If You Might Become Involved in any Way with an Arizona Medical Marijuana Dispensary I Urge You to Read All of This Article
The Arizona Department of Health Services will begin accepting applications for Arizona medical marijuana dispensary registration certificates on May 14, 2012. Applications will not be accepted after 5:00 pm Arizona time on May 25, 2012. Applications must be accompanied by a $5,000 application fee of which $1,000 will be returned to unsuccessful applicants.
Applying for a dispensary registration certificate is the first big step for any person or company that wants to obtain a license to be an Arizona medical marijuana dispensary. Only dispensaries licensed by ADHS can grow marijuana and sell it to Arizona medical marijuana licensed patients and other Arizona licensed dispensaries. ADHS Director Will Humble estimated that the number of dispensary licenses that will ultimately be issued is between 90 and 110.
I have been studying Arizona’s medical marijuana laws and closely watching news stories about medical marijuana since October of 2010, a month before the Arizona voters approved Proposition 203, the ballot initiative that created Arizona’s medical marijuana laws. The primary purpose of this website has been to help people interested in this topic to keep informed and up to date about what is happening in Arizona and in other states that have legalized medical marijuana. If you are new to this website and want to learn you will be able to spend many hours reading and learning from the 500+ posts we have made since January 1, 2011, when this website was created.
Federal Government’s War on Medical Marijuana Dispensaries
Over the last year and especially the last six months I have watched the federal government make a 180 degree turn from its 2009 position on medical marijuana in states that have legalized it. The Department of Justice no longer looks the other way with respect to medical marijuana dispensaries. The written position statements issued by the DOJ in the last year and its actions in closing dispensaries in states that legalized medical marijuana are sending an obvious message that can been seen by everybody except those that are blind. The DOJ’s message is this:
The federal government will “vigorously enforce” federal laws against those who “operate and facilitate large marijuana production facilities and marijuana production facilities involved in the cultivation, sale and distribution of marijuana, even if purportedly for medical purposes.”
The quoted text above is in a February 16, 2012, letter from acting U.S. Attorney for Arizona Ann Birmingham Scheel to Arizona Governor Jan Brewer. Not only has the DOJ made the above statement many times in the last year it is actively raiding and closing dispensaries in states that have legalized medical marijuana. The evidence of the feds war on medical mairjuana dispensaries is everywhere and only the blind cannot see it.
I urge you to read as many of the 78+ articles found in one of our topic areas called Federal Dispensary Attacks. These posts describe actual situations where the federal government has taken actions to close medical marijuana dispensaries.
The Federal Government’s Multi-Prong Attack on Medical Marijuana Dispensaries
The feds are using many different weapons to close medical marijuana dispensaries. Here is my list of the primary weapons the federal government is using in its war on state legal medical marijuana dispensaries:
- Raids. The DEA raids a dispensary or a dispensary grow facility and confiscates all property, including cash, marijuana and weapons. Some times people are charged with crimes and some times nobody is charged with a crime (at least initially). See ”Federal agents served a search warrant Wednesday at a marijuana dispensary in Santa Barbara and All known marijuana stores in Santa Barbara County are now the subject of federal enforcement actions. The feds have closed 150+ dispensaries in Santa Barbara County, California. See also a Sacramento Bee story that said: “Authorities raided a south Sacramento marijuana dispensary Thursday and arrested its operator and his father, alleging the pot shop has been operating illegally as a for-profit organization.”
- IRS Audits. Section 280E of the Internal Revenue Code prohibits taking deductions for expenses paid or incurred in connection with marijuana. Read my March 19, 2011, article called “IRS is in the Early Stages of a War to Kill Medical Marijuana Dispensaries.” The IRS has audited several large California dispensaries and demanded large amounts of alleged unpaid federal income taxes. See for example “IRS tells California Medical Marijuana Dispensary it Owes Millions in Unpaid Taxes” and “Millions at Stake in IRS Audit of Oakland Medical Marijuana Dispensary.” Henry Wykowski, the tax lawyer who represented Californians Helping to Alleviate Medical Problems . . . in that dispensary’s landmark 2007 case against the IRS said ‘I personally believe that a large part of the government decided that because they had not been successful through the DEA to shut [the dispensaries] down, maybe they could tax them out of business‘.”
- Seizure and forfeiture of Real Property Used to Sell or Grow Medical Marijuana. The DOJ is sending warning letters to landlords telling them to terminate leases with dispensaries and grow facilities or the federal government will confiscate the land. For landlords that do not comply the DOJ is filing forfeiture lawsuits against the land owners. See “U.S. Attorney Will Prosecute Dispensary Owners, Landlords who Rent to Dispensaries & State Employees Involved in State Medical Marijuana Law.” From the Denver Post: “All 25 of the medical-marijuana stores in Colorado that received warning letters for being within 1,000 feet of schools have heeded the threat from the U.S. Attorney’s Office and closed.” A May 5, 2012, story in Noozhawk said “As part of the enforcement effort, three asset-forfeiture lawsuits were filed this week in U.S. District Court in Los Angeles alleging that the owners ‘either knowingly allowed commercial marijuana stores to operate or knowingly allowed a significant indoor marijuana farm to function,’ according to the statement from the U.S. Attorney’s Office.” At least one landlord was convicted of a crime for leasing to a dispensary. Read “A Flathead Valley landlord has been sentenced to a year in prison for his tenants’ medical marijuana operation.”
- Dispensaries are Usually Unable to Open a Bank Account and are Forced to Operate on the Cash Basis. An April 30, 2012, story in the Seattle Times said: “Aaron Smith, executive director of the Washington, D.C.-based National Cannabis Industry Association, estimates that half of dispensaries nationwide lack a bank account, which he blames on pressure from federal banking regulators. ‘It is a widespread problem that threatens the entire industry,’ he said. . . . in June, Holder deputy James Cole issued a memo warning that ‘those who engage in transactions involving the proceeds’ of marijuana sales ‘may be in violation of federal money-laundering statutes and other financial laws.” See also an April 3, 2011, story in Recordnet.com: “Dispensaries run into difficulties dealing with financial institutions. Stockton and other local government agencies in California require medical marijuana dispensaries to promptly deposit cash into bank accounts. The federal government, meanwhile, is putting pressure on financial institutions to make that more difficult. Medical marijuana dispensaries throughout the state have been getting letters in recent months from their banks telling them their accounts are frozen or closed.”
- Warnings to Lenders Who Loan to Medical Marijuana Dispensaries. An October 26, 2011, ABC News story said: “In its effort to shut down California’s booming medical marijuana dispensaries, the Justice Department is seeking to seize the property where the clinics are based, even going after at least one bank that holds the mortgage on a clinic. Chase bank received a letter to evict the Marin Alliance for Medical Marijuana, according to Greg Anton, attorney for the clinic. The bank owns the note on the building in Fairfax, Calif. According to Anton, the bank received a similar letter from U.S. attorney Melinda Haag for the northern district of California that was sent to the Alliance’s landlord on Sept. 28 and other medical marijuana dispensaries. The letters threatened that unless the owners evicted the cannabis clinics within 45 days, they could face criminal action.”
- Targeting Leaders in the Medical Marijuana Dispensary Industry. The Bay Citizen wrote on October 21, 2011: “As the federal government’s crackdown on the state’s medical marijuana industry expands, the Department of Justice has targeted Richard Lee, the leader of the movement to legalize pot in California,”
- Feds Target Advertisers. The Sacramento Bee said on October 14, 2011: “U.S. Attorney Laura Duffy in San Diego said she may target TV and radio stations and print publications that run medical marijuana ads.”
What Do the Federal Government’s Attacks Mean?
Read my October 11, 2012, article called “Medical Marijuana Dispensaries are Dead in the United States.” In that article I said
“The U.S. Justice Department has said in no uncertain terms that it will do the following in all fifty states:
- Prosecute people involved in selling medical marijuana to medical marijuana patients or caregivers.
- Prosecute people involved in growing medical marijuana for the purpose of selling to medical marijuana patients and caregivers.
- Prosecute landlords who lease real property to people or businesses that grow or sell marijuana on the premises.
- Prosecute lenders who loan money to people or businesses that grow medical marijuana for distribution or that sell marijuana to medical marijuana patients or caregivers.
. . . The only people who have any comfort from the U.S. Justice Department’s current medical marijuana policies are state approved medical marijuana patients and caregivers who do not sell marijuana. . . . It is clear to me that the U.S. Justice Department’s policy is to prosecute everybody involved in growing, selling and distributing marijuana except patients and caregivers.”
I believe there is much more evidence to support the statement in red above now than there was seven months ago.
Arizona Medical Marijuana Dispensaries Must be Operated on a Not-for-Profit Basis
A lot of people believe that owning an Arizona medical marijuana dispensary is a way to get rich despite the fact that all Arizona medical marijuana dispensaries must be operated on a not-for-profit basis. Unfortunately neither Arizona’s medical marijuana laws nor the ADHS rules explain what that term means. The only guidance with respect to the meaning of this term is found in Arizona Department of Health Services rule R9-17-304(D).8 that states that the Bylaws of a dispensary must contain “Provisions for the disposition of revenues and receipts to ensure that the dispensary operates on a not-for-profit basis.” That’s it. Nobody has a clue what the phrase means.
We do know, however, that all Arizona medical marijuana dispensaries must provide annual audited financial statements to ADHS. Most businesses do not get audited financial statements, which are very expensive. The fact every dispensary will be giving ADHS audited financial statements means that ADHS will be able to examine in detail how dispensaries are spending money, i.e., who the dispensaries pay and how much they pay. I believe that all expenditures of money by a dispensary must be commercially reasonable or the dispensary is opening itself up to a claim that the dispensary is being operated on a for profit basis.
For example, if a member of the board of directors attends one two hour meeting of the board every quarter and provides no other services the board member may be paid for the reasonable value of the services rendered. What is the value of 8 hours of time spent at a meeting of the board of directors? Surely payments of $25, $100 or $250 hour may be justified since many professionals, plumbers and Xerox printer technicians charge those hourly rates. However, if that board member is paid $100,000 for eight hours of time I submit that ADHS will have a problem with that and ADHS could refuse to renew the dispensary’s license.
Money dispensaries pay to employees and insiders will be scrutinized closely. The dispensary must be able to justify the reasonableness of all payments to employees, insiders and affiliates. Dispensaries should not agree to pay for any services provided by employees, insiders and affiliates without tangible evidence that the payments are commercially reasonable. One way to do this is to follow the same rules used by bona fide tax exempt charities. To learn more about this important topic a good start is to read “Nonprofit Payments to Insiders and Outsiders: Is the Sky the Limit?” This article contains footnotes that refer to sources of information that can be used to justify payments to insiders of tax exempt charitable organizations.
Dispensary people must also understand that law enforcement and prosecutors will be able to access dispensaries’ audited financial statements given to ADHS for the purpose of determining if any dispensaries are not operating on a not-for-profit basis. I am sure law enforcement and prosecutors will pay special attention to payments of large amounts of money to “management” companies or service provider companies owned by the owners, officers or board members of a dispensary. It is a mistake to think you can make a dispensary operate on a not-for-profit basis by siphoning money from the dispensary to affiliated entities.
The bottom line with respect to the not-for-profit requirement is that Arizona medical marijuana dispensaries must actually operate a not-for-profit business so why would anybody want to invest the large amounts of money and time into a business that cannot pay profits that justify that risk?
Dispensary People Will Not Have a Defense If Charged with Violations of Federal Marijuana Criminal Laws
We all know that people charged with a crime are innocent until proven guilty. The prosecution must present sufficient evidence that the defendant committed a crime to convince the jury to find the defendant guilty. People who are involved with Arizona medical marijuana dispensaries who are charged with a crime will have two strikes against them when they are tried in court because the total system created by the Arizona Department of Health Services documents with overwhelming evidence that all Arizona medical marijuana dispensaries have engaged in the possession and sale of marijuana.
The computerized point of sale system to be used by all dispensaries will record all pertinent facts about every sale involving marijuana or a marijuana infused product. Dispensaries will be giving ADHS the names, dates, amounts and prices of all sales transactions. The evidence needed to prove that a dispensary was selling marijuana will be collected by ADHS and available for use by prosecutors. Evidence includes the audited financial statements dispensaries will give to ADHS. Prosecutors will have the legal equivalent of a slam dunk when proving that a dispensary sold marijuana. Defendants will not be able to deny that their dispensary was selling marijuana.
Consider for a moment you are an owner or an employee of an Arizona medical marijuana dispensary who is charged with felonies for violating federal criminal laws that prohibit the possession and sale of marijuana. What is your defense? Do you really want to risk your freedom and your future by hoping that prosecutors will go after people associated with other medical marijuana dispensaries instead of you?
Other Bad Developments that Affect the Medical Marijuana Industry
Two other very significant developments occurred in the last month that will have a substantial adverse affect on Arizona’s budding medical marijuana dispensary industry. These two developments are:
- The Maricopa County Superior Court Case called Michele Rene Hammer v. Today’s Health Care II. The court ruled that a medical marijuana dispensary that borrowed $500,000 has no legal obligation to repay the loan because the loan was made for an illegal purpose. See my May 7, 2012, story about this entitled “Maricopa County Superior Court Ruling May be Last Nail in the Coffin of the Unborn Arizona Medical Marijuana Dispensary Industry.” In this article I said: “Unless and until an Arizona appellate court rules that contracts involving Arizona medical marijuana are enforceable under Arizona law (as opposed to unenforceable under federal law), any contract that has a purpose related to Arizona medical marijuana may be unenforceable and not worth the paper it is written on!” Why would anybody want to become involved in an industry that does not have legally enforceable contracts?
- Insurance Company Cancels Colorado Lawyer’s Malpractice Insurance because She was Representing Clients in the Medical Marijuana Industry. See Denver lawyer has lost her liability insurance. The significance of this development is that it has a chilling affect on Arizona lawyers who might represent or who do represent an Arizona medical marijuana dispensary. Why would any Arizona lawyer represent an Arizona medical marijuana dispensary if the lawyer would not be covered by malpractice insurance? The possible lack of insurance is particularly disturbing in light of the fact many attorneys might be providing legal services related to contracts that may not be legally enforceable. Doctors who are considering being medical directors for an Arizona medical marijuana dispensary also risk having their malpractice insurance cancelled at least for services related to the dispensary.
These two recent developments are the “straw that broke the camel’s back” that made me write this article. On May 14, 2012, ADHS will begin accepting applications for dispensary registration certificates. The purpose of this article is to inform those people who are considering becoming involved with an Arizona medical marijuana dispensary of the facts of life that they must be aware of and consider before they actually get involved with an Arizona medical marijuana dispensary.
Warning to All Who are Considering Becoming Involved with an Arizona Medical Marijuana Dispensary
As an attorney who has followed medical marijuana law carefully since October of 2010, it is my opinion that nobody should become involved with an Arizona medical marijuana dispensary as an owner, officer, director, employee or independent contractor unless that person is willing to accept the more likely than not risk that he or she will be charged with violating federal criminal laws that prohibit the possession, growing, sale and transportation of marijuana. As an attorney I must advise anybody who asks me if they should become involved with an Arizona medical marijuana dispensary that they should not because he or she will probably be charged with federal crimes that are felonies.
As a result of the issues and problems discussed above, I have decided that beginning today neither I nor any KEYTLaw, LLC, attorney will provide any legal services or represent any person or entity that gets a dispensary registration certificate or that actually opens an Arizona medical marijuana dispensary. I will assist people and companies for whom I previously formed an Arizona entity to complete the formation services for which I was hired if they intend to continue the quest to open an Arizona medical marijuana dispensary, but I will not provide any other legal services for an actual or prospective Arizona medical marijuana dispensary or any person or entity that wants to enter into a contract with a dispensary. As a business lawyer I do not want people to pay me to review or prepare contracts that may not be enforced by courts or provide legal services that may not be covered by my malpractice insurance company.
Message to My Dispensary Clients
For my clients for whom I created an entity that intended to file an application to obtain a license to operate an Arizona medical marijuana dispensary I apologize for not providing legal representation with respect to their future legal needs as an Arizona medical marijuana dispensary. However, this change is the result of forces beyond my control. I can only observe what is happening nationwide to the medical marijuana industry and do what I think is right based on actual events that shape the medical marijuana industry and the laws that affect it.
One final word of advice for my clients for whom I formed an entity that intends to apply for a dispensary registration certificate: Make sure your Bylaws that you submit to the ADHS with your application are version two of my dispensary Bylaws. If your entity got its Bylaws from me before April 11, 2012, it has the out of date version of the Bylaws and needs to get the post April 11, 2012, version of the Bylaws. Existing clients for whom I formed an entity that intends to apply for a dispensary registration certificate may order their free update to the Bylaws by completing, signing and returning to me the questionnaire found here:
Arizona Medical Marijuana Law Will Continue to Follow News & Developments
I do intend, however, to continue to follow developments and news of Arizona medical marijuana laws and other states that legalized medical marijuana and continue to add the information to this website. If you want to stay up with medical marijuana news bookmark this site and return often or to get daily email updates enter your email address in the field at the top of the left column under the menu row that has a black background.