Call or email an Arizona attorney: 480-664-7478|rk@keytlaw.com

About Richard Keyt

The author of this article is Richard Keyt, an Arizona business law attorney who is the creator of this Arizona medical marijuana law website. Connect with Richard at 480-664-7478 or on Google+
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Can a Person Who Holds an Arizona Medical Marijuana Patient Card Sell Marijuana to Another Arizona Licensed Patient or Caregiver?

The arrest of Gary Ferguson and others by the Gilbert Police Department raises the question of whether an Arizona medical marijuana patient cardholder can sell marijuana to another person who is licensed by the Arizona Department of Health Services as a medical marijuana patient or caregiver.  Several people have been or will be arrested as a result of Mr. Ferguson’s operation of  the Medical Marijuana Advocacy Group where card-holding Arizona medical marijuana patients were able to gather to smoke pot and sell marijuana to other licensed patients.  Mr. Ferguson told a reporter that he believes that Arizona Revised Statutes Section 36-2815 authorizes Arizona licensed patients sell marijuana to other Arizona licensed patients.  For more on this arrest, see “Gilbert police raid of medical-marijuana group raises questions.”

Arizona Revised Statutes Section 36-2815.C states:

“Any cardholder who sells marijuana to a person who is not allowed to possess marijuana for medical purposes under this chapter shall have his registry identification card revoked, and shall be subject to other penalties for the unauthorized sale of marijuana and other applicable offenses.”

Unfortunately for those arrested in the Medical Marijuana Advocacy Group raid, this statute does not say that Arizona medical marijuana patients may sell marijuana to other licensed Arizona medical marijuana patients.  Nor does this statute authorize caregivers to sell marijuana to other caregivers or patients.

The issue of a licensed patient or caregiver supplying marijuana to a third party is addressed in Arizona Revised Statutes Section 36-2811.B, which states:

“A registered qualifying patient or registered designated caregiver is not subject to arrest, prosecution or penalty in any manner, or denial of any right or privilege, including any civil penalty or disciplinary action by a court or occupational or professional licensing board or bureau . . . For offering or providing marijuana to a registered qualifying patient or a registered designated caregiver for the registered qualifying patient’s medical use or to a registered nonprofit medical marijuana dispensary if nothing of value is transferred in return and the person giving the marijuana does not knowingly cause the recipient to possess more than the allowable amount of marijuana.”

This statute is a safe harbor for licensed Arizona medical marijuana patients who supply marijuana to other licensed Arizona medical marijuana patients ONLY IF THE SUPPLIER GETS NOTHING OF VALUE from the receipient.  If the supplier receives any money or any property of value, Arizona’s medical marijuana laws do not protect the supplier from prosecution for violating Arizona state or local marijuana laws.  Nor will the supplier avoid prosecution under federal law because the U.S. Attorney and many of the state U.S. Attorneys including Arizona’s Dennis Burke have said the U.S. will not generally spend U.S. resources prosecuting patients and caregivers who comply with the laws of a state like Arizona that have legalized medical marijuana.  An Arizona licensed medical marijuana patient who sells marijuana to another Arizona licensed patient is not complying with Arizona’s medical marijuana laws and could therefor be prosecuted for violating federal marijuana laws.

By |2014-07-25T06:48:48-07:00June 24th, 2011|Cannabis Clubs, Marijuana Crimes, Stories & Articles|Comments Off on Can a Person Who Holds an Arizona Medical Marijuana Patient Card Sell Marijuana to Another Arizona Licensed Patient or Caregiver?
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Brewer vs. United States: Arizona Sues Asking Federal Court to Rule on Whether Arizona can Implement Proposition 203

On May 27, 2011, Arizona sued the United States and asks the federal court to “declare the respective rights and duties of the Plaintiffs and the Defendants regarding the validity, enforceability, and implementation of the AMMA [Arizona Medical Marijuana Act]” and to “determine whether strict compliance and participation in the AMMA provides a safe harbor from federal prosecution.”  The defendants in the lawsuit are:

  • UNITED STATES OF AMERICA
  • UNITED STATES DEPARTMENT OF JUSTICE
  • ERIC H. HOLDER, JR., Attorney General of the United States of America, in his Official Capacity
  • DENNIS K. BURKE, UnitedStates Attorney for the District of Arizona, in his Official Capacity
  • ARIZONA ASSOCIATION OF DISPENSARY PROFESSIONALS, INC., an Arizona corporation
  • JOSHUA LEVINE
  • PAULA PENNYPACKER
  • DR. NICHOLAS FLORES
  • JANE CHRISTENSEN
  • PAULA POLLOCK
  • SERENITY ARIZONA, INC., an Arizona nonprofit corporation
  • HOLISTIC HEALTH MANAGEMENT, INC., an Arizona nonprofit corporation
  • JEFF SILVA
  • ARIZONA MEDICAL MARIJUANA ASSOCIATION (an unincorporated anonymous group loved by the media)

Why did Arizona name the people and entities as defendants?  I will refer to these people and entities collectively as innocent by standers?  Does the State expect the innocent by standers to hire a lawyer to file an answer and defend the lawsuit on the merits?  Does the State want the innocent by standers to sign a statement consenting to or acknowledging something?  Is the State hoping one or more innocent by standers will not file an answer to the complaint so the State can get a default judgment against one or more innocent by standers?

Read the entire Brewer_vs_United States complaint and the attached exhibits.  The complaint is an excellent summary of developments with respect to states that have legalized medical marijuana and the public positions taken by the U.S. Attorney with respect to enforcement of federal marijuana criminal laws in the 16 states that have legalized medical marijuana.

Read “Arizona U.S. Attorney: Brewer, Horne Twisting Medical Marijuana Memo.”

By |2011-06-05T08:42:27-07:00May 28th, 2011|AZ Marijuana Law Lawsuits, Stories & Articles|Comments Off on Brewer vs. United States: Arizona Sues Asking Federal Court to Rule on Whether Arizona can Implement Proposition 203
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Director of Arizona Department of Health Services Not Worried About Being Charged with Violating Federal Marijuana Criminal Laws

In an April 29, 2011, forum at the Phoenix Country Club sponsored by Valley Partnership, Will Humble, Director of the Arizona Department of Health Services, said that he personally is not worried that he might be prosecuted by the federal government for aidding and abetting the commission of crimes involving federal marijuana criminal laws.  He made the statement in response to a question that asked him to comment on the April 14, 2011, letter from the two Washington state U.S. Attorneys to the Governor of Washington who asked U.S. Attorney General Eric Holder if the U.S. would prosecute Washington state employees who implement Washington’s recently enacted medical marijuana law that provides for the creation of state legal medical marijuana dispensaries.

In an April 13, 2011, letter to the U.S. Attorney General, Washington Governor Christine 0. Gregoire asked:

“It would be very helpful to receive clear guidance on the Department of Justice enforcement position and whether the 2009 Memorandum from Deputy Attorney General Ogden should be read to encompass the activities that would be licensed under this state legislation. Also, it would be helpful if the guidance addressed whether state employees involved in inspecting the premises, auditing the records or collecting fees from the licensed dispensers, producers or processors would be immune from arrest or liability when engaged in the enforcement of this licensing law.”

The next day, Jenny A. Durkan, United States Attorney for the Western District of Washington, and Michael C. Ormsby, United States Attorney for the Eastern District of Washington, sent Governor Gregoire a letter in which they said:

“the Department could consider civil and criminal legal remedies regarding those who set up marijuana growing facilities and dispensaries as they will be doing so in violation of federal law. Others who knowingly facilitate the actions of the licensees, including property owners, landlords, and financiers should also know that their conduct violates federal law. In addition, state employees who conducted activities mandated by the Washington legislative proposals would not be immune from liability under the CSA. Potential actions the Department could consider include injunctive actions to prevent cultivation and distribution of marijuana and other associated violations of the CSA; civil fines; criminal prosecution; and the forfeiture of any property used to facilitate a violation of the CSA”

Mr. Humble said he is concerned about the affect the U.S. Attorney letters and news stories might have on DHS employees involved in implementing Arizona’s medical marijuana laws, especially DHS IT personnel.

Here are my notes from the one hour forum.

  • Phoenix Planning Director Debra Stark gave a list of zoning jurisdictions that require special zoning documents and those that do not.  The following do not require either a use permit, a conditional use permit or a special use permit:  Glendale, Surprise, Buckeye, Goodyear, Avondale, Mesa, Tempe, Fountain Hills, Tucson and Flagstaff.  The following require either a UP, a CUP or a SUP: Peoria, El Mirage, Carefree, Scottsdale, Chandler, Gilbert, Phoenix and Maricopa County.  After the forum I asked her how long it would take for a prospective dispensary to get the comfort letter from the Phoenix zoning department.  She said five days, but the letter would say that it is subject to the applicant obtaining a special use permit before opening for business.
  • Will Humble said that a financial institution can issue the bank comfort letter if the not-for-profit entity or one of its principal officers has $150,000 or more of cash on deposit, a $150,000 letter of credit or gold valued at at least $150,000.
  • When asked who DHS would consider to be the ideal owner of an Arizona medical marijuana dispensary, Will Humble said it is an owner whose primary concern is to do what is in the best interest of the patients.
  • Will Humble made a statement about the duties of the medical director that troubled me.  He said that the medical director has a duty / responsibility to make sure that patients of the dispensary do not abuse marijuana.  The DHS rules prohibit the medical director from having a patient doctor relationship.  How would it be possible for a medical director who is not present at the time of a sale or interaction between dispensary staff and the patient who is abusing marijuana to know: (i) about the abuse, or (ii) to take any action to prevent or help stop the abuse?

See “Washington Legislature Passes New Medical-marijuana Law, Governor Threatens Veto” and “U.S. Attorney Will Prosecute Dispensary Owners, Landlords who Rent to Dispensaries & State Employees Involved in State Medical Marijuana Laws.”

By |2011-05-01T07:19:00-07:00April 30th, 2011|Stories & Articles, Will Humble Speaks|Comments Off on Director of Arizona Department of Health Services Not Worried About Being Charged with Violating Federal Marijuana Criminal Laws
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What Must be In an Arizona Medical Marijuana Dispensary Applicant’s Business Plan

Arizona Department of Health Services rule R9-17-304.D.9 requires that every application for a license to operate an Arizona medical marijuana dispensary contain a business plan.  The rule gives some but not much guidance, as to what the business plan must contain.  The rule states that to apply for a dispensary registration certificate, an entity shall submit to DHS a:

“business plan demonstrating the on-going viability of the dispensary on a not-for-profit basis that includes:

a. A description of and total dollar amount of expenditures already incurred to establish the dispensary or to secure a dispensary registration certificate by the individual or business organization applying for the dispensary registration certificate,

b. A description and total dollar amount of monies or tangible assets received for operating the dispensary from entities other than the individual applying for the dispensary registration certificate or a principal officer or board member associated with the dispensary including the entity’s name and the interest in the dispensary or the benefit the entity obtained,

c. Projected expenditures expected before the dispensary is operational,

d. Projected expenditures after the dispensary is operational, and

e. Projected revenue”

If you need a business plan for your medical marijuana dispensary (Arizona or any other state), I recommend that you hire Robert Kane to prepare it.  He has prepared business plans for hundreds of prospective medical marijuana dispensaries.  Call him at 561-234-6929 or send him an email at [email protected].  Tell him Richard Keyt referred you to get a substantial price discount.

By |2011-04-30T11:53:14-07:00April 24th, 2011|Legal Issues, Stories & Articles|Comments Off on What Must be In an Arizona Medical Marijuana Dispensary Applicant’s Business Plan
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What the Final DHS Rules Require to Be In Dispensary Bylaws

As I have written before, all not-for-profit Arizona medical marijuana dispensaries must have Bylaws and submit the Bylaws to the Arizona Department of Health Services with its application for a dispensary registration certificate.  Both Arizona law (Arizona Revised Statutes Section 36-2806) and the Arizona Department of Health Services rules (R9-17-304(D).8) require the dispensary entity to have Bylaws.  Here is what the DHS rules say must be in the prospective dispensary’s Bylaws:

a. The names and titles of individuals designated as principal officers and board members of the dispensary;

b. Whether the dispensary plans to:

i. Cultivate marijuana;

ii. Acquire marijuana from qualifying patients, designated caregivers, or other dispensaries;

iii. Sell or provide marijuana to other dispensaries;

iv. Transport marijuana;

v. Prepare, sell, or dispense marijuana-infused edible food products;

vi. Prepare, sell, or dispense marijuana-infused non-edible products;

vii. Sell or provide marijuana paraphernalia or other supplies related to the administration of marijuana to qualifying patients and designated caregivers;

viii. Deliver medical marijuana to qualifying patients; or

ix. Provide patient support and related services to qualifying patients;

c. Provisions for the disposition of revenues and receipts to ensure that the dispensary operates on a not-for-profit basis; and

d. Provisions for amending the dispensary’s by-laws

See “Bylaws for Arizona Medical Marijuana Dispensaries,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”

By |2012-05-13T16:21:29-07:00April 21st, 2011|Legal Issues|Comments Off on What the Final DHS Rules Require to Be In Dispensary Bylaws
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Three IEDs in DHS’ Actual Final Rules Detonate & Blow Many Would-Be Arizona Medical Marijuana Dispensaries Away

Let the litigation begin.  The Arizona Department of Health Services had 120 days to create the rules to implement Arizona’s medical marijuana law.  During that time DHS produced FOUR versions of its rules, but it saved its three  improvised explosive devices until the 120th day.  When the smoke clears from the DHS final rule bombs and allows would-be dispensaries to check their damage, many will find that they are too crippled to continue the race to the dispensary license finish line.

Today, the DHS submitted its final rules to the Arizona Secretary of State, but not without making three new rules that will prevent many would-be dispensaries from actually filing an application for a dispensary license.  Here’s what DHS did:

The Zoning Comfort Letter Bomb

The first bomb is contained in new rule R9-17-304(D)(6), which reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions

DHS issued the following FAQ on this issue:

“Do I need a certificate of occupancy from my city in order to apply? No, applicants do not need to submit a certificate of occupancy in the initial application. They must attest to meeting zoning requirements and provide documentation from the local government saying either there are no local zoning requirements or the location meets the requirements. However, if chosen as the dispensary for a specific CHAA, a copy of a certificate of occupancy or other documentation issued by the local jurisdiction will be necessary when requesting approval to operate the dispensary.”

The legal significance of this new rule is that the decision on which entity will get a dispensary license will be determined at the city or local zoning level.   The rule does not give any guidance on what it means to be “in compliance with any local zoning restrictions.”  Each local zoning authority will decide the conditions on which it will give its zoning comfort letter.  The zoning authorities are  able to give one comfort letter per CHAA if they so desire.  Any would-be dispensary that fails to get a zoning comfort letter by June 30, 2011, is precluded from filing an application to get a dispensary license.   Each local zoning authority is now free to determine who will get its zoning comfort letter.  This new rule is an abrogation of DHS’ duty to select the qualified dispensaries and a shameful dereliction of its duty.

For a an actual example of how the cities are now able to select who will own a medical marijuana dispensary within their jurisdictions, see “Fountain Hills Faces Medical-marijuana Challenge.”  Fountain Hills has only accepted one zoning application so no other would-be dispensaries will be able to operate in Fountain Hills.  Result:  Fountain Hills will determine who owns the dispensary in Fountain Hills, not DHS.

The Landlord Comfort Letter Bomb

New rule R9-17-304(D)(7 ) reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation of:

a. Ownership of the physical address of the proposed dispensary, or

b. Permission from the owner of the physical address of the proposed dispensary for the entity applying for a dispensary registration certificate to operate a dispensary at the physical address;

DHS went backwards.  The second draft of the rules created a nightmarish situation for prospective dispensaries because a large number of prospective tenants were all trying to enter into leases for a very small number of possible sites.  The law of supply and demand made it impossible for most prospective dispensaries to find a properly zoned site and tie it up with a lease.  This caused rents to soar way above market because the laws of economics applies to medical marijuana dispensaries and available rental space like it does to every other commodity.  It was because of this hellish situation that I wrote an article on February 8, 2011, called “Prospective Dispensary’s Single Most Important Task Before May 30, 2011.”

Once again would be dispensaries will be engaged in a mad scramble to get a comfort letter from a landlord.  Many will not be successful or will be successful only at great expense in time and money.  Most landlords will demand real money to get a letter.  Few will give away comfort letters.  A commercial real estate broker who has been successful in getting leases for would-be dispensaries told me today that some landlords are demanding $5,000 to give a tenant a comfort letter for the purpose of getting local zoning approval.  He also said that he has seen rents for dispensaries as high as $27 a foot, which is more than the going rate for class A office space in the Camelback corridor.

I predict that no prudent landlord will simply issue a comfort letter that satisfies the vague language in the new rule.  I am a real estate lawyer and if I were advising a landlord and asked to draft a comfort letter that said the landlord will give the dispensary permission to lease the premises for a medical marijuana dispensary, I would put in language the makes it clear that the letter does not create a legal obligation on the part of the landlord to lease the premises to the dispensary.  Without actually having a signed lease with the dispensary, every landlord should be concerned that a comfort letter does not obligate the landlord to lease the premises.  I would also advise my landlord client to charge a substantial fee to get a comfort letter.

Query:  If the landlords issue comfort letters that clearly state they are not binding on the landlord, then what is the purpose of requiring the prospective dispensaries to get the comfort letter?  Maybe I’ve missed something, but the only reason I can see for this new requirement is to reduce the number of applicants for dispensary licenses and increase the applicants’ costs of doing business.  Landlords once again have the upper hand which means the dispensaries will pay higher rents and the patients will pay more for their medicine.

See “Arizona Medical-marijuana Dispensaries Face Property Hurdles.”

The Bank Comfort Letter Bomb

Last, but not least, are new rules R9-17-302.A.5 and R9-17-304.D.1.f.ii.  This last minute bomb was triggered by a question that should never have been asked of Will Humble last week at the April 5, 2011, forum in Phoenix.  The first final rules issued by DHS on March 28, 2011, added a new requirement that said the dispensary application had to include:

“Documentation, from an in-state financial institution or an out-of-state financial institution, demonstrating that the dispensary has at least $150,000 available to begin operating was submitted with the dispensary registration certificate application.”

Unfortunately for many would-be dispensaries, a man asked Will Humble if it would be ok to deposit money in the bank, get the letter from the bank and immediately take the money out of the bank.  Mr. Humble was visibly stunned by the question as he visualized a hole a mile wide in his capital requirement plan.  Because of that question, RR9-17-304.D.1.f.ii requires the applicant for a dispensary license to submit “documentation that:

(1) Is from an in-state financial institution or an out-of-state financial institution;

(2) Is dated within 30 days before the date the dispensary registration certificate application was submitted; and

(3) Demonstrates that the entity applying for the dispensary registration certificate or a principal officer of the entity has at least $150,000 under the control of the entity or principal officer to begin operating the dispensary and has had control of the $150,000 for at least 30 days before the date the dispensary registration certificate application was submitted“

In-state financial institution” means the same as in A.R.S. § 6-101.  Out-of-state financial institution” means the same as in A.R.S. § 6-101.

A client asked me the if Charles Schwab or Merrill Lynch are “out-of-state financial institutions?  A.R.S. § 6-101 states that “Out-of-state financial institution means a state or federal bank, savings bank, savings and loan association or holding company with its home office in a state other than this state.”  I don’t believe these types of institutions are banks or S & Ls, but could they be “holding companies?”  I have no clue what the term “holding company” means.  It appears, however, that a person who has sufficient assets in Merrill Lynch or a similar financial institution could not use that type of entity as an out of state financial institution for the purposes of this new rule.

This rule is outrageous, unreasonable, unfair and just plain wrong.  Whether or not the reasoning behind the rule is good is something we could debate, but that is not my problem with the rule.  I despise this rule because it is much too late in the process to issue the rule and simply not enough time for many prospective dispensaries to be able to comply with this new rule issued on the last day of the 120 days DHS had to finalize its rules.

The last day applicants may submit applications for dispensary registration certificates is June 30, 2011.

Note carefully requirement number 3.  It could be a nuclear bomb!  Either the entity applicant or A PRINCIPAL OFFICER OF THE ENTITY (whichever one actually has the funds) must show that it/he/she has had control of the $150,000 for at least 30 days before the dispensary application is submitted to DHS.

Bottom line:  DHS may have just opened the litigation flood gates and may have cost the State of Arizona mega-millions in damages for promulgating unreasonable rules that have no basis in Proposition 203.

What do you think?  What am I missing?  Am I wrong.  Add your comments below.

By |2017-02-11T17:21:23-07:00April 14th, 2011|Banking Issues, Legal Issues|1 Comment
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Words of Wisdom from Will Humble on April 5, 2011

I attended the forum sponsored by the Arizona Medical Marijuana Association and the Marijuana Policy Project in Phoenix on April 5, 2011.  Will Humble spoke for about 30 minutes then answered questions for about 30 minutes.  Here are my notes from the Director’s presentation:

  • The final rules published by the Arizona Department of Health Services on March 28, 2011, are not the actual final rules.  The actual final rules will be the rules that DHS submits to the Arizona Secretary of State on April 14, 2011.  DHS intends to make some changes to the March 28, 2011, version of the rules.
  • The final rules will probably require that dispensary license applicants obtain a “comfort” letter from the landlord of the site where the dispensary’s address listed on the application.  Mr. Humble did not use the phrase “comfort” letter.  That is my characterization of what he said, which was the applicant must attach to the application something in writing from the owner of the site where the dispensary will operate that the owner is ok with the applicant using the owner’s address on the application.
  • Rather than merely requiring the applicant to affirm that the zoning of the prospective dispensary site is “groovy,” the applicant will be required to get something in writing from the city that the proposed site is in accordance with city zoning, i.e., it is properly zoned and not too close to a prohibited structure or area.
  • The March 28, 2011, rules will be modified, but DHS does not intend to make substantive changes.  I submit that the two preceding items, especially the second are substantive changes to the rules.
  • Patient and dispensary applications will be submitted online.  DHS’ goal is to reduce DHS costs.
  • There is no advantage in submitting a dispensary application early.
  • DHS will review dispensary license applications in July and August.  He predicted that there will more applications for licenses in highly populated CHAAs and fewer applications in low populated CHAAs.
  • A dispensary in Ajo that is in a low populated CHAA could have a big grow operation and sell marijuana to other dispensaries.
  • After a dispensary has been operating for three years, it can move any where in the state subject to proper zoning.
  • Dispensary licenses in CHAAs that are located in tribal land will be issued in 2012.
  • A dispensary can move any where within its approved CHAA during its first three years, subject to zoning.
  • If there are multiple dispensary license applicants who meet all five levels of review in a CHAA, the dispensary registration certificate will be awarded by a lottery conducted by the Arizona Lottery Commission.
  • Level five review consists of the applicants providing a letter from a bank that says that the applicant has $150,000 of available capital.  DHS doesn’t care if the available capital is cash in the bank or a line or credit or the ability to borrow $150,000, but it must say that the applicant (not an owner, officer or board member) has the money.  A questioner asked if it would be ok to remove the cash from the bank that day after the bank issued the letter.  Mr. Humble was stumped.  He had not thought of that and the March 28, 2011, version of the rules would not prohibit the removal.
  • Concerning the quality of the dispensary applications:  DHS will take into consideration and look to see if the required documents are submitted and appear to be comprehensive, but will not evaluate them for quality.  Not sure what he meant.
  • The security and inventory control policies and procedures must show that the applicant will be able to prevent the diversion of marijuana from its intended and state lawful use.
  • When asked if the applicant for a dispensary license will be notified if its application is defective and be given a chance to correct any defects, Mr. Humble said he doesn’t know yet.  He said that if the total number of applications for a dispensary license is relatively low, DHS will probably notice applicants of defects and give them a cure period, but will not do so if there are too many applications.  He did not give any indication of when the number of applications would be too many to give defect notices and cure periods.
  • He mentioned that the business plan should include references to the Arizona medical marijuana statutes and the DHS rules where appropriate.
  • As DHS receives applications for dispensary licenses, it will post the location on its CHAA maps.  He did not say what other information would be made available to the public.
  • Subject to applicable zoning requirements, a dispensary agent of a dispensary can deliver marijuana to its patients anywhere in Arizona as long as the agent remains with the marijuana at all times and complies with the DHS delivery rules.
  • It is ok to have multiple dispensary applications for the same site.
  • If a person or group of people who own one or more entities that apply for multiple dispensary licenses in multiple CHAAs were to win more thann one license, DHS expects and demands that a dispensary be opened in each CHAA.  Not sure how DHS would enforce this.  Would it try to terminate all of the licenses if the group failed to open or operate one of the dispensaries?
  • A medical director of a dispensary cannot write certifications for any patient.  Another doctor in the medical director’s medical group can write certifications, but the medical director must disclose that fact to DHS.
  • I asked Mr. Humble this question:  Can a for profit corporation get a dispensary license if it has one or more shareholders who own less than 20 percent of the shares and who are not officers or directors of the corporation if these shareholders do not meet the eligibility criteria including they are not residents of Arizona.  He said yes.

Caution:  What Mr. Humble says is not the official position of the DHS and may or may  not actually be implemented by DHS.  His comments are enlightening, but it is the official acts of DHS such as the rules that have legal significance.

By |2011-04-12T08:50:31-07:00April 12th, 2011|DHS Rules, Will Humble Speaks|Comments Off on Words of Wisdom from Will Humble on April 5, 2011
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Update on the Bylaws Update

Before the “final” Arizona Department of Health Services rules issued on March 28, 2011, I prepared Bylaws for Arizona limited liability companies, for profit corporations and nonprofit corporations that intend to apply for a license to own and operate an Arizona medical marijuana dispensary.  I have not been able to “finalized” my Bylaws because I have been waiting for the “final” version of the DHS rules to be set in concrete.  I want to modify my Bylaws only one more time so I am waiting patently for DHS to “finalize” the rules.

You will notice that I have put “final” and “finalize” in quotes.  I did that because despite DHS’ statements that the March 28, 2011, version of the rules was the final version, the rules have not yet been “finalized.”  I attended a forum last Tuesday at which DHS Director Will Humble announced two important facts about the March 28, 2011, version of the rules.

  • The rules will not be final until DHS delivers them to the Arizona Secretary of State on or before April 14, 2011.
  • DHS intends to make changes to the March 28, 2011, version of the rules before submitting the rules to the Arizona Secretary of State.

Note to KEYTLaw Dispensary Clients & People Who Purchased Dispensary Bylaws Online in Our Store

My goal is to review the final final version of the rules delivered to the Arizona Secretary of State this coming weekend and modify the Bylaws as necessary to comply with the final rules.  You should anticipate that my “final” version of the Bylaws will be available beginning on April 18, 2011.

If you are an owner of a not for profit LLC or corporation that I formed to own and operate an Arizona medical marijuana dispensary, you should have gotten an email message from me that I sent to you three days ago.  In that message, I asked that the contact for your company send the following information to me so I can prepare the Bylaws for your company:

  • Names of all members of the board of directors of the company
  • Name of the President (must be one of the managers if the company is an LLC – can only have one President)
  • Name of the Secretary (can be the same as the President)
  • Name(s) of any Vice Presidents (optional officers)
  • Name of the Treasurer (optional officer)

If I formed your company, make sure that your contact person sends an email message to me asap with the above information.

See “All Arizona Medical Marijuana Dispensaries Must Have Bylaws.”

By |2012-05-13T16:21:55-07:00April 10th, 2011|DHS Rules, Legal Issues, Will Humble Speaks|Comments Off on Update on the Bylaws Update
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Arizona Department of Health Services Publishes the Final Medical Marijuana Rules

The Arizona Department of Health Services published its final medical marijuana rules (92 pages).

Here are my first impressions of the provisions that apply to would-be dispensaries:

  • DHS took my recommendation and added the owners of entities to its definition of board members who must satisfy the eligibility requirements to obtain a dispensary license.  R9-17-301.B adds the owners of limited liability companies, partnerships and members of a cooperative to the list of board members.  The section starts, “in addition to the individual or individuals identified in the dispensary’s by-laws as board members of the dispensary the following individuals are considered board members: If a corporation is applying for a dispensary registration certificate, the officers of the corporation”  Wow!  This subsection is astonishing because it shows how totally unaware of the business world DHS is.  First, the Bylaws do not normally name the members of the board of directors.  Second, the shareholders of the corporation are not considered principal officers or directors – only the officers of the corporation are deemed to be board members!!!!!!!!!!!!!!!!!!!!!  DHS open the door a mile wide.  People with excluded felonies and non-Arizona residents  apparently can be shareholders of a for profit corporation that seeks a dispensary license.
  • R9-17-302.A states, “If more than one dispensary registration certificate application. . . is received for a single CHAA, the Department shall review the dispensary registration certificate applications for the CHAA to determine if:

1.  Each applicant, principal officer, or board member associated with a dispensary registration certificate application has submitted Arizona state income tax returns for the previous three years with the dispensary registration certificate application;

2. Each applicant, principal officer, or board member associated with a dispensary registration certificate application:

a. Is current on paying court-ordered child support;

b. Is not delinquent paying taxes, interest, or penalties due to a governmental agency;

c. Does not have an unpaid judgment due to a governmental agency; and

d. Is not in default on a government-issued student loan;

3. Each individual who has 20% or more interest in the dispensary is the applicant or a principal officer or board member of the dispensary;

4. Each applicant, principal officer, or board member has never filed for personal or corporate bankruptcy; and

5. Documentation, from an in-state financial institution or an out-of-state financial institution, demonstrating that the dispensary has at least $150,000 available to begin operating was submitted with the dispensary registration certificate application.

Holy money bags Batman!  I didn’t see that one coming.  I guess the big money players won.  Mom & pops lose.  This new and outrageous rule apparently means that applicants for a dispensary license must have at least $150,000 in a bank account to get in the lottery.

What’s with the bankruptcy exclusion?  Many good people have been forced to file for bankruptcy.  There is no relationship to bankruptcy and being involved with a medical marijuana dispensary.  It’s just a DHS excuse to limit the possible pool of owners for what reason I cannot imagine.

R9-17-302.A.3 seems to require that every person who owns 20% or more of an entity (including a for profit corporation) that applies for a dispensary license must be a principal officer or a board member.

  • There are major changes in the way dispensary registration certificates will be awarded.  The lottery may or may not be used, depending on the actual to be determined facts associated with each CHAA.  DHS may award a dispensary registration certificate based on if there are no qualified applicants or multiple applicants at each of the five levels set forth in R9-17-302.A.  Think of R9-17-302.A as containing five review levels.  If only one qualified applicant exists at the A(1) level, that applicant gets a dispensary registration certificate.  If there are multiple qualified applicants at a R9-17-302.A level, they move to the next round/level.  For example, if there are multiple qualified applicants that meet the requirements of A(1), A(2) and A(3), they move to the A(4) level and if only one qualified applicant meets the A(4) level, that applicant gets the dispensary registration certificate.  If there are multiple qualified applicants that satisfy A(1), A(2), A(3), A(4) and A(5) then “the Department shall randomly select one of the dispensary registration applications” to get the dispensary registration certificate.  So, the lottery lives!
  • Looks like there will be a dispensary in all 124 of the 126 CHAAs.  If there are no qualified applicants for a dispensary registration certificate in a CHAA, DHS will select an applicant from another CHAA and award the dispensary registration certificate to that “lucky” or ‘unlucky” applicant.  R9-17-302.B.3 states, “If the Department determines that none of the reviewed dispensary registration certificate applications meets the criteria in subsection (A)(1), the Department shall randomly select one dispensary certificate registration application and allocate a dispensary registration certificate to that applicant.”
  • Multiple dispensary applications are allowed with one catch.  R9-17-302.C states,  “If an applicant submits more than one dispensary registration certificate application, the documentation in subsection (A)(5) needs to demonstrate there is at least $150,000 available for each dispensary registration certificate application submitted.”
  • R9-17-303.C states, “A city or town that contains more than one CHAA may request the reassignment of a dispensary registration certificate allocation from one CHAA to another CHAA under the jurisdiction of the city or town by submitting a written request to the Department by June 1, 2011”
  • DHS pushed back the start date for accepting applications for a dispensary registration certificate to June 1, 2011.  R9-17-303.D states, “The Department shall accept dispensary registration certificate applications for 30 calendar days beginning June 1, 2011.”
  • R9-17-304.A states, “An individual shall not be an applicant, principal officer, or board member on:

1. More than one dispensary registration certificate application for a location in a single CHAA, or

2. More than five dispensary registration certificate applications for locations in different CHAAs”

DHS sanctions multiple applications for dispensaries so long as the applications are in different CHAAs, no more than five applications are submitted and the applicant can get a letter from a bank that it has at least $150,000 for each dispensary application.  Big money wins again!  Shame on DHS for misleading people who don’t have $150,000 cash in the bank into believing for months that they could possibly obtain an Arizona medical marijuana dispensary license.

Note:  DHS appears to have taken my suggestion and that of Alan Sobol to clarify that dispensary applicants do not have to get final city or county zoning approval to be able to file an application for a dispensary registration certificate.  Rule R9-17-304.D.5 combined with R9-17-305.A give dispensary applicants a two stage zoning process.  R9-17-305.A requires final zoning approval only after the would-be dispensary obtains a dispensary registration certificate.  Unfortunately DHS took my suggestion and will allow the winner of a dispensary registration certificate to change its dispensary site to a different location within its CHAA if  final zoning is denied or some other reason exists to move to a different location arises.  Getting final zoning approval is a good thing to do before getting a dispensary registration certificate, but not a requirement to filing an application as some people said.

  • DHS actually set minimum requirements for a business plan.  R9-17-304.D.7 states that the application for a dispensary registration certificate must contain “A business plan demonstrating the on-going viability of the dispensary on a not-for-profit basis that includes:

a. A description of and total dollar amount of expenditures already incurred to establish the dispensary or to secure a dispensary registration certificate by the individual or business organization applying for the dispensary registration certificate,

b. A description and total dollar amount of monies or tangible assets received for operating the dispensary from entities other than the individual applying for the dispensary registration certificate or a principal officer or board member associated with the dispensary including the entity’s name and the interest in the dispensary or the benefit the entity obtained,

c. Projected expenditures expected before the dispensary is operational,

d. Projected expenditures after the dispensary is operational, and

e. Projected revenue;”

  • DHS apparently clarified that applicants for a dispensary registration certificate do not need to jump through all the city and county zoning hoops just t be eligible to apply for a dispensary license.  R9-17-305.A states, “To apply for approval to operate a dispensary, a person holding a dispensary registration certificate shall submit to the Department, at least 60 calendar days before the expiration of the dispensary registration certificate, the following:

2. A copy of documentation issued by the local jurisdiction to the dispensary authorizing occupancy of the building as a dispensary and, if applicable, as the dispensary’s cultivation site, such as a certificate of occupancy, a special use permit, or a conditional use permit;

3. A sworn statement signed and dated by the individual or individuals in R9-17-301 certifying that the dispensary is in compliance with local zoning restrictions”

  • Finally, we get some guidance on what it means for a dispensary to operate on a not-for-profit basis.  R9-17-310.A states, “A dispensary shall:

13. Not lend any part of the dispensary’s income or property without receiving adequate security and a reasonable rate of interest;

14. Not purchase property for more than adequate consideration in money or cash equivalent;

15. Not pay compensation for salaries or other compensation for personal services that is in excess of a reasonable allowance;

16. Not sell any part of the dispensary’s property or equipment for less than adequate consideration in money or cash equivalent; and

17. Not engage in any other transaction that results in a substantial diversion of the dispensary’s income or property.”

  • R9-17-316.B states, “A dispensary shall only acquire marijuana from:

1. The dispensary’s cultivation site,

2. Another dispensary or another dispensary’s cultivation site,

3 A qualifying patient authorized by the Department to cultivate marijuana, or

4 A designated caregiver authorized by the Department to cultivate marijuana.”

 

By |2011-04-03T22:43:13-07:00March 28th, 2011|DHS Rules, Video|Comments Off on Arizona Department of Health Services Publishes the Final Medical Marijuana Rules
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KEYTLaw Medical Marijuana Dispensary Workshop on Saturday March 26, 2011

This Saturday at 9 am I am holding a free workshop for my Arizona medical marijuana dispensary owners to swap dispensary war stories and learn from two guest speakers about dispensary insurance needs and why dispensaries need an architect. Here are the details:

Time:  9 am – 11 am
Date:  Saturday, March 26
Where:  8765 W. Kelton Ln, Bldg A-1, Ste 102, Peoria, AZ.  Located on the SW corner of 87th Ave., & Kelton Lane (1 block south of Bell Road, just west of the 101 freeway).

Agenda:

  • 9:00 opening remarks
  • 9:15 Doug Banfelder, Premier Southwest Insurance Group on dispensary insurance needs
  • 10:00 Mike Wakefield of Wakefield Architects.  Mike will discuss why dispensaries will need an architect for things such as a floor plan and site plan.  He will also discuss use permit requirements.
  • 10:30 open forum – would be dispensary owners are invited to share information
By |2015-04-06T18:50:21-07:00March 24th, 2011|Stories & Articles|Comments Off on KEYTLaw Medical Marijuana Dispensary Workshop on Saturday March 26, 2011
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Would Be Dispensaries Struggle to Lease a Dispensary Site

My DHS Wish

I continue to talk to many people who are having a very hard time finding a location to operate their Arizona medical marijuana dispensary.   The Arizona Department of Health Services has inadvertently created a nightmarish situation for would-be dispensary owners who do not own the real property on which to operate a dispensary.  The DHS rules coupled with very restrictive city zoning ordinances and many landlords who simply do not want to lease to a medical marijuana dispensary result in many more prospective dispensary tenants than available properly zoned dispensary sites.  A lot of people have told me that they believe that one or more big money outfits are going around Arizona tying up potential sites with the goal of reducing the number of prospective dispensaries that apply for a dispensary license.

A large number of nonprofit entities are all fighting to tie up a small number of properly zoned and available sites throughout Arizona.  This means that there will not be very many dispensary applications filed by the application deadline.  It is a supply and demand problem.  The demand among would-be dispensaries is high and the supply of properly zoned sites with willing landlords is low.  Econ 101 teaches that when demand exceeds supply, the cost of the item (rent) goes up.  Higher rents mean higher prices passed on to patients.  One of DHS’ goals should be to keep the patients cost of medical marijuana down, not be the cause of patients paying higher prices to purchase their medicine.

The current rules and restrictive city zoning ordinances create a bizzaro world where nonprofits that do not have a license to operate an Arizona medical marijuana dispensary are entering into leases and applying for zoning with cities and they will never get a dispensary license.  For many would be dispensaries it is a total waste of time and money, not to mention a waste of the cash-strapped cities’ time and money.

DHS should clarify in the final version of the rules that would be dispensaries need only to affirm on their applications for a dispensary license that their dispensary and grow locations comply with applicable zoning ordinances without the need to actually apply for or receive a city use permit.  The rules should also allow the winners of a license to change the location of their dispensaries and grow facilities after obtaining a dispensary registration certificate, but before obtaining the final dispensary license.  This would allow a dispensary to change locations after obtaining a dispensary registration certificate if the city denies the zoning use permit or any other problem arises with the site location stated in the initial dispensary application.

DHS:  Please amend the rules to solve this terrible problem that will reduce the number of actual dispensaries, increase the number of patients who grow their own and cause higher rents to be passed on to patients.

See “Phoenix Medical Marijuana Locations Reflect Restrictive Zoning.”

By |2011-03-23T07:43:30-07:00March 22nd, 2011|DHS Rules, Legal Issues, Real Estate Issues, Zoning|Comments Off on Would Be Dispensaries Struggle to Lease a Dispensary Site
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IRS is in the Early Stages of a War to Kill Medical Marijuana Dispensaries

Question:  Does a medical marijuana dispensary that is legal under state law have anything to fear from the Internal Revenue Service?

Answer:  Yes.  In 2007 the United States Tax Court issued its opinion in the case of Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue.  The issue in this case was what business expenses could a California medical marijuana dispensary deduct on its federal income tax return in light of Internal Revenue Code Section 280E, which states:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

In the CHAMPS case, the IRS conceded that the taxpayer could deduct its cost of goods sold, which included $575,317 for marijuana.  Based on news reports about recent IRS audits of big California medical marijuana collectives, it appears that the IRS wants to revisit Section 280E and how it applies to medical marijuana dispensaries.

Warning to All Would-Be and Existing Medical Marijuana Dispensaries about Federal Income Taxes

The IRS is auditing a number of high dollar revenue medical marijuana dispensaries in California.  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.”  I believe that the ultimate goal of the IRS is to change the result in the CHAMPS case, which will have the practical affect of putting almost all state legal medical marijuana dispensaries out of business.  If a dispensary spends $1,000,000 to grow its marijuana in 2011 and none of that expense is deductible because of Section 280E, then the dispensary will pay federal income taxes of $340,000 that it would not pay if the expense were deductible.  This means it actually will cost the dispensary $1,340,000 to grow $1,000,000 of marijuana.

I do not know why the IRS conceded in CHAMPS that the taxpayer could deduct the cost of goods sold.  COGS was the taxpayer’s biggest expense.  I believe the IRS regrets conceding in CHAMPS that the COGS was deductible.  I predict the IRS  will disallow the  COGS of the medical marijuana dispensaries it audits.  I believe the IRS wants to litigate this issue in federal district court rather than in Tax Court with the ultimate goal of having the 9th Circuit Court of Appeals rule that COGS is not deductible by a state legal medical marijuana dispensary.  If the IRS can get one or more appellate courts to agree that the COGS is not deductible, the practical result may be to kill the medical marijuana industry in every state that has legalized it.

Tax Court vs. Federal District Court & Circuit Courts of Appeal

The CHAMPS case was a U.S. Tax Court case that had a good result for the medical marijuana dispensaries in states that have legalized the growing and sale of medical marijuana.  Neither federal district courts nor Circuit Courts of Appeal are required to follow the decisions of the Tax Court.  That is why the IRS wants to relitigate Section 280E in the federal district courts and then the appropriate Circuit Court of Appeals.   The IRS wants to reverse the CHAMPS case by winning at the Circuit Court of Appeals level.

When the IRS conducts an audit and demands more taxes from a taxpayer, the taxpayer who wants to dispute the results of the audit has two choices:

  1. Pay the entire amount of taxes in dispute and ask the U.S. Tax Court to determine how much additional taxes, if any, the taxpayer owes, or
  2. Pay none or less than all of the amount of taxes demanded by the IRS and ask the U.S. district court to determine how much additional taxes, if any, the taxpayer owes.

Tax court decisions cannot be appealed.  Federal district court decisions can be appealed by the losing party to the appropriate Circuit Court of Appeals, which is the 9th Circuit for California and Arizona. district courts.   Any legal medical  marijuana dispensary that is assessed additional taxes by the IRS will want to pay the additional taxes and have the Tax Court rule on the dispute.  The practical problem with this tactic, however, is that most dispensary taxpayers will not have the cash to pay the amount of taxes in dispute and will be forced to litigate in the federal district court.

The choice of venue to litigate the dispute is significant.  Dispensaries will want to pay the tax and go to the Tax Court where they expect the Court to apply the holdings of the CHAMPS case.  Clearly the IRS does not want these medical marijuana dispensary Section 280E cases to go to the Tax Court where the CHAMPS case is bad precedent for the IRS.  What the IRS is doing is going after dispensaries that have high income and expenses so that when it demands more taxes, the dispensaries most likely will not have the money to pay the amount in dispute and must then go to the U.S. district court.  Because the amount of tax dollars in dispute will be so big, the loser in the district court will appeal to the 9th Circuit Court of Appeals where the IRS hopes it will get a favorable Section 280E ruling that will effectively allow it to tax legal medical marijuana dispensaries out of existence.

The Marin Alliance for Medical Marijuana is being audited by the IRS.  When asked how much the IRS is demanding in back federal income taxes, Lynnette Shaw, the owner of this dispensary, would not disclose the amount, but she said, “It’s a staggering sum, millions and millions.”  I’m guessing this dispensary does not have a few spare millions of dollars lying around to pay the IRS so it can litigate the dispute in tax court.

Related Stories:

Disclaimer

Although I have a masters degree in income tax law from New York University Law School, I am  no longer a practicing tax lawyer.  I recommend that every dispensary hire a good  experienced tax CPA or tax lawyer to advise the dispensary on the federal and state income tax issues arising from the operation of a medical marijuana dispensary.

Circular 230 Notice:  Pursuant to recently-enacted U.S. Treasury Department regulations, I am required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including websites linked to, is not intended or written to be used, and  may not be used, for the purpose of  (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

By |2015-04-06T18:50:21-07:00March 19th, 2011|Federal Dispensary Attacks, Questions People Ask, Tax Issues|2 Comments
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Alan Sobol Adds the Rose Law Group to His List that Includes DHS, MPP & AzMMA

Alan Sobol’s latest letter to Arizona Department of Health Services Director Will Humble is dated March 14, 2011, and it contains some explosive allegations.  In the letter Mr. Sobol complains about the zoning nightmare created by DHS rules and the cities of Arizona.  He correctly claims that it is the cities of Arizona who are effectively making the decision on who will ultimately get a dispensary license rather than DHS. Here are some choice statements from Mr. Sobol’s letter:

“Although the AZDHS rules are ambiguous and do not specifically require Zoning approval at the first stage of the application process, nevertheless, the Rose Law group has been aggressively pursuing Zoning Approval for their clients. Do they know something that nobody else does? Is Mr. Humble’s final rules going to interpret the current ambiguous rules to mean that you do indeed need ZONING APPROVAL? It is hard to imagine that a State Agency could not have done a better job promulgating their rules, if that was truly their intention.”

“We hereby demand that Mr. Humble immediately clarify his position regarding Zoning Approval with respect to the initial Application process; Is Zoning Approval a requirement or NOT? If zoning approval is a requirement we further demand that the Health Department extend the time for applicants to submit their Dispensary applications. The extended time should be sufficient for all applicants to seek and obtain local Zoning Approval, in any event no less than 60 additional days.”

“we adamantly oppose the requirement that Applicants obtain Zoning approval prior to submission of the initial application. If the Health department requires such zoning approval they are in fact deferring their authority under Title 36 to select the Dispensary licensees to local zoning boards. Under this scenario the Health Department could only consider applicants who were approved by local zoning boards, precluding all others.”

I agree with each of the three statements made above.

Rule R9-17-303.B.5 says the application for a dispensary license must be accompanied by:

“A sworn statement signed and dated by the individual or individuals in R9-17-301 certifying that the dispensary is in compliance with local zoning restrictions“

Unfortunately the zoning rules do not explain what it means for “the dispensary is in compliance with local zoning restrictions.” There are two schools of thought on the meaning:

  1. The applicant can make the zoning affirmation if the dispensary site is properly zoned and not too close to a prohibited structure or area.
  2. The applicant can make the zoning affirmation if the application has filed the necessary paperwork with the city and obtained whatever magical city zoning paperwork is required to ultimately operate a medical marijuana dispensary at the site such as a use permit, a variance or a note from the mayor’s mommy saying she really really likes one of the owners of the applicant (I made up the last item).

Ryan Hurley, a zoning attorney with the Rose Law Group was a speaker at a March 3, 2011, seminar sponsored by the State Bar of Arizona.  Ryan said he thought Rule R9-17-303.B.5 meant choice #2.  After the seminar I asked Tom Salow of the DHS if he agreed with Ryan Hurley about the zoning affirmation and he said no – he interpreted the rule to mean choice #1.  Unfortunately it is no legal significance what either Ryan Hurley or Tom Salow think the rule means.  What is important is WHAT DOES THIS RULE ACTUALLY MEAN?  See “Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?“

DHS needs to clairfy the meaning of the rule.  I hope that the third and hopefully final draft of the rules due March 28, 2011, will clarify this point and make it clear that the applicant need only affirm that its site is properly zoned and not too close to a prohibited structure or area.  It is just stupid and a waste of everybody’s resources for multiple applicants for the one license within a CHAA to go through the actual zoning process and get city zoning approval before the applicant wins the lottery.

Mr. Sobol makes a valid point that the current chaos created by the DHS rules, the CHAAs and local zoning is in effect allowing the zoning authorities to determine who can apply for a license for an Arizona medical marijuana dispensary.  The cities are the gate keepers who decide who gets a site and who doesn’t.  If the rules mean that an applicant for a dispensary license must get city zoning approval before being able to affirm that the site zoning is groovy then the cities are, in fact, selecting which would-be dispensaries will get a dispensary license within their jurisdictions.  This is contrary to Arizona’s medical marijuana laws, which require that DHS determine who gets a dispensary license.

I suggest all would-be dispensaries and their owners to send a letter to Arizona Department of Health Services Director Will Humble and ask him to change the rules to clarify that the affirmation of zoning means only that the site is properly zoned and not too close to a prohibited structure or area.  Send your letter to Will Humble, Director, Arizona Department of Health Services, 150 N. 18th Avenue, Phoenix, AZ 85007.

By |2014-01-05T10:02:10-07:00March 14th, 2011|Legal Issues, Stories & Articles, Zoning|Comments Off on Alan Sobol Adds the Rose Law Group to His List that Includes DHS, MPP & AzMMA
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Feds Warnings to Oakland & Its Plan to Allow Large Scale Growing of Pot May Affect All Prospective Arizona Medical Marijuana Dispensary Owners

The New York Times had a story on March 2, 2011, entitled “Oakland’s Plan to Cash in on Marijuana Farms Hits Federal Roadblock,” which everybody who is contemplating becoming an owner in an Arizona medical marijuana dispensary should read.  The story said:

“an exchange of letters between the city attorney and federal law enforcement officials has made it exceedingly clear that Washington will not tolerate plans for the large-scale marijuana farms the City Council approved last July. . . . just weeks before the city was set to issue the permits, the Council voted to stall the plan after the city’s attorney, John Russo, and a county district attorney warned the Council that the marijuana cultivation ordinance thwarted state law and that city officials could be held criminally liable.

On Jan. 14, Mr. Russo wrote a letter to the United States Department of Justice seeking guidance on the city’s legal standing. In a response, Melinda Haag, United States attorney for the Northern District of California, warned that ‘individuals who elect to operate ‘industrial cannabis cultivation and manufacturing facilities’ will be doing so in violation of federal law.’ The letter went on to say that the Justice Department was ‘carefully considering civil and criminal legal remedies regarding those who seek to set up industrial marijuana growing warehouses‘.”

If you are considering becoming an owner of a medical marijuana dispensary in Arizona, you must read and consider U.S. Attorney for the Northern District of California Melinda Haag’s letter of February 1, 2011, to John A. Russo, the then Oakland, California, City Attorney.  Here are some pertinent quotes that every dispensary and grower of any quantity, but especially large quantities of marijuana should read and consider carefully:

“I have consulted with the Attorney General and the Deputy Attorney General about the Oakland Ordinance.”

“growing, distributing, and possessing marijuana in any capacity, other than as part of a federally authorized research program, is a violation of federal law regardless of state laws permitting such activities.”

“The prosecution of individuals and organizations involved in the trade of any illegal drugs and the disruption of drug trafficking organizations is a core priority of the Department. This core priority includes prosecution of business enterprises that unlawfully market and sell marijuana.”

“we will enforce the CSA vigorously against individuals and organizations that participate in unlawful manufacturing and distribution activity involving marijuana, even if such activities are permitted under state law.”

“the Department is carefully considering civil and criminal legal remedies regarding those who seek to set up industrial marijuana growing warehouses in Oakland pursuant to licenses issued by the City of Oakland. Individuals who elect to operate “industrial cannabis cultivation and manufacturing facilities” will be doing so in violation of federal law. Others who knowingly facilitate the actions of the licensees, including property owners, landlords, and financiers should also know that their conduct violates federal law. Potential actions the Department is considering include injunctive actions to prevent cultivation and distribution of marijuana and other associated violations of the CSA; civil fines; criminal prosecution; and the forfeiture of any property used to facilitate a violation of the CSA.”

Clearly the Department of Justice intends to take legal action against those it believes are involved in the “industrial growing of marijuana.”  The problem for all Arizona dispensaries that intend to grow marijuana is what  is the difference between nonindustrial growing of marijuana and industrial growing of marijuana?  This problem and the risk of criminal prosecution is especially great for Arizona medical marijuana dispensaries that intend to grow excess amounts of marijuana to sell to other dispensaries.

If Arizona medical marijuana dispensary owners think they can take cover under the Department of Justice memo of October 19, 2009, think again.  This memo said only that the U.S. has a better use of its resources than to prosecute individuals (such as patients and caregivers) who are using medical marijuana in compliance with state law.  The memo does not say that the Department of Justice will not prosecute  medical marijuana dispensaries and their owners who are complying with state law.  It says just the opposite.

“prosecution of commercial enterprises that unlawfully market and sell marijuana for profit continues to be an enforcement priority of the Department. To be sure, claims of compliance with state or local law may mask operations inconsistent with the terms, conditions, or purposes of those laws, and federal law enforcement should not be deterred by such assertions when otherwise pursuing the Department’s core enforcement priorities.”

For a related story, see “Medical Marijuana Cultivation Plan Antagonizes Feds in Oakland — and Arizona’s Plan is Similar.”

By |2012-08-18T09:14:08-07:00March 5th, 2011|Federal Dispensary Attacks, Legal Issues, Marijuana Crimes, Stories & Articles|Comments Off on Feds Warnings to Oakland & Its Plan to Allow Large Scale Growing of Pot May Affect All Prospective Arizona Medical Marijuana Dispensary Owners
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What is a Nondisturbance Agreement & Why Do Dispensary Tenants Need It?

One of the important provisions included in my Addendum to Lease between a landlord and a tenant that intends to operate an Arizona medical marijuana dispensary is a condition that requires the landlord to deliver to the tenant a Nondisturbance Agreement from every person or entity that holds a deed of trust or a mortgage on the premises.  If your not-for-profit dispensary entity intends to lease premises for the dispensary or the growing facility, a Nondisturbance Agreement from every lienholder is a must have document.  This document protects the tenant from being evicted if the landlord loses the real property in a foreclosure.

Under Arizona real estate law, when the landlord defaults on a lien that encumbers real estate, the lienholder can foreclose and the land is sold to the highest bidder.  The legal consequences of a foreclosure is that the foreclosure terminates / extinguishes the interests in the land of every party whose interest is of a lower priority than the foreclosed lien.  Translation:  If a lienholder whose lien was recorded before the tenant entered into a lease forecloses, the foreclosure terminates the lease.

Solution:  If the premises your nonprofit entity leased or intends to lease are encumbered by one or more Deeds of Trust or Mortgages, the entity must get a Nondisturbance Agreement from every lienholder.  This is an agreement signed by the lienholder in which the lienholder promises that if the lienholder forecloses on its lien, it will honor the tenants lease as long as the tenant does not default on the lease.

Example 1.  Landlord borrows $X from Lender on January 1, 2011.  The loan is secured by a Deed of Trust that encumbers the land of which the leased premises is a part.  The Deed of Trust is recorded on January 3, 2011.  Landlord leases premises to dispensary on March 4, 2011.  Landlord defaults on the payments due to Lender on January 1, 2013.  Lender forecloses by selling the property at an auction held by the trustee under the Deed of Trust on May 1, 2013.   The foreclosure terminates the lease as of May 1, 2013.  If the tenant cannot make a deal with the new owner to stay in the premises, the tenant will be out on the street and the dispensary will die.  If the tenant can work out a new lease with the new owner, the new rent will probably be a lot higher because the new owner has the tenant over a barrel.

Example 2.  Same facts as above except the lease required the landlord to get a Nondisturbance Agreement from the Lender and the Lender signed and delivered the Nondisturbance Agreement to the tenant.   The tenant recorded the Nondisturbance Agreement on March 4, 2011.   The foreclosure does not terminate the lease and the new owner becomes the new landlord and cannot evict the tenant as long as the tenant satisfies all of the tenant’s obligations under the lease.

Warning #1:  During these difficult economic times, many landlords are defaulting on their loans.  Do not take a chance that you might lose your entire investment in your Arizona medical marijuana dispensary because your landlord defaults on a loan.  Your dispensary must get a Nondisturbance Agreement from every lender that holds a lien that was perfected before the date of the lease because the failure to do so could cause the loss of your entire investment in the dispensary if the landlord defaults and the property is sold at a foreclosure sale.

Warning #2:  You can ask the landlord to disclose the existence of liens and the name and address of the lienholder(s), but the only safe way to determine if a lien, Deed of Trust or Mortgage encumbers your leased premises is to pay a title insurance company to give you a status report that lists all liens and encumbrances on the leased premises.  If the landlord tells you there are no liens and you don’t verify that fact independently, you’ll wish you had purchased a status report from a title insurance company when the property sells at a foreclosure auction and your dispensary is evicted from the premises.

Solution:  Every would be dispensary that leases premises that are encumbered by a lien must protect itself from potential eviction due to the landlord’s default on a lien by obtaining a Nondisturbance Agreement signed by the lienholder.

If you have already signed a lease, it’s not too late to ask the landlord to ask the lender to give you a Nondisturbance Agreement, but the landlord and the lender are less likely to to it if it is not a condition to the effectiveness of the lease.

By |2012-08-18T09:16:24-07:00March 4th, 2011|Dispensary Leases, Legal Issues|Comments Off on What is a Nondisturbance Agreement & Why Do Dispensary Tenants Need It?
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Coming in March & April – KEYTLaw Dispensary Client Workshops

Arizona’s newest industry reminds me of what the Oklahoma land rush of the 1800s must have been like.  Thousands of people racing in all directions at the same time trying to beat out the competition for a valuable asset.  There is a lot to learn and know to own and operate an Arizona medical marijuana dispensary.  Useful information about this new industry is hard to come by.

As a service to the 40+ not for profit companies I have formed that intend to apply for a license to operate an Arizona medical marijuana dispensary, I am holding four workshops over the next two months for my dispensary clients that want to share their knowledge and learn from other would-be dispensaries.  The goal is for everybody to learn more about all of the issues that every dispensary must solve to apply for a license and open a dispensary.  I encourage all of my dispensary clients to attend and participate.  Dispensaries that are not in the same CHAA clearly are not competing against each other for a license.  Dispensaries that are in the same CHAA should realize that only one of them will win the lottery so sharing of information does not increase the chances that a nonprofit entity will will the lottery.

I encourage all of my dispensary clients to attend these free workshops and share knowledge.  One of the goals will be for everybody to work together to create a business plan and the four policies and procedures that must be submitted with the application for a dispensary.  One option is for the group to hire somebody to create the five documents and share the cost.  Let’s divide the task of creating these five documents among the 40+ dispensaries and prevent each dispensary from spending time and money creating all of these required documents.

KEYTLaw dispensary clients:  Mark the following dates on your calendar.  We will start at 9 am and end at 11 am.  People who are interested will then go some where nearby for lunch.  The workshops will be held at 8765 W. Kelton Ln, Bldg A-1, Ste 102, Peoria, AZ 85382.

March 12, 2011
March 26, 2011
April 9, 2011
April 23, 2011

By |2014-01-05T09:59:59-07:00March 2nd, 2011|Stories & Articles|Comments Off on Coming in March & April – KEYTLaw Dispensary Client Workshops
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Alan Sobol’s Excellent March 1, 2011, Letter to Will Humble

What follows below is the text of a March 1, 2011, letter from Alan Sobol and the Arizona Association of Dispensary Professional, Inc., to Arizona Department of Health Services Director Will Humble.  Alan asks that DHS immediately clarify two huge problems that almost all prospective dispensaries face:

  • The requirement of Proposition 203 and the Arizona Department of Health Services rules that the application for a dispensary license show the actual address of the dispensary.
  • Confusion in the rules as to whether all owners of the dispensary must meet the Arizona residency requirement.

I agree with Alan on all three issues.  It’s a landlord and zoning zoo out there for prospective dispensaries, but it doesn’t have to be.  Rather than have 5,000 would be dispensaries scramble to tie up 5,000 sites, file 5,000 zoning applications, pay 5,000 city and county zoning fees and have cities and counties waste their scarce and valuable resources processing 5,000 zoning applications, the DHS rules should provide that prospective dispensaries be required to list on its application the actual location of the dispensary after they obtain a dispensary registration certificate, but before they apply for their final inspection necessary to obtain the license.

Under the current rules 5,000 prospective dispensaries are all competing for the limited number of sites that meet local zoning requirements.  The result is landlords can charge higher rent because the demand is much bigger than the supply of properly zoned sites.  Yesterday somebody told me that there are only two properly zoned sites in Surprise and one is leased and the other is in foreclosure.  It makes no sense for any prospective dispensary to waste its time and resources and the time and resources of a city or county zoning department unless the dispensary has obtained a dispensary registration certificate.  Require dispensary applicants to disclose the location of their sites and affirm the zoning only after they win the lottery and get a dispensary registration certificate.

Alan’s third issue is valid.  In my February 18, 2011, letter to Will Humble I suggested that the rules be amended to clarify that all eligibility requirements for any principal officer and director be expanded to include apply to all owners.

Here’s Alan Sobol’s March 1, 2011, letter.  DHS please listen and help.

March 1, 2011

Arizona Department of Health Services
Office of the Director:
150 North 18th Avenue
Phoenix, Arizona 85007

RE: Open letter To Director Humble.  The Market Place is in Chaos, Please help!!

Dear Mr. Humble

I am writing to you at the request of the members of the Arizona Association of Dispensary Professionals, (AADP). With over 6100 members we are the largest trade association of its kind in the State of Arizona. Collectively, we represent the largest percentage of Dispensary applicants in Arizona. Upon information and belief we have at least one member/applicant in almost every AZDHS CHAA.

We are writing to you regarding our great concern for the current chaotic market conditions across the State of Arizona. We adamantly believe these conditions are a direct result of the confusion unintentionally caused your agency. (more…)

By |2011-03-02T07:42:57-07:00March 2nd, 2011|Legal Issues, Stories & Articles|Comments Off on Alan Sobol’s Excellent March 1, 2011, Letter to Will Humble
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Richard Keyt’s Suggested Changes to the DHS Rules

What follows below is the abbreviated text of my letter to Will Humble dated February 18, 2011.  You may also read or download a copy of the actual letter.

February 18, 2011

Will Humble, Director
Arizona Department of Health Services
150 N. 18th Avenue
Phoenix, AZ 85007

Re:  Comments to the Arizona Department of Health Services’ Proposed Rules to be Promulgated Under Arizona Revised Statutes Section 36-2801, et. Seq., Arizona’s Medical Marijuana Laws

Dear Mr. Humble:

I am the creator of a website called “Arizona Medical Marijuana Law” found on the internet at www.arizonamedicalmarijuanalaw.com. The purpose of this website is to inform the public about the new law created by the voters’ approval of Proposition 203. Although this new website is just shy of seven weeks old, it will have close to 20,000 visitors this month because it contains a treasure trove of information about this new law.

I am an Arizona attorney who has been practicing business law in Arizona since 1980. Since I started counting in 2002, I have formed over 3,000 Arizona limited liability companies, for profit corporations and nonprofit corporations. As of the date of this letter, I have been hired by more than 30 groups that intend to apply for a dispensary registration certificate. What follows are my suggested changes and comments to the proposed Rules.

1. The Lottery. Eliminate the lottery and replace it with a selection system based on the quality of the application and the applicant. Our country has been a country where people succeeded on merit, not on government give-aways. DHS should pick the applicants that are best qualified and most likely to operate a successful business. The people of Arizona deserve the best dispensary owners, not a group of winners who are lucky to have their names drawn out of a hat. The application fee of $5,000 is sufficient to pay for a review and analysis of each application. State in detail the criteria on which applications will be graded. Create a point system and say that dispensary registration certificates will be awarded to the top 124 scores. Provide in the Rules that if any of the 124 applicants selected for a license fails to actually obtain its dispensary license within one year, the dispensary registration certificate will be revoked and a new dispensary registration certificate be offered to the applicant whose total score was 125th and go down the list if other entities fail to open their dispensaries within the designated time period.

I submit to you that selecting dispensary owners by a lottery is the surest way for DHS to get sued and to cost the State of Arizona a large amount of defense money it does not have. The current Rules are totally lacking in any guidance or requirements for conducting a lottery. Here are just a few of the almost unlimited problems with a lottery: (more…)

By |2011-03-04T20:54:58-07:00February 18th, 2011|DHS Rules|2 Comments
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Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?

Question:  When my nonprofit entity files its application for a dispensary registration certificate, must it have a conditional use permit from the city in which the dispensary will be located?

Answer:  Maybe. Arizona Department of Health Services Rule R9-17-304 states:

To apply for a dispensary registration certificate, an entity shall submit to the Department the following

6. Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions;

The rule does not specifically state that a Certificate of Occupancy must accompany the application for a dispensary registration certificate, but the local zoning authority may require the dispensary to get a CO as a condition to getting the documentation required by Rule R9-17-304.

Bottom line:  Every would-be dispensary owner needs to consult with a good zoning attorney about this issue and for advice and assistance if making sure that the dispensary’s desired location complies with local zoning requirements.  See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012.”

By |2015-04-06T18:50:19-07:00February 16th, 2011|Legal Issues, Questions People Ask, Zoning|Comments Off on Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?
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Speakers at Medical Marijuana Hearing Criticize Strong Regulations

Ray Stern of the Phoenix New Times has an excellent two part article in which he reports on what he heard at the Arizona Department of Health Services public hearing held on February 15, 2011, at ASU’s Sandra Day O’Connor School of Law, which has little public parking.  Ray has names and actual comments made by speakers.  Ray was live blogging from the event, which is what I wanted to do, but could not because the law school’s Great Hall was not so great – there were no outlets to plug my laptop into.

See “Medical Marijuana Policy Hearing in Tempe Draws Large Crowd,” “Speakers at Medical Marijuana Hearing Criticize Strong Regulations” and “Live-Blogging Continues at Prop 203 Hearing in Temp.”

By |2011-02-16T07:50:21-07:00February 16th, 2011|Stories & Articles|Comments Off on Speakers at Medical Marijuana Hearing Criticize Strong Regulations
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Clauses to Include in a Contract between a Medical Director & a Dispensary

Question:  Are there any special clauses my dispensary should include in its contract with its medical director?

Answer:  Yes.  The contract should be an independent contractor agreement, not an employment agreement.  The contract should contain the standard clauses found in a good lawyer drafted independent contractor agreement plus the following clauses unique to this agreement:

  • The medical director will provide the specific duties of the medical director set forth in the rules.
  • The medical director must obtain and maintain at all times a dispensary agent registration from the Arizona Department of Health Services.  See R9-17-309.A.4.b., which states:

“A dispensary shall . . . Not allow an individual who does not possess a dispensary agent registry identification card issued under the dispensary registration certificate to: . . . Serve as the medical director for the dispensary“

  • The medical director will comply with the applicable laws contained in Arizona Revised Statutes Section 36-2801 et.seq (Arizona’s medical marijuana statutes), and all applicable DHS rules in effect as of the date of the agreement and during the term of the agreement.
  • The doctor represents and warrants that he or she satisfies all of DHS’ requirements to be a medical director not later than April 1, 2012.
  • The doctor will obtain a license from Arizona Department of Health Services to be a medical director not later than April 1, 2012.
  • If at any time the medical director ceases to be eligible to be a dispensary agent or if he or she cannot perform his or her duties for any reason, the contract must terminate without prior notice to the medical director.
  • The contract terminates if the dispensary loses its dispensary registration certificate or ceases to operate.
  • The medical director must grant a license to the dispensary to copy and use the copyrighted content the medical director gives to the dispensary as required under the rules.
  • The medical director must represent and warrant that all content he or she gives to the dispensary does not infringe on anybody’s copyrights.
  • The medical director must maintain at all times the types of insurance appropriate for the position in amounts not less than $500,000 or what is recommended by the medical director’s insurance agent.
  • The medical director must give to the dispensary proof of insurance satisfactory to the dispensary.
  • The medical director’s insurance company must be instructed to notify the dispensary of any change to or cancellation of any insurance policy.
  • The compensation payable to the medical director will be reduced by X percent for every additional dispensary the doctor acts as the medical director, but the compensation will not ever be less than Y percent of the compensation payable if the doctor is a medical director for only the dispensary.  If I’m representing a dispensary, I’ll try to put this clause in because the duties of the medical director are nonexistent once he or she does the initial set up so why should a doctor who is a medical director for multiple dispensaries get paid the same as a doctor who is the medical director for a single dispensary?
By |2012-08-18T09:20:26-07:00February 15th, 2011|DHS Rules, Legal Issues, Medical Directors, Questions People Ask|Comments Off on Clauses to Include in a Contract between a Medical Director & a Dispensary
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Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation

Question:  I know my Arizona medical marijuana dispensary must be operated on a not for profit basis, but does not have to be an Arizona nonprofit corporation.  Why would I want to form an Arizona nonprofit corporation that is also a tax-exempt organization under the Internal Revenue Code?

Answer:  Neither the Arizona medical marijuana law nor the Arizona Department of Health Services proposed rules require that an Arizona medical marijuana dispensary be a nonprofit corporation.  My recommendation is that all Arizona medical marijuana dispensaries be an Arizona limited liability company.  See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?“

One of the best ways to help satisfy the requirement that the dispensary be operated on a not for profit basis is for the dispensary to make substantial donations of profits to a tax-exempt charitable organization such as the American Red Cross, the Arizona Humane Society or any one or more of the many tax-exempt charities that have purposes consistent with those of the dispensary’s owners.  Donations to local tax-exempt charities that give to the local community are especially good choices.  The dispensary should have a regular policy of publicizing its charitable donations such as handouts given away at the dispensary or signs on the walls of the dispensary.

Dispensary owners should also consider creating an Arizona nonprofit corporation that applies for and becomes an IRS approved tax-exempt charitable organization.  One or more of the owners could be on the board of directors of the charity.  The charity’s purpose would not involve the growing, possession or sale of marijuana.  Instead, the charity’s purpose could be picked by the founders of the nonprofit corporation.  I recommend its purpose be to engage in charitable activities in which the dispensary owners have an interest and that the money donated to the charity be spent in the local community.  The tax-exempt organization must not  have a purpose that is related to marijuana, including medical marijuana.

Here are some potential charitable purposes for a tax-exempt organization founded by an Arizona medical marijuana dispensary:

  • Provide monetary assistance to people who are in a terminal condition or who cannot afford medical treatment
  • Pay the cost for low income people to live in a care home
  • Pay for nursing care for low income people
  • Pay for legal drugs for low income people

The tax-exempt organization cannot be a subsidiary of the dispensary entity.  It must be a separate stand-alone corporation governed by its board of directors.

Caveat:  The dispensary owners and insiders cannot control the tax-exempt organization.  The IRS will not grant tax-exempt status to a nonprofit corporation that is controlled by a person or a group of people.  The board of directors of the tax-exempt organization can have one or more owners or insiders of the dispensary on its board of directors as long as the board of directors has enough independent members who could out vote the dispensary’s owners and insiders.

I would love to form your Arizona nonprofit corporation that you intend to become a federal tax-exempt organization.  To learn more about forming an Arizona nonprofit corporation read “How to Form an Arizona Nonprofit Corporation” and “Arizona Nonprofit Corporation Formation Service.”

By |2011-02-14T08:23:31-07:00February 14th, 2011|Legal Issues, Questions People Ask|Comments Off on Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation
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Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store

Question:  I know that in 2007 the U.S. Tax Court ruled in the CHAMPS case that Section 280E of the Internal Revenue Code prohibits deducting from gross income any business expenses that are paid or incurred in connection with trafficking in marijuana.  Is there a way that my nonprofit entity that operates an Arizona medical marijuana dispensary can deduct any of its expenses from its gross income on the dispensary’s federal income tax return?

Answer:  Yes.  In the CHAMPS case, the IRS conceded that the taxpayer could deduct its cost of goods sold, which included $575,317 paid for marijuana.  The fight in the CHAMPS case was over what business expenses the taxpayer could deduct.  The IRS argued that the taxpayer had only one business – trafficking in marijuana – and therefore none of its business expenses other than its cost of goods sold were deductible.  The taxpayer successfully argued that it operated two businesses – its medical marijuana sales business and its care-giver business.  The Tax Court agreed with the taxpayer and allowed the taxpayer to allocate its expenses to its two separate businesses and deduct expenses attributable to the care-giver business.

If your Arizona medical marijuana dispensary wants to be able to deduct anything from its gross income above and beyond its cost of goods sold, the dispensary must engage in one or more trades or businesses that do not  involve medical marijuana.  Every would-be dispensary should carefully study the CHAMPS case and learn how CHAMPS operated its care-giver business, which was very extensive and real.  The case illustrates that the sale of medical marijuana was in fact a small portion of everything that the dispensary offered to its patients.  Note also that the salaries paid to management and staff were very nominal – $14,914 paid to officers and directors and $44,799 salaries paid to 25 employees of a dispensary that collected just over $1,000,000 in gross revenue.

Example 1:  Dispensary 1 operates a 2,000 square foot retail dispensary in Phoenix where its sole activity is displaying its products and selling products to patients over the counter.  This dispensary’s entire business involves trafficking in marijuana so it cannot deduct any of its expenses from its federal income tax return.

Example 2:  Dispensary 2 operates a 2,000 square foot retail dispensary in Phoenix, but next door to the dispensary it has an additional 2,000 square feet of space where it provides other services and products to the public such as:

  • yoga classes
  • acupuncture
  • massage therapy
  • classroom instruction on the use of medical marijuana and other pain medications
  • classroom instruction on health care related topics
  • library of books, DVDs and other materials about medical marijuana that patients of the dispensary can use for reading on the premises or to check out and view at home.
  • coffee bar with pastries where people can congregate and relax

Dispensary 2 can now:

  1. allocate occupancy expenses to retail and nonretail
  2. allocate payroll expenses to retail and nonretail
  3. apply a transactional factor

Consider this simple allocation of dispensary 2’s expenses:

  1. Since 1/2 of the leased space is not used for the sale of marijuana, fifty percent of the total rent expense is deductible.  This includes ancillary expenses such as security for the premises, utilities, landscaping, common area expenses and maintenance, janitorial service and premises maintenance.
  2. Dispensary 2 can deduct its payroll expenses attributable to personnel who work solely in the non-marijuana side of the business.  For personnel that work in both aspects of the business, the dispensary must have a method for allocating their payroll to the marijuana related services and the non-marijuana related services.

For more on this important topic, see “IRS is in the Early Stages of a War to Kill Medical Marijuana Dispensaries.”

Although I have a masters degree in income tax law from New York University Law School, I am  no longer a practicing tax lawyer.  I recommend that every dispensary hire a good experienced tax CPA or tax lawyer to advise the dispensary on the federal and state income tax issues arising from the operation of a medical marijuana dispensary.

Circular 230 Notice:  Pursuant to recently-enacted U.S. Treasury Department regulations, I am required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including websites linked to, is not intended or written to be used, and  may not be used, for the purpose of  (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

By |2014-05-21T19:42:45-07:00February 12th, 2011|Dispensary Leases, Real Estate Issues, Tax Issues|Comments Off on Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store
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Participate in Our New Message Forum

We added a message forum to this website.  Its purpose is to create an on-going dialogue among people who are interested in obtaining a license to operate a medical marijuana dispensary, prospective medical directors and others who are interested in Arizona’s newest industry.

The forum is new so we need your help to get it going.  We hope that the forum will be a place that people can discuss industry issues, including various aspects of the proposed Arizona Department of Health Services rules.  Please leave one or more messages.  The more people who participate the more we will all learn.  Please take a minute or two to leave a message by clicking on the Message Forum link on the far right of the top menu.  If nobody uses the forum, I’ll kill it.

By |2015-04-06T18:50:18-07:00February 11th, 2011|Miscellaneous|Comments Off on Participate in Our New Message Forum
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Advice to Landlords With Premises Zoned for Medical Marijuana Dispensaries

Question:  I own real property that is zoned for an Arizona medical marijuana dispensary or cultivation site.  How can I increase the chances of obtaining a tenant that will actually obtain a dispensary registration certificate and become a long term paying tenant?

Answer:  Easy.  Lease your property to more than one prospective dispensary owner.  Consider the following two scenarios:

Scenario 1:  You lease to prospective dispensary owner number 1.  The prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license.  The tenant does not obtain a license.  Long term rental income = $0.

Scenario 2:  You lease the same site to 20 prospective dispensary owners.  Each prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license.  One of the 20 prospective tenants obtains a license to operate an Arizona medical marijuana dispensary.  Nineteen prospective tenants leases are canceled.  Long term rental income = big $$.  Of course, each lease should have appropriate language in the lease that notifies each prospective tenant that its lease only becomes effective if the tenant actually obtains the dispensary registration certificate.

Update:  A visitor to this website sent me the following message:

“I thought of this a couple of weeks ago and checked with the AZ Department of Health Services. The first person I spoke with was an employee of the department. She told me that multiple license applications with the same address would all be rejected. I then spoke with Laura Oxley the head of the department. She said it was a good idea, but I should speak with Tom Salow the department  attorney for medical marijuana. Tom said that what I was proposing was currently acceptable under the guidelines, but he expected the guidelines to change making it unacceptable in the next revision.”

If Tom Salow’s statement about is true, why would the Arizona Department of Health Services reject multiple applications for the same location?  It would not make any sense.  The only purpose behind such a rule would be to make it more difficult for prospective dispensaries to find a suitably zoned location and to cause a lot of landlords to waste time entering into leases with tenants that will never get a dispensary registration certificate.  If DHS changes the rules to reject applications for the same location, it would be another instance of the Arizona Department of Health Services bureaucrats/desk jockeys being the problem, not part of the solution.

By |2012-08-18T09:11:36-07:00February 11th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off on Advice to Landlords With Premises Zoned for Medical Marijuana Dispensaries
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Will any Arizona Doctor Agree to be the Medical Director of an Arizona Medical Marijuana Dispensary?

The Arizona Department of Health Services’ January 31, 2011, second draft of the rules require that every Arizona medical marijuana dispensary have a medical director on the premises or on call.  Proposition 203 contains no such requirement.  Why DHS put the medical director requirement in the rules is beyond me.  I do not understand the purpose of the medical director unless it is to increase the cost of the products sold by the dispensary.  Most doctors are not willing to act as a medical director for a pot clinic and of those that are, not many are willing to do so for free.

I wonder if any doctor will actually take the position as medical director of an Arizona medical marijuana dispensary.  The big unknown at this time is whether a doctor who is the medical director of a dispensary can purchase malpractice insurance and products liability insurance.  I’m guessing that medical malpractice insurance would not cover the doctor because the doctor’s activities as a medical director do not involve the practice of medicine.  The medical director does not see patients.  The rules state,”A medical director shall not establish a physician-patient relationship with . . . a qualifying patient.”  If the medical director cannot purchase appropriate insurance, why would any doctor be the medical director of an Arizona medical marijuana dispensary?

We all know that litigators love to sue anybody within 100 miles of an incident.  Consider what might happen if a patient were to buy a THC laced brownie that caused permanent bodily harm or that killed the patient.  Who do you think will be sued?  I submit that the defendants in the lawsuit will be the dispensary, the medical director, the infusion company that made the brownie, the cook who actually cooked the brownie and possibly the officers and directors who failed to adopt an product inspection system that would have detected the harmful brownie.  The plaintiff may sue the medical director for medical malpractice and for products liability.  Can the medical director purchase malpractice insurance and products liability insurance?

I am not a litigator.  I don’t sue people.  Maybe I am completely off base.  If I am wrong, please let me know.  I’d love to publish an article from somebody in the know that can explain the potential liability of the medical director and what types of insurance the medical director will need and if it is possible for the medical director and/or the dispensary to purchase the insurance.

Suggestion to Arizona Department of Health Services:  You have a medical director.  If you think dispensaries should have a medical director why not require your medical director to be the medical director of all dispensaries and charge each dispensary $500 a month?  Your medical director can then prepare the literature and patient brochures the medical director thinks is appropriate and DHS can sell them to the dispensaries for distribution to patients.

See Will Humble’s unconvincing and nonsensical blog post on why a medical director is necessary and my comments about his reasoning.

An Arizona Physician’s Comments to the Above Article

I was intrigued by your recent post. I am not a attorney, but as a physician with my own medical-legal consulting firm, I do not see much risk of a dispensary’s medical director being sued for medical malpractice. The primary reason for this is that there is no physician-patient relationship – not even contact – between a dispensary customer and the medical director, so by definition, there can be no medical malpractice. (more…)

By |2011-02-11T18:37:01-07:00February 9th, 2011|Medical Directors, Stories & Articles|Comments Off on Will any Arizona Doctor Agree to be the Medical Director of an Arizona Medical Marijuana Dispensary?
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What is the Arizona Medical Marijuana Association?

Something called the “Arizona Medical Marijuana Association” (AzMMA) has gotten a lot of publicity in the Phoenix area ostensibly as an Arizona medical marijuana support group, but it is not clear what the AzMMA is or if it even exists.  In December a lot of people, including me, attended a four hour talk presented by the AzMMA on Arizona’s Proposition 203 and the new medical marijuana law.  The AzMMA charged me an admission fee of $300.

I checked the Arizona Corporation Commission’s database today and found that there is no entity formed in Arizona called the Arizona Medical Marijuana Association.  On October 10, 2010, a firm called Suzette M. Brown, PC, PO Box 11528, Glendale, Arizona 85308, apparently filed Articles of Organization for a limited liability company to be called the “Arizona Medical Marijuana Association, LLC.”  However, this company has not yet been approved and does not currently exist.  The Arizona Corporation Commission says that there is a potential conflict with an entity name reservation for the “Arizona Medical Marijuana Corporation” obtained by Curtis A. Shelton on October 19, 2010.

A bigger problem, however, for the Arizona Medical Marijuana Association, LLC, is that Arizona Revised Statutes Section 29-602 prohibits an Arizona limited liability company from having the word “association” in its name.  If the Arizona Medical Marijuana Association wants to be an Arizona entity, it must form a corporation.  Curtis Shelton currently has first dibs to the name until his name reservation expires on February 17, 2011.

What I cannot tell from the record is if either of the above Arizona Corporation Commission filings were for our beloved, but non-existent Arizona Medical Marijuana Association manned by Andrew Myers and Joe Yuhas.  Is their AzMMA the third group that wants what apparently is a very popular name?

There is a website at www.azmma.org that apparently is a website for the “Arizona Medical Marijuana Association, but there is no there there.  This site lacks meaningful content and consists of a single page with a small amount of text.  The homepage states:

“During its formative stage, the AzMMA invites you to participate in our organizational efforts.”

This statement is apparently total BS.  On December 27, 2010, and every day for the next three days I called Joe Yuhas who the newspapers say is the AzMMA man.  I wanted to discuss a very disturbing statement that one of my clients attributed to Mr. Y about the proposed Arizona Department of Health Services rules.  Despite leaving daily messages for four days asking Joe to call me, he blew me off and to this date has not returned my call.  In practicing law in Arizona for 31 years, I don’t ever remember calling somebody that many times and not getting the courtesy of a call back.

Why do Myers and Yuhas continue to say they are involved with a non-existent entity?  Who are the members of this non-existent entity?  Are there any members besides Myers and Yuhas?  Where are its offices?  The January 7, 2011, cover letter Andrew Myers sent to Will Humble with the AzMMA’s comments to the first draft of the rules does not have an address or phone number for Myers or the AzMMA.  Does anybody care? Myers letter refers to the leadership of AzMMA, but who are its leaders and why is their identity not made public?

If the leadership of this want-a-be organization cannot form an Arizona entity for their group and if the group does make its address and phone number and leadership public, why do Myers and Yuhas have what appears to be a very close relationship with Will Humble and the Arizona Department of Health Services and why does the media give Myers and the AzMMA so much press and credibility?  Just yesterday Will Humble and Andrew Myers were interviewed simultaneously on Phoenix’ National Public Radio affiliate.  What a co-inky-dink!  Read about and listen to the February 4, 2011, radio interview at “Will Humble & Andrew Myers on KJZZ Radio.”

P.S.  Alan Sobol and his Arizona Association of Dispensary Professionals also are not happy with the AzMMA.  See “Arizona Association of Dispensary Professionals Declares War on Arizona Department of Health Services, Marijuana Policy Project & the Arizona Medical Marijuana Association.”  Beware of the Arizona Medical Marijuana Association, the Arizona Medical Marijuana Corporation and the Arizona Medical Marijuana Association, LLC and a semi-secret club that really likes those names!

By |2019-06-14T08:24:52-07:00February 5th, 2011|Stories & Articles|Comments Off on What is the Arizona Medical Marijuana Association?
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Sad Message from a Pharmacist Who No Longer Seeks a Dispensary License

I received an email message from a pharmacist who had intended to seek a license to operate an Arizona medical marijuana dispensary.  This person is a very experienced Arizona pharmacist who believes in the need for medical marijuana and who has experience operating a successful pharmacy business.  Here’s the text of the message:

“For all your reasons listed from the division of areas to random selection, we have decided to leave the field.  As professionals, as a pharmacist, I felt the only way to give medical marijuana professionalism was to have a pharmacist dispensing the medication or at least on staff or as a medical director, some significant role.  However, pharmacists were completed excluded from any rules or regulations.  The random nature of selection when you are a highly qualified candidate, just was too much to continue on with the process and all the changes and unforeseeable laws that will evolve.”

This message confirms my belief that the Arizona Department of Health Services’ lottery (aka random selection process) will drive many good people away from this new industry and increase the number of gamblers who are willing to bet $5,000 for a shot at a big jackpot that has much better odds than Arizona’s legal lottery.

By |2011-02-05T07:41:07-07:00February 5th, 2011|Stories & Articles|Comments Off on Sad Message from a Pharmacist Who No Longer Seeks a Dispensary License
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Is DHS’ Lottery for a Medical Marijuana Dispensary License Gambling in Violation of Arizona Law?

Under the second draft of Arizona’s medical marijuana rules issued by Arizona Department of Health Services on January 31, 2011, DHS proposes to select dispensary registration certificates (aka dispensary licenses) by a lottery.  The rules divides Arizona into 126 zones called Community Health Analysis Areas (CHAAs).  DHS will allow one dispensary in each CHAA.  Currently there will be 125 possible dispensaries so one CHAA may not have a dispensary.

DHS will begin accepting applications for dispensary registration certificates for thirty days on May 1, 2011.  On June 30, 2011, DHS will award dispensary registration certificates as follows:

  • If a CHAA has only one qualified application for a dispensary registration certificate, that applicant will be awarded the certificate.
  • If a CHAA has more than one qualified application for a dispensary registration certificate, DHS will conduct a lottery and the winner will be awarded the certificate.

DHS has created a new Arizona lottery.  Here is how the new lottery works.  Pay $5,000 and take a chance your chit will be pulled out of a hat.  If your number is picked, you will win a really big valuable prize, i.e., a state authorized monopoly to make money.

How can DHS unilaterally create a new Arizona lottery.  I thought legalized gambling in Arizona had to be authorized by a law passed by the legislature and signed by the governor.  Apparently I am wrong.

Arizona Revised Statutes Section 13-3301.1 states:

“Gambling” or “gamble” means one act of risking or giving something of value [$5,000] for the opportunity to obtain a benefit [a dispensary registration certificate] from a game or contest of chance [the lottery conducted by DHS for a dispensary registration certificate] or skill or a future contingent event but does not include bona fide business transactions which are valid under the law of contracts including contracts for the purchase or sale at a future date of securities or commodities, contracts of indemnity or guarantee and life, health or accident insurance.”

I submit that DHS process does not involve a contract.  There will not be any contract between the applicants and DHS so the contract exception will not apply.

Arizona Revised Statutes Section 13-3303 states:

A. Except for amusement, regulated or social gambling, a person commits promotion of gambling if he knowingly does either of the following for a benefit [a dispensary registration certificate] . . . Conducts, organizes, manages, directs, supervises or finances gambling.

B. Promotion of gambling is a class 5 felony.

Is the DHS lottery exempt from Section 13-3303 and therefore not illegal under Arizona law because it is amusement, regulated or social gambling as defined in Section 13-3301?  It is clear to me that the DHS lottery is not amusement or social gambling.  DHS would probably claim its lottery is regulated gambling, which is defined in Section 13-3301 as:

“Regulated gambling” means either:(a) Gambling conducted in accordance with a tribal-state gaming compact or otherwise in accordance with the requirements of the Indian gaming regulatory act of 1988 (P.L. 100-497; 102 Stat. 2467; 25 United States Code sections 2701 through 2721 and 18 United States Code sections 1166 through 1168); or

(b) Gambling to which all of the following apply:

(i) It is operated and controlled in accordance with a statute, rule or order of this state or of the United States.

(ii) All federal, state or local taxes, fees and charges in lieu of taxes have been paid by the authorized person or entity on any activity arising out of or in connection with the gambling.

(iii) If conducted by an organization which is exempt from taxation of income under section 43-1201, the organization’s records are open to public inspection.

(iv) Beginning on June 1, 2003, none of the players is under twenty-one years of age.

Conclusion:  The DHS rules that create a lottery to select dispensary registration certificates is legalized gambling because it appears to be regulated gambling, which is exempt from the criminal prohibition on gambling set forth in Section 13-3303.  Given the public interest in the lottery and the high value of the prizes to be awarded to the sweepstakes winners, DHS should make public the lottery procedures and televise every drawing to avoid the appearance of impropriety and actual impropriety.

By |2017-02-11T20:34:34-07:00February 3rd, 2011|DHS Rules, Legal Issues|Comments Off on Is DHS’ Lottery for a Medical Marijuana Dispensary License Gambling in Violation of Arizona Law?
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Don’t Copy Original Content Found on This Site Without Prior Written Consent

Warning:  Do Not Steal Our Content

I spend a considerable amount of time writing original content for this website and other websites I own.  None of my original content may be copied or republished without my express prior written consent.

In the last week, I learned that two different websites each copied my original content more than once.  I am not a happy camper when that happens.  The U.S. copyright law provides that nobody can copy or republish a copyrighted work without the consent of the copyright holder. Last week I asked one of the sites to take down my articles and that site complied immediately.  Today I learned of the second site on which I found three articles that were copied entirely.  I asked that site to take down those articles.  Neither site had the courtesy to link to this site.

I am the copyright holder for all original content on this site, except for articles that are written by other people whose names appear at the beginning of the article.  I do register the copyrights for all the original content on this site with the U.S. Copyright office.  As the warning says on the right column – do not steal content from a copyright lawyer, which I am.  If you steal my content, you risk having me file a lawsuit for copyright infringement in federal court and asking the court to impose statutory damages of $150,000 for each infringement.  Take my advice, you don’t want to be a defendant in a copyright infringement lawsuit when the plaintiff holds a registered copyright.

Warning to Infringers:  If you think I will not discover that you stole my content, you would be making a mistake that could cost you a lot of money.  There are websites that find and monitor copyright infringement on the internet.  See for example Copyscape.   Infringers should know that KEYTLaw attorney Richard Keyt is a copyright lawyer and his brother, Norman Keyt is the copyright infringement litigation attorney who will represent me in the federal court lawsuit.  I could be wrong, but my copyright lawyer will probably cost me a lot less than yours plus your lawyer won’t be getting paid to represent you on a contingency fee basis.

If you want to learn more about U.S. copyright law and the large financial liability incurred by somebody that copies a work that was registered with the U.S. Copyright Office,  read the following articles on this topic that I wrote in while wearing my copyright lawyer hat:

  • Internet Copyright Law: A Rat Pilfered My Web Site Cheese – What Do I Do?  Remedies for Web Site Copyright Infringement
  • Top 10 Urban Copyright Myths
  • Benefits of Web Site Copyright Registration
By |2015-04-06T18:49:27-07:00January 30th, 2011|Copyright Warning|Comments Off on Don’t Copy Original Content Found on This Site Without Prior Written Consent
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