All involved in the new regulated industry in California owe a debt of gratitude to those who paved the way (they owe us for teaching them how to grow the best medicine). When Canna Resource Group started in early 2016 all we could do was look to the other legal states in order to anticipate what we could expect once the dust settled. Well the dust is still very much up in the air, especially when it comes to enforcement and regulatory audits. As always, thanks to Canna Law Blog for all of your timely and on-point advice.
Source: Canna Law Blog | Date: 2/13/18 | Author: Jim Hunt
Like all business, cannabis businesses are subject to audit by state taxing authorities and other agencies. These audits tend to proceed differently with cannabis business, though, given the unique regulatory approach states take with marijuana. If a regulatory audit turns up issues, then fines and even loss of your business’s license could follow. This post outlines the top issues in preparing for, and managing, a regulatory audit of your cannabis business.
Every state with a regulated cannabis market has specific record keeping requirements. Prepare for future audits by keeping meticulous records. Like other businesses, a marijuana business must keep detailed records regarding all aspects of the business including: sales, inventory management, purchases, taxes, employment, environmental compliance, legal and transportation. Unlike other businesses, a cannabis business is required to keep all source documentation. For example, purchases of goods and services must not only be supported by master goods and service contracts, but transaction level invoices; bank statements must include check and deposit slip detail. When in doubt, keep as much detail as possible.
As stated HERE and HERE, it is wise to conduct periodic self-audits to identify any weakness in record keeping or any other compliance issues. Self-audits allow a cannabis business to address issues as early as possible. Self-audits also assist a business is constantly improving not only its regulatory compliance but improving customer service and profitability.
Each state differs in how long records must be maintained. Washington requires that records be archived for three years while California requires records be archived for seven years. However long a state requires a cannabis business to archive records, it is a best practice to archive records in electronic format where possible, alongside retention of hard copy data.
Cannabis regulators will notify you by letter that your cannabis business is under audit. Included with that letter will be a list of records to provide. All states with regulated cannabis markets have wide latitude to inspect records and your physical business location. For example, Washington regulations require a cannabis business to archive a wide variety of documents and mandate that such records “must be made available for inspection if requested by an employee of the WSLCB.” In general, a cannabis business will have no standing to challenge a cannabis regulatory agency right to demand and to inspect records. Your time and money will be best spent gathering the records requested.
Typically, records must be produced in a very short time frame, so a cannabis business should immediately begin to gather the documents requested. Typically, information must be requested from CPA’s bookkeepers and attorneys, so give your business as much time as possible to get this information.
Disclosure and Truthfulness
Most states have strict sanctions for a cannabis business that fails to provide documents to the regulators. For example, a determination of a failure to provide documents in the State of Washington will result in the cancellation of a license. As expected, most states have strict sanctions for misrepresentations of fact to cannabis regulators. Again, a determination that a cannabis business has misrepresented facts will result in the cancellation of a license. A cannabis business must be aware that every document provided and statement made to the regulators is “on-the-record”. A cannabis business should never speculate or guess in responding to inquiries made by the regulators.
Understand the Appeal Process and Your Rights
Although your cannabis business has an affirmative duty to provide accurate information to the regulators, you do have legal rights and protections.
If the enforcement officer identifies a potential violation, the enforcement officer must follow a specific notice procedure. In Washington, the enforcement officer must issue an Administrative Violation Notice (AVN) and deliver the notice to the cannabis business, or the businesses agent or employee.
The AVN must include:
- A narrative description of alleged violations;
- The dates of violations;
- A copy of the relevant statutes or regulations;
- An outline of the licensee’s options;
- Identify the recommended penalty; and
- Identify any aggravating or mitigating circumstances adjusting the penalty.
Requesting a Stay
If the regulators suspend a license, the licensee must promptly initiate an adjudicative proceeding before an Administrative Law Judge assigned by the Washington office of Administrative Hearings. A hearing must be held within 90 days of the date of suspension.
In Washington, a cannabis business must petition for a stay of suspension within 15 days of service of the suspension order. A hearing must be conducted within 14 days from receipt of the filing of the petition for stay.
A Washington cannabis business has 20 days from receipt of the AVN to:
- Accept the recommended penalty; or,
- Request a settlement conference; or,
- Request an administrative hearing;
Missing this key 20-day period will result in a range of sanctions from penalties to revocation of the cannabis business license.
One of the key tactical decisions is whether to request a settlement conference or to move directly to requesting an administrative hearing. Although a settlement conference offers an opportunity to resolve issues in a more informal manner, there may be instances where moving directly to an administrative hearing is wise. This tactical decision should be considered carefully in consultation with counsel, and is highly dependent on the facts and circumstances of each case.
Although a regulatory audit is intimidating, your cannabis business can best prepare for such an audit by aggressively implementing best practices, performing internal compliance audits, and keeping meticulous records. Remember, states that have legalized adult cannabis use, such as Washington, are under scrutiny by the federal government. Increased federal scrutiny puts pressure on states to enforce their local cannabis laws, and a key part of such enforcement is through regulatory audits. For all of these reasons, your cannabis business would be wise to plan for an audit by state regulators.