018.

And to all parties currently engaging in intellectual property (IP) licensing or manufacturing deals as or with a non-licensee, you should most definitely submit your written comments if you want to be able to keep those deals alive. The modifications to the text of the proposed regulations include the following:

5032. Designated M and A Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

These regulations would seemingly prohibit most, if not all, IP licensing agreements where the licensor is not licensed by the state, given that such licensing deals call for the licensee’s use of the licensed IP to manufacture particular goods, often utilizing the licensor’s proprietary techniques, recipes or trade secrets. Section (b)(3) above describes exactly what a licensee does under a trademark licensing agreement where the licensor does not possess its own manufacturing license from the state: “packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.”

Until Friday, there was nothing in the proposed regulations prohibiting a non-licensed third-party from engaging in these types of licensing deals, which we have written about extensively. Under those proposed regulations, a non-licensed entity entering into a licensing or manufacturing deal and taking a royalty from a licensed entity would need to be disclosed to the state as a party with a financial interest in a licensee but would not need to obtain a manufacturing license of their own. These kinds of deals are extremely prevalent throughout the industry, and are allowed to varying degrees in the other states in which my law firm’s cannabis business lawyers work (Washington and Oregon). For California to prohibit licensing deals involving non-licensed entities would be a major departure from what we’ve seen in other jurisdictions and would be incredibly disruptive to the cannabis industry as it currently operates.

This change would have far-reaching and unfortunate implications. Here are some examples of deals and structures that would not be allowed if this modification is ultimately adopted:

  • Licensed operators that have set up separate IP-holding companies to hold and license their intellectual property back to the operator;
  • Out-of-state cannabis companies that wish to license their existing cannabis brand to California manufacturers, but do not wish to directly engage in manufacturing in California;
  • Non-licensed third-parties that have developed technology to manufacture a cannabis product or a brand identity and wish to license that technology or brand identity to a licensed manufacturer.

The list goes on. If you have any type of licensing or manufacturing deal in place that involves both a licensed entity and a non-licensed entity, you should talk to your attorney as soon as possible to determine what the implications of this modification would be. And most importantly, you should provide written feedback immediately to the Bureau of Cannabis Control during the very short 15-day comment period expressing opposition to this modification.

equal pay oregon marijuana employmentIn 2017 Oregon passed sweeping Equal Pay Legislation. Towards the end of August, Oregon Bureau of Labor and Industries (BOLI) issued draft rules implementing the Oregon Equal Pay Act. This series of post is exploring those new rules and how they will affect cannabis businesses. In my last post, I unpacked the definition of “compensation” under the Equal Pay Act and the proposed rules. This week I’ll discuss “work of a comparable character.”

The Oregon Equal Pay Act prohibits employers from paying wages or other compensation to “any employee at a rate greater than that at which the employer pays wages or other compensation to employees of a protected class for work of a comparable character.” To put it simply, cannabis businesses need to pay employees doing the same work the same pay. But what is “work of a comparable character?”

Work of a comparable character is not determined simply by job title alone. Two cannabis workers who have the same job title but perform different tasks are not necessarily performing “work of a comparable character.” Similarly, two cannabis workers that perform essentially the same tasks but have different job titles may be performing work of a comparable character.

According to the BOLI draft rules, to determine if different jobs constitute “work of a comparable character” the employer must consider whether the jobs require “substantially similar knowledge, skill, effort, responsibility, and working conditions.” No one factor is determinative. Meaning, an employer should balance the factors against each other to determine if employees are performing the same work and therefore should be receive equal pay. The proposed BOLI rules further define each factor.

  • Knowledge. When considering whether two jobs require similar “knowledge,” the employer should consider whether the jobs require similar education, experience, or training.
  • Skill. Things to consider to determine if two jobs require the same “skill” include the ability, agility, coordination, efficiency or experience required to perform the job.
  • Effort. Considerations to determine the “effort” of a job include the “amount of physical or mental exertion needed; amount of sustained activity; or complexity of job tasks performed.”
  • Responsibility. To determine if responsibility of two positions are “similar,” an employer should consider the “accountability, decision-making discretion, or impact of an employee’s exercise of their job functions on the employer’s business; amount, level, or degree of significance of job tasks; autonomy or extent to which the employee works without supervision; extent to which the employee exercises supervisory functions; or extent to which an employee’s work or actions expose an employer to risk or liability.
  • Working conditions. Finally, to determine if employees are working in similar “working conditions” an employer should consider the “work environment; hours; time of day worked; physical surroundings; and potential hazards.”

Determining how to pay your employees is not an easy task. The Equal Pay Act, while it has good intentions, may make that task even more difficult. Regardless, now is the time to analyze how you are paying your cannabis employees. Now is the time to look at the jobs that are being performed, identify work of a comparable character, and adjust wages accordingly. If you’re unsure whether two workers should be receiving equal pay, you should contact an employment attorney.

The Equal Pay Act pay provisions are effective on January 1, 2019. Again, now is the time to ensure compliance before BOLI starts handing out penalties next year.

california cannabis regulations
Here we go again!

This morning, the California Bureau of Cannabis Control, California Department of Public Health, and California Department of Food and Agriculture issued 15-day notices of modification to the texts of their respective proposed regulations. The California Cannabis Portal has published links to each notice and the modified texts of the proposed regulations. For each set, the respective Department will accept written comments by November 5, 2018.

Stay tuned to the Canna Law Blog for future posts analyzing modified proposed regulations, which are extensive.

california cannabis indemnity
Don’t skim over that indemnification clause!

Coming from Seattle to Los Angeles, I’ve already seen one state flip from being a “gray medical cannabis state” to a fully regulated licensing system and I understand how painful a process this can be. So much of what I saw in Washington State is now happening in California.

In California today, folks are jockeying for operational licenses on the state and local levels under MAUCRSA and “the cream” is rising to the top, just as it did in Washington. One-to-two-person shops and mom and pop operators are feeling the financial pinch of licensing costs and compliance woes. The secondary market for buying cannabis businesses is also beginning to open up as cities and counties solidify and stick with their local cannabis entitlement programs. Transactions between cannabis licensees are becoming increasingly sophisticated, from IP licensing agreements, to distribution agreements, to white labeling agreements, to purchase and sale agreements for inventory.

And just as happened in Washington State at the onset of legalization there, we are seeing many cultivators and manufacturers overpromising on what they can deliver, more often due to overconfidence as to dishonesty. In legal terms, this means we are also seeing cultivation and manufacturing licensees, and distributors agreeing to indemnify retailers and other licensees for everything under the sun, quite often to their own detriment. Even though the cannabis industry is maturing rapidly in California, many are still using boilerplate or Google-discovered or Legal Zoom and Rocket Lawyer contracts for these very serious transactions. This use of bad template documents (most of which are modified little if at all for the realities of the cannabis industry) has got to stop, or cannabis licensees will soon find themselves embroiled in costly and counter-productive disputes/litigation.

And that brings me to the crux of this post, which is one of the most important “boilerplate” contract provisions that absolutely must be tailored for a California cannabis contract: indemnification. What, exactly, is indemnification? It’s when one party (the “indemnitor”) agrees to hold harmless and compensate the other party (the “indemnitee”) for losses suffered by the indemnitee.

Many cannabis sellers in California are far too willing to indemnify third parties for things completely out of their control, like lab results, changes in regulations that may affect the other party’s operations, and unforeseen conduct by users of the cannabis product. These blanket indemnification provisions are creating liability and exposure.

In the past month or so, many cannabis companies have come to us (both in Los Angeles and in San Francisco) with poorly drafted, irrelevant or nonsensical indemnification provisions and agreements from cannabis sellers. So, what makes for a good indemnification provision in a cannabis contract?

A preliminary question should be the breadth of the indemnification. If you are the seller and you want to protect yourself, you should tailor your indemnification to what makes sense and to what you can afford. You do not want something like the following (which is being used fairly often in California these days by inexperienced lawyers and lawyerless companies):

“The Indemnitor agrees to indemnify, defend, and hold harmless the Indemnitee, its officers, directors, employees, owners, agents, assigns, and affiliates (collectively, the “Indemnified Parties”) from and against any and all claims, liability, loss, expenses, suits, damages, judgments, demands, and costs(including reasonable attorneys’ fees and expenses) (each a “Claim”) arising out of any accident, injury, or death to persons, or loss of or damage to property, or fines and penalties which may result, in whole or in part, by reason of the use or sale of any Product, or its packaging, except to the extent that such damage is due solely and directly to the gross negligence or willful misconduct of the Indemnified Parties and that the Indemnified Parties, or any of them, were acting in bad faith.”

This sort of provision is a bad idea for any cannabis seller. It means that seller will be liable to the buyer for just about anything that could go wrong–anywhere, for anyone–from the product. No one wants to be on the hook for things they cannot control.

Here are a few important things to consider when crafting a cannabis indemnification term:

  • Both the cannabis seller and buyer need to focus on what kinds of losses will or will not be covered by indemnification. If I’m the seller, I’m going to want to exclude incidental, punitive, and indirect damages even if foreseeable. If I’m the cannabis buyer, I’m going to want to include at least incidental damages and foreseeable indirect damages.
  • It is both unusual and risky for a seller to agree to indemnify a party indefinitely, and yet this too has become common in California. If you are the seller, make sure your indemnity agreement or provision has an end date.
  • Your indemnification agreement or provision should include a protocol for making indemnification claims to the indemnifying party. The boilerplate indemnification provisions and agreements we are seeing typically never even mention any claim deadline or claim notice requirements. As the cannabis seller you should, at minimum, address these two issues in your indemnification provision or agreement.
  • If the indemnification is mutual, and captures reciprocal indemnification obligations in the same paragraph or contract section, ask yourself “why?” Putting the same parameters around indemnification for both parties often makes no sense, because each party has a different role in the business relationship. Consider separating the indemnity obligations and applying tailored language for each party, as appropriate for that party’s role in the transaction.
  • Finally, can you just cross it out? If you have deal leverage, and someone presents you with an indemnification provision (particularly an onerous one), you may be able to get rid of it altogether. Sometimes, you can convince the other party to give you everything they need to feel comfortable through appropriate representations and warranties.

There are certainly very good and reliable stock indemnification provisions in most contracts, and there’s a reason for that boilerplate in that it’s time-tested and mostly appropriate for more standard business agreements. However, be sure that whatever you’re putting into your cannabis contracts on indemnification is tailored to your specific situation. If not, you could find yourself holding the bag on way more than what is fair — let alone what you expected or can afford.

Today let’s talk about Matthew Price, the Oregon marijuana businessman headed to jail for tax crimes. This story got a lot of coverage when it broke last month, partly because it was the first known tax-related prosecution for a licensed pot business owner, and partly because Price was fairly well known in Oregon. He once sat on an Oregon Liquor Control Commission (OLCC) rules advisory committee for cannabis retail, and he owned three dispensaries. Seems like he was off to a pretty good start.

Well, not any longer. In addition to the seven-month lockup, Price was ordered to pay the I.R.S. $262,776 in restitution on the nearly $1 million in taxable income he raked in from 2011 to 2014. He will probably never be allowed to participate in the OLCC program again, given the agency’s recent tightening of the screws, and its authority to bar anyone with a federal conviction “substantially related to the fitness and ability of the applicant” to obtain a license.

cannabis marijuana tax IRS

Generally speaking, marijuana businesses are liable for lots of tax under IRC 280E. As cannabis business lawyers, we work with CPAs and others to attempt to mitigate our clients’ tax liability, but at the end of the day, that liability is always there. Tax obligations do not end at the federal level, of course: Most states have income tax programs, and all states with legal cannabis programs seem to collect additional taxes on the sale of marijuana. In Oregon, for example, that sales tax must be escrowed by OLCC retailers and paid to the state Department of Revenue. As to Matthew Price, the news reporting was silent on whether he was also shirking those payments.

Having advised state-legal cannabis businesses since 2010, we have seen a lot of monkey business when it comes to tax. We have seen bad lawyers advise clients not to pay taxes, on the theory that tax programs violate business owners’ rights against self-incrimination. We have seen businesses attempt to claim “non-profit” status and avoid taxes in that manner, despite the impossibility of receiving an I.R.S. exemption. And we’ve seen lots of “management company” schemes, most of which are nonsense. At the end of the day, a baseline level of tax is unavoidable.

Interestingly and appropriately, the judge in this case didn’t seem to treat Price differently because his income derived from cannabis sales. It was reported that federal prosecutors petitioned the judge to go hard on Price, in order to send a message to the marijuana industry. The judge wasn’t having that:

The fact that the product involved here is marijuana is utterly meaningless to me in passing a sentence,” the judge said. “It’s a tax case to me.”

That didn’t stop the Justice Department from bragging a bit, but it’s encouraging to see cannabis entrepreneurs being treated like everyone else — in theory, anyway — and for better or worse. On that point, we have often said on this blog that just because someone is violating one federal law by trading in cannabis, that doesn’t make it a good idea to violate all the others. And we always advise entrepreneurs to run their cannabis business like real businesses. That includes paying taxes.

oregon marijuana equal pay

Back in 2017, the Oregon legislature passed equal pay legislation prohibiting employers from asking applicants about compensation history. The law is known as the Equal Pay Act. This law, like other employment laws, applies to cannabis businesses. The equal pay provision of the law goes into effect on January 1, 2019. Oregon Bureau of Labor and Industries (BOLI) was tasked with drafting rules implementing the Equal Pay Act and recently released draft rules. This series of posts will unpack the new rules and explain the impacts on your cannabis business.

The Equal Pay Act prohibits employers from paying disparate compensation for work of a comparable character. The Equal Pay Act defines compensation as “wages, salary, bonuses, benefits, fringe benefits and equity-based compensation.” What this means is each of these taken in total is an employee’s compensation. The proposed BOLI rules provide clarification to each of the words that make up “compensation.”

BOLI defines benefits as:

“the rate of contribution that an employee makes irrevocably to a trustee or to a third person under a plan, fund or program; or the rate of costs to the employer in providing benefits to an employee beyond what is required by federal, state or local law pursuant to an enforceable commitment to carry out a financially responsible plan or program which is committed to the employee affected including but not limited to the following: medical or hospital care; pensions on retirement or death; compensation for injuries or illness resulting from occupational activity; insurance to provide any of [the above]; unemployment benefits; life insurance; disability insurance; sick leave pay; accident insurance; vacation or holiday pay; or defraying costs of other bona fide fringe benefits.”

But what does this long-winded definition actually mean? As an example, if you have two extraction technicians that perform substantially the same work, you need to provide them the same benefits, otherwise you will be in violation of the equal pay laws. If you provide one health insurance, you need to provide the other the same level of health insurance. Etc.

Bonus, similarly has been given a long definition. Bonus is defined as:

“an amount that is paid or something of monetary or quantifiable value that is given to an employee by an employer in addition to the employee’s regular rate of pay, typically as a means of encouragement or in recognition of superior performance. Bonuses include but are not limited to the following: signing or job acceptance bonuses; attendance bonuses; loyalty bonuses; performance bonuses; and productivity bonuses.”

Again, if you provide a performance bonus to one extraction technician, you must provide a bonus on the same terms to any other extraction technician. A future post will discuss in detail exactly what the “same terms” means.

Finally, “salary” is defined as a predetermined amount constituting all or part of the employee’s compensation paid for each pay period of one week or longer. And “wages” means all compensation for performance of service by an employee for an employer. Your extraction technicians need to be receiving the same salary or wages otherwise, you’ll be in violation of the rules.

All of the above definitions need to be considered in total when setting compensation for your employees. Remember–work of a comparable character must be paid the same. And yes, a future post will explore what “comparable character” means.

The Equal Pay portion of the Equal Pay Act officially goes into effect on January 1, 2019. Now is the time to get familiar with the law and its implementing rules, and to ensure you are paying your cannabis employees in accordance with the requirements. If you are unsure, consult an attorney to review your pay practices. Non-compliance will come with hefty fines.

california cannabis marijuana privacy policy
No longer optional for your canna business website.

Unless you’ve been living under a rock for the past few months, you’ve probably read about the host of sweeping new laws in California, like its new Internet of Things law, cannabis privacy law, or net neutrality law, to name just a few. California has long been regarded a trailblazer when it comes to making people who are outside of California do things to comply with California law. So it probably comes as no surprise that website operators outside of California may need to comply with a privacy policy law in California: the California Online Privacy Protection Act.

Pursuant to this law, any business that owns or operates a website that advertises to, services, or in many cases is simply accessible by California residents will almost certainly need to conspicuously post (and—importantly—actually follow) a privacy policy containing statutorily defined disclosures. This requirement applies when a website collects “personally identifiable information” about California consumers, including first and last name, home or other address, email address, telephone number, Social Security number, or any other information that would permit a person to contact a website user (either physically or online). Moreover, a policy may be required even for businesses located in distant areas of the United States just by virtue of the fact that its website can collect this information.

If a company fails to create or adhere to a privacy policy and does so either intentionally or in a material and negligent way, that company may be in violation of the law. The law does state that website operators will not be in violation until 30 days after being notified that their website does not contain a privacy policy, but it does not specify where notification can come from (i.e., the state or any source), which means that reliance on this window may be risky. The law is enforced by the California Attorney General, with penalties of up $2,500 per violation. These penalties could be a severe for businesses that offer mobile apps, as the California Attorney General has taken the position that a new (potentially $2,500) violation occurs each time a non-compliant app is downloaded.

You may be wondering how this applies to your cannabis business. The fact is that there are numerous ways in which even seemingly passive websites collect protected information from and about users. Even if your website does not sell any products, it may include “Contact Us” or mailing list subscription portals which collect protected information. If your website sells or ships any sort of product, it may collect at least some protected information. Even if your business has not collected information about any California residents in the past but simply could do so, the mere possibility may mean it needs to comply.

Furthermore, there are other good business and legal reasons to post and adhere to a privacy policy. Customers appreciate when businesses are transparent about their privacy practices. For obvious reasons, ensuring that cannabis customers’ privacy is maintained is important. Additionally, in the event of a data breach which requires notification to state or federal authorities, the fact that a company took steps to maintain customer privacy may be important considerations in determining if any enforcement actions should be taken.

The good news is that, unlike some laws or regulations that cannabis companies face, California’s privacy policy law is relatively straightforward in that it specifies what a company needs to disclose in a privacy policy and how that policy needs to be displayed on a website. That said, ensuring that a privacy policy accurately describes a company’s current and future privacy practices can be a challenge, and inaccurate or gratuitous statements in a privacy policy could expose a company to additional liability. In other words, a policy needs to be tailored to a company’s specific practices, and so copying language from other privacy policies could cause even more trouble for a company.

Cannabis companies have enough to worry about. They shouldn’t add to the problem by failing to address privacy or data security laws. A good place to start is engaging counsel to draft a comprehensive privacy policy. After all, at least according to California, one is required.

lcb washington cannabis marijuana
Unfortunately, a lot of this stuff is not written anywhere.

To successfully work in Washington’s regulatory cannabis industry, you need to understand the overlapping levels of laws and rules that are in the state’s regulatory arsenal. State statutes in RCW 69.50 set forth the boundaries of the regulatory system. State regulations in WAC 314-55 fill in the details of that regulatory system. Then there are official Liquor and Cannabis Board guidance documents, administrative cases, and court cases that formally interpret those statutes and rules. But there is yet another tier of rulemaking that is harder to see. This tier houses all the unwritten, often changing policies and interpretations of the LCB. If you aren’t aware of these unwritten rules, you can get yourself into a lot of trouble, including potentially losing your license — even if you think you’ve done everything by the book.

For example, did you know that the LCB has two different enforcement policies with regard to its “minor frequenting” violation? If a marijuana retailer does not check ID at its door, here’s the order of events. The minor enters the retail store and attempts to make a purchase. The store employee checks ID and sees that the minor is underage and asks the minor to leave without completing a sale. There is no violation. However, take this same set of circumstances and add an additional security ID check at the front door, in addition to the ID check at point of sale. In that circumstance, if the ID check at the front door misses spotting the date on the ID card but the minor is still turned away at the secondary ID check at point of sale, the retailer has committed a violation. If a retail business is going to have an outside security check, it has a different, stricter standard for what constitutes a rules violation than if it doesn’t have that security check. Regardless of whether that policy is bad (it is), you can’t find it anywhere in the LCB’s rules or in case law interpreting those rules.

In another example, the LCB has generally held that a financial contribution to a licensed business creates a financier relationship the entails a full criminal background check on the financier and a disclosure by the financier to the LCB of all that financier’s assets, debts, etc., all under penalty of perjury. On the other hand, if that same financier wanted instead to invest just in real estate and equipment and lease that equipment to a licensed marijuana business, no LCB disclosure or background check is required. All of that is reasonably reflected in the rules as written. However, the LCB also has a twist on that policy. If a marijuana business owner also wants to co-own the real property that is leased to the marijuana business, any other financiers or owners of that real property are considered as financiers or owners of the underlying marijuana business. Even if a property were purchased a year before the marijuana license was issued, a lender that holds a deed of trust on property that is owned by an individual that leases it to that individual’s marijuana business is considered a financier. Again, this policy is not reflected at all in any statute or regulation.

We deal all the time with people who are unwittingly violating written regulations. As a layperson in a regulated industry, it is your responsibility to know those rules, but that doesn’t mean it’s easy. When companies get into trouble because of violations of the unwritten rules, however, they don’t have real notice that what they are doing is contrary to LCB policy. And it allows the LCB to implement policies without being subject to the state’s mandatory notice and comment period for new rules. I don’t think that the LCB does this on purpose — the notice and comment period creates delays and can be taxing to work through. But there are enough tools in the LCB’s belt (emergency rules, interim policies, formal guidance documents, etc.), that any time we see the unwritten rules in practice, we need to push back. Lately, we’ve been doing that a lot around here.