18 min read
Cannabis Compliance Risks That Every Cannabis Dispensary Can Avoid
Regulatory compliance is at the core of every successful business, even more so for cannabis dispensaries. While the legalization of cannabis and its acceptance is still in its early stages, it is clear that THC and CBD will slowly take on a more prominent role within the market. It will compete with traditional medicine to provide safe relief to those in need. But the legal cannabis supply chains are not devoid of complexities. While rules vary in each state, the risk of non-compliance is much higher. Although the marijuana legal lines may seem blurred, abiding by the regulations is essential to preserving the business’s reputation and its ability to operate.
The following guide will help you understand more about the cannabis compliance risks, what consequences of non-compliance are, and how to avoid rules violation penalties.
What Is Compliance In The Cannabis Business?
Every business has rules and regulations that must be followed, and this is particularly important in the cannabis industry. From plant cultivation to distribution to product sales, compliance with local and state laws is crucial for the success – and survival, of each dispensary. Any misstep may not only negatively impact your brand but can also result in audits, fines, or even complete business shutdowns.
What makes the cannabis industry more complex than other sectors such as healthcare or finance is its legal framework, which varies from state to state. Dispensary owners must be aware of their state’s rules, what is demanded by the authorities, and the consequences taken against non-compliant businesses. When it comes to marijuana, compliance is more than just a set of rules to follow – it guarantees protection, reliability and is crucial to progress as a viable business.
What Does Financial Non-Compliance Mean For Dispensaries?
While dispensaries are required to comply with all rules concerning their business, financial compliance is particularly important to ensure all marijuana products are properly distributed and sold. Failure to report all transactions will immediately compromise the dispensary’s legal status and its ability to operate.
To ensure full financial compliance, every cannabis dispensary must verify the following aspects:
Cannabis businesses are required to keep all tax records up to date, including income taxes, sales taxes, and monthly excise taxes. Failure to report or update tax information may prevent the dispensary from renewing its license.
In the cannabis industry, documentation is crucial to protect a dispensary’s reputation, reliability, and legal status. From taxes to standard operating procedures, all statements must be properly outlined and updated when needed. This applies to all aspects of a business’s financial reporting.
Although marijuana is still federally illegal, dispensaries must ensure that bank transactions are properly recorded and connected to a specific sale. The same applies to all other sources of funds that come into the bank from a cannabis-related business. Every time a dispensary owner deposits funds, they must attach a document describing the source of those funds, explaining in detail where the money came from. Failure to comply with banking regulations results in loss of bank account and impossibility to manage the business funds.
Where Does Dispensary Non-Compliance Occur?
With the continuous growth of recreational and medical cannabis across the country, understanding the challenges faced by cannabis dispensaries is now more important than ever. Many risk areas may impact compliance for cannabis businesses, which are worth discussing further.
Since card transactions are still not common, dispensaries tend to be a cash-intensive business, so they are more subject to traceability risks.
Just like cash, marijuana-related documentation may present inconsistencies. For instance, Metrc and POS may record sales differently, so they must be checked for any necessary reconciliation. Bank documents are considered as well. Failure to provide all requested items may make banks suspicious about the nature of the business’s operations.
If a business does not have SOPs or is unable to validate funds, significant problems may arise.
What Does Non-Compliance Imply?
The consequences of non-compliance depend on how severe the action was. In some cases, dispensaries are issued warning letters to notify landlords that they may be subject to criminal and civil penalties following illegal cannabis activity. When cases are more serious or when there is a lot of evidence against the business, court action follows, usually accompanied by a heavy fine.
Following a penalty for non-compliance, a business is expected to make the necessary changes to its model or, in worst cases, change the entire ownership completely. If changes do not occur, the business’s license may be revoked or suspended.
Dispensary Compliance is Good Business
The cannabis business is one of the fastest-growing market sectors, growing 250 percent over the last decade and increasing its revenue by 67 percent even during the 2020 pandemic. Needless to say, this industry will keep expanding even more in the near future. But the greatest success of marijuana does not rely upon its market growth, but on how it stays compliant with local and state regulations.
Dispensaries must take steps to protect themselves and ensure the business adheres to all ethical and legal principles. Abiding by the rules is highly beneficial for the cannabis business, as most compliance failures are often due to not following all necessary security policies. Compliance risks can be easily avoided by researching and learning all local laws and planning the operations accordingly. Doing so will help your business thrive and stay solid for a long time.
How to Avoid Non-Compliance Risks
Failing to comply with state rules results in loss of reputation, heavy fines, and overall discretization of the entire cannabis industry. To minimize the risks of non-compliance, there are a few steps that dispensaries need to follow:
Dispensaries must remain vigilant against fake IDs and check that all customers are legally allowed to purchase and use marijuana or are authorized by a doctor through proper documents.
Reinforce Security Systems
In the cannabis world, security does not only involve setting up video surveillance or an alarm system at each dispensary. Data protection, transaction recording, financial reporting, and respect for interstate regulations are equally important.
Inventory must be properly checked at all times from the moment it is transported to the storing and selling stage. Inventory discrepancies usually result in a very large fine, among other penalties.
Comply With Product Safety Laws
Some of the most serious cannabis compliance risks are related to the safety, packaging, and labeling of marijuana products. Every state has its own regulations with regards to product safety – for instance, products must be childproof, and all warning symbols must be visible on each product. To remain compliant, business owners should keep an eye out for any changes to states and local laws.
Control Loop Customers
Loop customers are those individuals who enter a dispensary to buy the maximum allowed quantity of a product and return to make another maximum purchase. This is also known as overselling. The compliance issue arises when these people acquire large amounts of items with the purpose of resale. Loop customers can create serious problems for the business, as both the dispensary owner and the customer are at risk of jail sentencing.
Cannabis Compliance Tips
Given the future growth potential of the cannabis industry, opening a dispensary is a great opportunity to step into the market and explore new business routes. But cannabis dispensaries come with a set of rules and guidelines that must be followed to succeed in the long term.
If you are considering starting a cannabis business, there are a few compliance tips to consider:
Compliance Is Time Consuming
Understanding the mechanism of cannabis compliance can take some time, and it will require you to step away from the main business operations. This can be problematic because it will require business owners to invest additional time and resources that would otherwise be put into yielding returns. But while compliance may not bring an instant ROI, learning the rules will keep the company in good standing, especially if you just started.
The U.S. cannabis compliance rules are not all the same, they change from state to state, and sometimes among different local municipalities. This leads to a high volume of regulatory frameworks that need to be considered to avoid license loss, fines, or court penalties. In addition to following the local and state rules where your business is located, there is federal legislation to keep in mind such as the Occupational Safety and Health Administration (OSHA), the Health Insurance Portability and Accountability Act (HIPAA), and the Federal Communications Commission (FCC).
Aside from being numerous, cannabis compliance regulations are also fairly complex – and confusing, to grasp. In addition, these rules change frequently, so business owners must keep an eye for new amendments at all times. If you are looking to enter the marijuana industry and run a successful dispensary, be prepared to abide by countless rules and legal requirements.
Reporting results, sales, and inventory information ensure the success of the business. Lack of detailed documentation can lead to hefty penalties and fines. The challenge is being able to manage the often-unstable state-mandated reporting tools, which may not be up to par with the complex laws of the cannabis industry.
Managing Cash for the Cannabis Dispensary
Money management is a critical aspect for all cannabis dispensaries. Since cannabis is federally illegal, business owners cannot count on the support of most banking institutions, which are entirely regulated by the federal government. Without banks, the cannabis industry has sharply turned into an all-cash environment. This makes dispensary management slightly different from other retail businesses. Owners must keep all cash under control, ensuring all sales are properly recorded and that strict security protocols are put in place to protect this asset.
Inventory Best Practices
Managing inventory is at the basis of all cannabis-related operations, the success of the business, and its legal standing. Since rules change from one state to the other, regulators are interested in the movement of marijuana products through the various distribution networks.
Dispensaries must ensure that all inventory can be properly identified as it moves across state lines, ensuring it does not end up in the hands of minors or ineligible users. Solid inventory management solutions facilitate regulatory compliance and help to quickly identify lost or stolen products, ensuring that the business flows properly along all legal lines.
Point-of-sale (POS) is the most important infrastructure of a cannabis dispensary. It helps employees record every sale without manually entering data one by one. Entering seed-to-sale transaction information may be challenging, but since recording sales is crucial to cannabis compliance, choosing an efficient POS solution is key. This will reduce the time spent to record inventory sales and allow dispensary employees to focus on other value-generating activities.
Customer Loyalty and Rewards Programs
Because of its uncertain market presence and since not everyone is allowed to use marijuana, cannabis marketing campaigns need to take a different route compared to traditional retailers. Customers are dispensaries’ biggest assets. To market cannabis products, reward and loyalty programs are frequently offered to returning customers, in the hope that they can spread the word among the community. Valuing customers not only works well for the business but also ensures long-term success against restrictive cannabis regulations.
Obtaining Insight Through Customer Data
Customer information is used to track seed-to-sale applications and report sales transactions to regulators, showing that the business is fully compliant with cannabis sales laws and logistics requirements. For a customer-centric business like the cannabis one, data analysis is of immense value – it facilitates financial reporting and helps the business identify sales trends.
Inventory Optimization Through Seed-to-Sale Tracking
Managing and tracking inventory is one of the greatest challenges for cannabis dispensaries. Without a proper inventory, it is easy to fall behind with recording data, especially when plants are transported across the state. To avoid a regulatory audit, owners should take time to reconcile their inventory, making sure all products are properly recorded. This will avoid delays during official inspections by state regulators.
Audits help state regulators identify who is complying with the rules and who is undertaking illegal operations. In states like California, all non-compliant dispensaries are subject to license suspension, though there is currently a lot of pressure to completely shut down all locations that fail to observe regulatory law. As the cannabis industry expands, these checks will become more frequent and severe, so you want to make sure you are fully prepared ahead of time for any business verification from state authorities.
What About National Standards?
Although cannabis is federally illegal, some associations have established national standards for cannabis sale and use. These standards help all cannabis sectors operate according to the same framework, from the cultivators to the dispensaries. These standards also provide a solid compliance basis for small and big business owners, which comes useful as the industry evolves and matures.
Performing ID Checks
Consumers must be 21 years of age or older to purchase and consume recreational cannabis or possess a valid medical card to buy medical marijuana products. To stay compliant, dispensary employees are responsible for checking the ID of every customer who enters the premises and checking the local age requirements regularly in case of policy changes.
Although every state put in place specific security system requirements, all dispensaries must be supplied with 24-hour video surveillance and an active alarm system to protect both inventory and staff. Cameras must have clear access to all entrances and exits, as well as the check-in area and any other area where sales may take place. Since the cannabis industry is highly regulated, it is crucial to set up a security system that is both robust and rule compliant.
Keep Track Of Your License Papers
Obtaining all necessary licenses and permits is not enough – you must keep them in order at all times. The validity of most paperwork is 12 months, so be sure to stay in control of the renewal process. You should also keep all license-related documentation on hand, so you can be prepared for any compliance audit from state or local jurisdictions. Regulators have the right to ask for all business documentation, so make sure it is easily accessible.
Comply with Product Safety Laws
Safety is at the core of every cannabis business, which is why dispensaries must comply with all state and local laws to protect the safety and quality of marijuana products. These laws have been put into place for all stages of cannabis production: cultivation and testing, storage and distribution, handling, and labeling.
Keep Your License Number Visible at All Times
All marijuana products, including marketing and advertising campaigns, must reassure customers that the items are safe to use and come from legal, authorized companies. The best way to keep your products away from illegal connotations is by displaying your licensee information clearly on all platforms where marijuana is advertised and sold. Showing the license number will not only keep you compliant with state regulations but will also help your brand gain trust with consumers.
Products Are For Adult Use Only
While this may be an obvious point, many states like Massachusetts, Washington, Nevada, Alaska, Oregon, and Michigan explicitly require the addition of adult-use warnings in all cannabis advertisements. Failure to label products will result in non-compliance. Businesses must include a label specifying that products can only be consumed by those who are not underage. In addition, some states where cannabis is legal have adopted a specialized compliance-based marketing policy aimed at showing adverts only to of-age viewers.
Include Health Risk Warnings
In addition to displaying business license numbers and consumer warnings, marijuana dispensaries are also strongly encouraged to add U.S. Food and Drug Administration health assurance on their advertisements. This will keep all products within the safe zone while preventing the product from being viewed as dangerous or suspicious.
As mentioned before, transparency is crucial to keep the cannabis business in good standing. This applies to product marketing as well. A cannabis brand is not allowed to make false advertising, especially if you cannot offer substantiation of your claims. You can either display a health warning or potential side effects, but if your claims have not been approved by the FDA, the business will be subject to non-compliance penalties.
Prioritize The Web Over Other Media
Advertising marijuana differs from traditional retail stores. When it comes to CBD, the Internet is the most legitimate – and efficient, source to spread the voice about your products. Aside from staying compliant, using the online marketplace will give your brand major visibility, making your consumers more inclined to explore your products.
Invest in Employee Training
Employee training is crucial for the success of a dispensary. Failing to provide budtenders with the proper training may lead to serious legal issues, as well as compromising the long-term reputation of the business. No budtender should be allowed to perform their duties without passing the required training test. Once they start working, it’s time to hold them accountable by monitoring their performance, their customer service, as well as how reliable they are with maintaining the dispensary fully compliant. Keep a paper trail of all training and compliance practices, as they may come useful over time.
Follow Public Sanitation Requirements
Among the manifold local and state-level regulations that the cannabis industry has to follow, dispensaries must also comply with several public health policies:
- Reviewing and updating all sanitation policies as needed, following local and state health regulations.
- Ensuring that employees follow all sanitation guidelines during their shift.
- Maintaining a regular cleaning schedule at each facility.
- Storing chemicals away from employee areas and the rest of the inventory.
- Inspecting freezers and refrigerators where edible marijuana is stored daily.
- Maintaining the dispensary free of mechanical issues or water leaks.
Failure to prevent health hazards may result in non-compliance penalties or hefty fines.
Design a Crime-Proof Environment
Most criminals tend to examine the target area before acting, so make sure your premises are crime-proof by aligning the cameras with all major corners and check that the facility is secured. Both the owner and the employees must comply with all security measures and update the procedures when necessary. Facilities must follow local and state security requirements. It is wise to always encourage your staff to stay fully compliant by protecting sensitive information and reporting any suspicious activity.
Prepare for Regulatory Inspections
Facility inspection is an integral part of compliance. Many states allow authorities to step into licensed dispensaries unexpectedly and carry out the necessary audits. Owners must be fully prepared for unannounced visits, and make sure the premises is always compliant, including inventory, staff operations, sanitation, and so forth. It only takes a small action to fall into the non-compliance road, which could turn into something more serious and result in a license violation.
Digitization of Licenses and Renewal
Cannabis is a critical industry, and operations are constantly monitored against unauthorized actions, preventing marijuana from falling into the hands of the wrong people. Business owners must check the validity of their license, making sure their dispensary can fully operate. An invalid or expired license will result in heavy fines, suspension, or total shutdown. To avoid such risks, you can automate your license renewal through several digital platforms. This will help you manage your licenses without missing any due dates or important renewal deadlines.
Maintain Traceability from Seed to Sale
As the country opens up to a new era of cannabis legalization, monitoring product distribution becomes even more important. All dispensaries must be able to properly trace their products to remain fully compliant. Tracing products also ensures that there has been no contamination with harmful chemicals or unhygienic processes, which may pose serious health risks for the consumers. Demonstrate that your products can be trusted by following the supply chain every step of the way, from planting to sale. This will also help to account for every single cannabis item sold at your dispensary and respond to audits or investigations if needed.
Allow POS Purchase Limit alerts and Built-In ID
Purchase limits differ from state to state. Dispensaries cannot sell more than the stipulated limit and within a certain time frame. Failing to pay attention to these limits poses a high risk for both you and the customer – up to jail time. Leveraging your POS software with purchase limit alerts will be very helpful, as you will no longer need to track every single transaction manually. You can also set up built-in ID software to combat looping, ensuring that buyers do not purchase more products than what they are allowed to. The system will alert the dispensary in case of suspicious transactions. This will make cannabis compliance much easier while saving your business from heavy legal consequences.
Identify Your State’s Local Agencies
It is always wise to take some time to find your state’s agencies, where they are located, and what their responsibilities are. The same thing applies to local authorities such as police departments, public health departments, city councils, and tax collection offices. These agencies can help you with regulating your business, keeping it compliant, or simply provide useful contact information when needed.
Update Standard Operating Checklists and Monitoring Logs
To maintain compliance, understanding your business’s daily processes is not enough. You also need to pay attention to the potential risks that the business may incur and create standard operating procedures (SOPs) to mitigate the negative outcomes. These procedures range from checklists to monitoring logs and ensure that the business follows good manufacturing practices, sales reporting, and inventory distribution. You also want to keep an eye on everyone who has access to the facility’s security system, restricting access only to budtenders or authorized dispensary personnel.
Compliance Managers Can Help
Compliance in the cannabis industry is extremely important and must be maintained at all times. One of the most effective ways to ensure a dispensary is as compliant as possible is working with a manager to oversee any compliance-related issues that may arise. A compliance manager can also help with implementing strategies or reviewing the business’s internal operating procedures, ensuring your dispensary is following all the rules. With a compliance manager handling most of the legal matters, you will be able to focus on growing your business without the fear of dispensary penalties.
What Should Dispensaries Do To Stay Compliant At All Times?
The first thing to consider when entering the cannabis industry is that the state of marijuana regulation is updated frequently, as more states introduce new laws to legalize marijuana use. The easiest way to stay compliant is to first know the main rules, and then stay on top of any amends that may come over time.
Cannabis dispensary operations require knowledge of various processes, from sales and inventory to POS to bank deposits and Metrc. To minimize the chances of errors and risk of non-compliance, it is advised to always have a paper record for each of these different areas. For instance, a dispensary POS can help track purchases and prevent employee theft. Make sure to review all activity register information and act if you see any anomalies or potential risks. Always keep a written record and document your process.
Together with documentation, transparency is another key element in ensuring a cannabis dispensary stays compliant. You always want to be honest about the nature of the operations and be prepared to answer all the questions a regulator may ask. Providing inaccurate information may jeopardize the business and its reputation. Financial institutions care about transparency as well. They need to validate that you are not only able to manage the dispensary, but that you can also detect any potential risk and protect the business against legal penalties.
The cannabis industry is in continuous evolution, so much so that more states are allowing legal marijuana consumption into their territory. Knowing the main rules of this business is not only essential to carry out cannabis-related operations without legal repercussions, but also to maintain the credibility and brand reputation of the dispensary itself. Although marijuana is still illegal on a federal level, every little action counts towards minimizing risk and the compliance burden.