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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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Arizona Main Stream Media Silent on HB 2557 & the Proposed 300% Tax on Medical Marijuana

HB 2557 (aka the Grow Your Own Pot All Over Arizona Act or the Small Group of Elites Overrules the Majority of the Arizona Voters Act)

On January 26, 2011,  a group of legislators who want to overturn the will of the majority of the Arizona people who voted for Arizona Proposition 203 (legalization of medical marijuana) and who know what is best for the masses introduced a proposed law that would kill Arizona’s medical marijuana industry before it begins and allow all 160,000 future medical marijuana patients to grow their own marijuana.  House Bill 2557 will, if enacted unchanged, impose a sales tax of 300% on all medical marijuana.  That means a $10 THC laden candy bar would cost the patient $40 and an ounce of marijuana that retails for $250 would cost the patient $1,000.

I googled “HB 2557” and marijuana today and found only one story in the first 5 pages of Google results in Arizona’s main stream media about HB 2557.  The Tucson Citizen published a story on January 26, 2011, entitled “Drug Cartel Empowerment Act: Arizona Legislature proposes 300% sales tax on medical marijuana,” which stated:

“All I can say is WTF are you thinking?“

On January 27, 2011, the Arizona Daily Star published “Medical marijuana sales taxable, Horne says” in which HB 2557 is discussed.  Apparently the paper interviewed one of the bill’s sponsors, Rep. Steve Farley, D-Tucson (phone (602) 926-3022; email address: [email protected]), about HB 2557.   Farley said the tax could bring in as much as $1.8 billion a year and solve Arizona’s deficit problem.  He also claimed that patients would not have a problem paying a total of $160 to buy an ounce of medical marijuana for $40.  This guy appears to be out of touch with reality.  Taxing anything 300% does not generate more sales tax revenue it generates ZERO sales tax revenue.  Is there any item in the U.S. that must be purchased for 4 times its actual value?

My clients who operate dispensaries in Colorado tell me that an ounce of medical marijuana in Colorado sells between $250 – $400 depending on the strain and quality.  For the benefit of the we know what is best for the people of Arizona legislators who think a 300% sales tax will generate revenue, I will do the math and show my work.

Example:  Patient goes to local dispensary to purchase 1 ounce of medical marijuana and decides to buy the cheapest ounce for $250.  Clerk rings up the sale and says “that will be $1,000 please.”  Let’s analyze this sale from the perspective of the Arizona legislators who live in a different world and the perspective of the average guy on the street who may not be as smart as our legislators.

How the legislators  think:  160,000 patients will happily fork over $1,000 to buy one $250 ounce of medical marijuana as just a small part of the patient’s grand plan to purchase 5 ounces per month and 60 ounces a year. Total cost to patient to purchase 60 ounces a year = (60 ounces x $250) $15,000 plus 300% tax of $45,000 = $60,000.  Total sales tax revenue collected annually on medical marijuana purchases by 160,000 patients = 160,000 x $45,000 = $7,200,000,000.   Budget deficit solved with the additional bonus that Arizona will have so much new revenue it can cancel all other types of sales taxes.

How the patients and citizens think:  Are you kidding?  Nobody is going to pay $40 for a $10 candy bar or $1,000 for a $250 ounce of medical marijuana.   All  160,000 patients will grow their own marijuana.  Total sales tax revenue collected by Arizona = 160,000 patients x $0 plus $0 sales tax = $0.  There will not be medical marijuana dispensaries in Arizona.

Some years ago the brains in Congress who also are unaware of the laws of economics passed a luxury tax on yachts.  The idiots actually thought that the rich would be happy to pay the tax and the federal government would collect more revenue.  What actually happened was the rich (who are not stupid) stopped buying luxury yachts, the luxury yacht manufacturing industry died and the federal government collected less money from yacht sales.

Main Stream Media Not Reporting for Duty

Why isn’t the main stream media reporting this story?  Does the main stream media oppose Proposition 203 and want to suppress news of HB 2557 to minimize public opposition to the bill?  Early on the morning of January 27, 2011, I called and emailed an Arizona Republic reporter who has written a lot of stories about Prop 203 and medical marijuana in Arizona.   The reporter responded that he/she would check out my January 27, 2011, article called “Arizona Legislators Introduce HB 2557 to Overturn Voters Approval of Proposition 203.”  No Republic story on the 27th, 28th or 29th, but it did have two  “who cares” stories on the front page of the Saturday, January 29, 2011, online version of the paper called “Valley cities fight unwanted garage-sale signs” and “Economy has 3 Valley chefs down, not out.”

What gives?  Why aren’t the big Arizona papers and TV channels covering this story?

By |2014-05-21T19:46:29-07:00January 29th, 2011|AZ Legislation, Legal Issues, Tax Issues|Comments Off on Arizona Main Stream Media Silent on HB 2557 & the Proposed 300% Tax on Medical Marijuana
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Phoenix Medical Marijuana Zoning a Confusing Nightmare

People are asking me questions about Phoenix zoning that I cannot answer such as:

  • What is pre-registration, what does it mean and how does it work?
  • If I pre-register how does pre-registration relate to actual registration?
  • The application requires the applicant to list the location of all existing and/or pending medical marijuana dispensaries, cultivation and infusion facilities within 5,280 feet (1 mile) of the applicant’s site.  Are you kidding?  How in the world would an applicant know the location of other sites that have not yet been approved by Phoenix zoning and that do not yet have DHS licenses?
  • The application requires the applicant to submit its operations procedures.  Excuse me!  What are operations procedures?  Arizona Department of Health Services doesn’t require operations procedures so why would Phoenix other than to create a pain in the nonprofit entity’s butt.
  • The application requires the applicant to submit a plot plan or survey showing compliance with the separation requirements.  Does this mean the applicant must hire a licensed surveyor to prepare a survey that shows the location is not too close to any thing?  Probably.  You will need a legal description of the site, which a surveyor can provide if it’s not easily obtainable.  Without a survey how are you going to determine if your location is more than:

1.  5,280 feet from existing and/or pending medical marijuana dispensaries, cultivation and infusion facilities

2.  1,320 feet from all preschool, kindergarten, elementary, secondary or high school, public park or public community center

3.  500 feet from all places of worship

4.  250 feet from any residence (for a dispensary)

5.  1,000 feet from any residence (for cultivation and infusion sites).  I thought the 1,000 foot setback was a typo because according to my calculations (which could be wrong because I’m a lawyer not a mathematician) the site would have to be at least 92 acres in size.  A 1,000 foot setback requires a square parcel to have four sides each 2,000 feet long, which is 4,000,000 square feet.  Are there any locations in Phoenix that have the necessary zoning and meet this setback requirement?

The application contains this confusing statement:

“Registrations that have expired are NON-RENEWABLE. A new registration for the proposed use shall not be accepted within thirty (30) days of the expiration date of the prior registration. A maximum one-time thirty (30) day extension may be granted to the applicant by the Zoning Administrator.”

Here are links to the actual Phoenix zoning documents:

For additional information, questions, or comments, please send an e-mail to [email protected].

I am not the only one who has a problem with Phoenix’ zoning ordinance and procedures.  See “Arizona Association of Dispensary Professionals Threatens to Sue Phoenix Over Its Pre-registration Zoning Procedure.”

By |2015-04-06T18:49:26-07:00January 28th, 2011|Stories & Articles, Zoning|Comments Off on Phoenix Medical Marijuana Zoning a Confusing Nightmare
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Must All Dispensary Owners, Officers & Directors be U.S. Citizens?

Question:  Must all owners, officers and members of the board of directors of an Arizona medical marijuana dispensary be a citizen of the United States?

Answer:  Apparently “the principal officer” or one board member must be a U.S. citizen as of today, January 26, 2011. It appears that no other owner, officer or director must be a U.S. citizen, except for  the one  “principal officer” or board member selected by the insiders to give proof of U.S. citizenship to the Arizona Department of Health Services.

Although Proposition 203 does not contain U.S. citizenship or Arizona residency requirements, the first draft of the Arizona Department of Health Services rules contain both requirements.  Rule R9-17-107.F.1.d.v(1) requires that after a dispensary applicant receives the written notice of preliminary approval from DHS, the applicant shall submit to DHS “a copy of  the principal officer or board member’s Arizona driver’s license or identification card issued before October 1, 1996, and one of the following:

(1)  Birth certificate verifying U.S. citizenship,
(2 ) U. S. Certificate of Naturalization, or
(3)  U. S. Certificate of Citizenship.”

My take from reading this poorly worded rule is that only one person who is an owner, officer or board member of an Arizona medical marijuana dispensary must be a United States citizen.  The term “principal officer” is used 47 times in the rules, but the term is not defined.

By |2011-01-26T21:00:21-07:00January 26th, 2011|DHS Rules, Legal Issues, Questions People Ask|Comments Off on Must All Dispensary Owners, Officers & Directors be U.S. Citizens?
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How Can a Non-Arizona Resident Who Wants to Own an Interest in an Arizona Medical Marijuana Dispensary Participate Before Becoming a Resident?

Question:  Arizona Department of Health Services’ first draft of the medical marijuana dispensary rules requires that all officers and directors of Arizona medical marijuana dispensaries be Arizona residents for at least three years.  I don’t satisfy the residency requirement so how can I be involved in a dispensary now and become an owner when I qualify?

Answer:  There are several ways.  If your goal is to own an interest in an Arizona medical marijuana dispensary, you must establish Arizona residency for at least three years so the sooner you move to Arizona, the sooner you will meet the residency requirement.  The current DHS rules contain a three year Arizona residency requirement to be an owner, officer or director of a dispensary.  Myself and others have suggested to DHS that it eliminate the residency requirement because the requirement is not contained in Proposition 203 and it is a violation of the equal protection clause of the United States Constitution.  DHS could increase or decrease the residency requirement or eliminate it altogether before it issues the final rules.

A person who has not lived in Arizona for three years could become a paid employee or an unpaid volunteer of a dispensary.  These positions are great learning experiences and can help to establish contacts and relationships with the dispensary owner that could lead to an ownership interest in a dispensary.  However, without a legally binding written contract between you and the nonprofit entity or the owner(s) of the nonnprofit entity to acquire an ownership interest in the dispensary, you probably would never become an owner.

Make a Loan with an Option to Convert the Debt to Equity

A better way for a non-Arizona resident to acquire an ownership interest in an Arizona medical marijuana dispensary is by the non-Arizona resident loaning money to the nonprofit entity and having a written option to convert the loan to an equity (ownership) position after the non-Arizona resident establishes residency and each of the 17 other requirements of ownership currently in the DHS rules.  For example, if you and another person want to own a dispensary and become equal 50/50 owners, the other person could loan or contribute $125,000 to the nonprofit entity and you could loan it $125,000.  The other person would initially be the sole owner of the dispensary.  Your loan documents would provide that once you satisfy all 18 requirements to be an owner of an Arizona medical marijuana dispensary, you would have the option to notify the entity and its owner that you exercise your option to purchase a fifty percent ownership interest in the entity in exchange for releasing the entity from its obligation to repay the loan.  A condition to actually becoming an owner would be that DHS would have to approve you becoming an owner.

During the period of time before the lender becomes eligible to become an owner of the dispensary, the lender could be a paid employee of the nonprofit entity.

What Documents are Needed to Evidence a Debt to Equity Conversion Option

Here are the documents that must be prepared and signed by the appropriate parties do create and document a transaction where the nonprofit entity borrows money and gives the lender an option to convert the debt to equity:

  1. Loan Agreement:  This document sets forth all of the terms and conditions of the loan and the rights and obligations of the parties with respect to the option to convert the debt to equity.  For example, it would state the conditions that must be satisfied before the borrower can exercise the option such as establish residency and each of the 17 other DHS requirements for ownership, state when the option would expire, require the borrower to become a signer on the entity’s governing document [Operating Agreement for an LLC and stockholders agreement for a corporation] and on a buy-sell agreement and state the conversion ratio for converting one dollar of debt into a specified percentage of ownership of the entity.
  2. Promissory Note:  The Note evidences the loan terms and repayment obligation of the nonprofit entity.  It could be interest only for a period of time.  If principal payments are made, the lender would receive a smaller ownership interest in the entity on converting the debt to equity.
  3. Security Agreement:  If the loan will be secured by any personal property of the entity, the lien is evidenced by a Security Agreement signed by borrower and lender.
  4. UCC-1 Financing Statement:  If the borrower obtains a lien on the entity’s personal property, the lender must file a UCC-1 Financing Statement with the Arizona Secretary of State
  5. Deed of Trust on Real Property:  If the nonprofit entity owns any real property, the loan could be secured by a lien on the real property.
  6. Lender’s Title Insurance:  If the loan is secured by a lien on the entity’s real property, the lender should obtain a policy of lender’s title insurance.
  7. Personal Guaranty:  The lender should require the other owners of the nonprofit entity to guaranty the Loan Agreement.
  8. Resolutions of an Action by Unanimous Consent:  The governing body of the entity (board of directors of a corporation or members of an LLC) must hold a duly called and noticed meeting and adopt a resolution authorizing the entity to enter into the Loan Agreement, the Promissory Note and any other documents and designating the person who has the authority to sign the documents on behalf of the entity.  In lieu of holding a meeting, the governing body can sign an Action by Unanimous Consent that adopts all of the necessary resolutions, but all members of the governing body must sign the Action by Unanimous Consent or it will not be valid and the governing body must then hold a duly called and noticed meeting.
  9. Employment Agreement:  Needed if the lender will work for the nonprofit entity and be paid compensation before becoming an owner of the entity.
  10. NonDisclosure & Confidentiality Agreement:  The parties should sign this document to prevent either party from disclosing anything about the loan and to keep information confidential.
By |2014-01-05T09:33:44-07:00January 25th, 2011|Legal Issues, Questions People Ask|Comments Off on How Can a Non-Arizona Resident Who Wants to Own an Interest in an Arizona Medical Marijuana Dispensary Participate Before Becoming a Resident?
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New Record: 2,750 Visitors During the Week Ending 1/23/11

January 23, 2011, was the end of the fifth week since I started this website.  The number of visitors continues to grow each week.  For the week ending at midnight on January 23, 2011, this site had 2,750 visitors.  Thanks to all who visit.  If you have any suggestions for topics for articles, please send me a message.

By |2011-01-24T01:05:02-07:00January 24th, 2011|Miscellaneous|Comments Off on New Record: 2,750 Visitors During the Week Ending 1/23/11
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Is it Legal for a Promoter to Ask Me to Invest $25,000 in a Syndicate that Will Seek to Own an Arizona Medical Marijuana Dispensary

Question:  An Arizona business has a website on which it is offering to put together a group of people to own minority interests in an entity that will seek to obtain a license to operate a medical marijuana dispensary in Arizona.  In exchange for paying $25,000 I would become a part owner with several other investors in the entity that will seek the license.  Is this legal?

Answer:  Maybe, but be cautious.  It appears that the people who are seeking the investors are soliciting investors to purchase a security.  Federal and state securities law regulate the offer and sale of securities.  The general rule is that no person or entity can offer to sell or actually sell a security unless the securities are registered with the United States Securities and Exchange Commission or offered and sold as a private offering under one of the SEC’s rules that provide for exceptions to the general rule.

In the famous United States Supreme Court case of Securities & Exchange Commission v. W. J. Howey Co. the Court ruled that the sale of real estate coupled with a mandatory leaseback of the land was a type of security called an “investment contract.”  The Court said that”

“an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

If Sure Thing Investments, Inc., solicits me to join nine other investors who will each contribute $25,000 to World Wide Widgets, LLC, and my only involvement with the company is as a silent investor, I have purchased a security, i.e., the 10% membership interest in the LLC.  Sure Thing Investments, Inc., and the people who put the deal together must comply with applicable federal and state securities laws or they will be liable to me  and the other investors for any loss I suffer plus be subject to sanctions by the SEC and each state where an investor resides.  Complying with securities law involves many things, including  a requirement that the promoter deliver to investors before purchase a written prospectus or private placement memorandum that contains all material facts concerning the investment and that does not fail to disclose a material fact.

Given that the medical marijuana industry is brand new in Arizona and that its core busi9ness involves violating federal law, it is especially important that promoters and prospective issuers of securities involving an Arizona medical marijuana dispensary provide all prospective investors with a detailed disclosure document that lists all of the many risks arising from the unusual type of business.

Note:  Federal law provides that no person or entity can be compensate or receive property of value for finding an investor who purchases a security unless the person or entity is licensed as a securities broker or licensed as a securities sales agent working for a licensed securities broker.  For example, if Joe solicits investors on his website to invest $25,000 to become one of ten people who form an Arizona limited liability company that seeks to obtain a license to operate an Arizona medical marijuana dispensary and the LLC pays Joe $500 for each investor he brings to the deal, Joe must be a licensed securities broker or a licensed securities salesman working for a licensed securities broker.

Query:  What if Joe finds the investors for the would be dispensary LLC, but the LLC does not pay Joe any money or property for finding investors.  Instead, the LLC hires Joe  for big bucks to assist the LLC in obtaining a dispensary license.  Must Joe be a broker or a salesman working for a broker?  I don’t know, but it is a good question to ask a securities law lawyer or the Securities Division of the Arizona Corporation Commission.  You could argue that Joe must be licensed because the only reason the LLC paid Joe the money was because of Joe’s efforts that caused the investors to form the LLC for the purpose of hiring Joe.  My advise to Joe is to consult with an experienced securities law lawyer and if necessary, get licensed.

Warning:  Any person or business that solicits investors over the internet is by definition involved in a public offering that must be registered with the Securities and Exchange Commission.  As an Arizona business lawyer I have had people come to me from time to time because they placed an ad in a newspaper soliciting investors and received a cease and desist letter from the Securities Division of the Arizona Corporation Commission.  If you know of a website that is making a public offer to sell a security that has not been registered with the SEC or that is exempt from registration, contact the SEC.  If you have any inquiries or complaints regarding salesmen, investment advisers or securities involving offers or sales of securities to an Arizona resident, call the Securities Division of the Arizona Corporation Commission at  (602) 542-0662.

See “Arizona Corporation Commission Takes Action Against Sellers of Unregistered Real Estate Investments,”  “But is it a security?” and “Federal Securities Laws Basics.

By |2017-02-12T07:38:36-07:00January 22nd, 2011|Legal Issues, Questions People Ask|Comments Off on Is it Legal for a Promoter to Ask Me to Invest $25,000 in a Syndicate that Will Seek to Own an Arizona Medical Marijuana Dispensary
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Thanks for Coming – 569 Visitors Yesterday is a New Record

Yesterday, January 20, 2011, this website had a new record number of daily visitors – 569.  I started my Arizona medical marijuana law website on December 23, 2010, because I want to help people learn about legal issues affecting Arizona’s new industry.  The number of viewers has climbed steadily since day one.  Each of the last four days set a new daily record number of visitors.  This site has had 6,836 visitors in the first 29 days its been online.

My website at www.keytlaw.com has had over 6,000,000 visitors since January 1, 2006, because it contains tons of useful information about Arizona and federal law.  I currently have two other law websites.  They are IRA LLC Law and the KEYTLaw Law Blog.  I just started a new website called U.S. Real Estate Law, but it is not live yet.  The purpose of the new site is to inform non-U.S. citizens about legal issues that arise when they want to purchase investment real estate in the United States.

By |2011-01-21T07:51:44-07:00January 21st, 2011|Miscellaneous|Comments Off on Thanks for Coming – 569 Visitors Yesterday is a New Record
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Why Every Arizona Medical Marijuana Dispensary Must Hire a Primary & an Alternate Medical Director

The rules of the Arizona Department of Health Services require that every Arizona medical marijuana dispensary have a medical director.  See “What is a Medical Director & Why Does Every Arizona Medical Marijuana Dispensary Need One?”  If an operating dispensary were to suddenly lose its medical director, the dispensary would be in jeopardy of losing its Dispensary Registration Certificate, i.e., its license to grow and sell medical marijuana.

A dispensary could lose its medical director if the doctor were to:

  • die
  • become incapacitated or incompetent
  • lose his or her license to practice medicine
  • refuse to provide services even though it might be a breach of contract
  • suffer health problems
  • or experience any of an infinite number of events that result in no further services.

I could be wrong, but I’m pretty sure that no dispensary owner would want to risk losing the Dispensary Registration Certificate because of the loss of its medical director.  Because the risk of the  medical director could stop providing services at any time and cause the dispensary to lose its license and because the financial consequences so great, every dispensary should enter into a written contract with at least one other doctor to be an alternate medical director who automatically becomes the primary medical director if for any reason the primary medical director ceases to be the medical director.

By |2012-08-18T09:21:18-07:00January 19th, 2011|Legal Issues, Medical Directors|Comments Off on Why Every Arizona Medical Marijuana Dispensary Must Hire a Primary & an Alternate Medical Director
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What is a Medical Director & Why Does Every Arizona Medical Marijuana Dispensary Need One?

Question:  I am an Arizona physician who is considering offering my services to be the medical director of an Arizona medical marijuana dispensary.  Does every dispensary need a medical director?  What are the duties of the medical director under the Arizona Department of Health Services rules?

Answer:  The Arizona Department of Health Services rules require that every Arizona medical marijuana dispensary hire a medical director.  Proposition 203 did not contain a requirement for a medical director, but DHS decided in its wisdom that every dispensary should spend a lot of money to hire a medical director who must be doctor of medicine who holds a valid and existing license to practice medicine pursuant to A.R.S. Title 32, Chapter 13 or its successor or a doctor of osteopathic medicine who holds a valid and existing license to practice osteopathic medicine pursuant to A.R.S. Title 32, Chapter 17 or its successor and who has been designated by a dispensary to provide medical oversight at the dispensary.  R 9-17-312.

The Arizona Department of Health Services rules (R 9-17-312) for Arizona medical marijuana dispensaries require that every dispensary contract with a medical director who shall provide oversight for the development and dissemination of educational materials for qualifying patients and designated caregivers.  Here is the text of R9-17-312:

A. A dispensary shall appoint an individual who is a physician to function as a medical director.

B. During hours of operation, a medical director or an individual who is a physician and is designated by the medical director to serve as medical director in the medical director’s absence is:

1. On-site, or

2. Able to be contacted by any means possible, such as by telephone or pager.

C. A medical director shall:

1. Develop and provide training to the dispensary’s dispensary agents at least once every 12 months from the initial date of the dispensary’s registration certificate on the following subjects:

a. Guidelines for providing information to qualifying patients related to risks, benefits, and sides effects associated with medical marijuana;

b. Guidelines for providing support to qualifying patients related to the qualifying patient’s self-assessment of the qualifying patient’s symptoms including a rating scale for pain, cachexia or wasting syndrome, nausea, seizures, muscle spasms, and agitation;

c. Recognizing signs and symptoms for substance abuse; and

d. Guidelines for refusing to provide medical marijuana to an individual who appears to be impaired or abusing medical marijuana; and

2. Assist in the development and implementation of review and improvement processes for patient education and support provided by the dispensary.

D. A medical director shall provide oversight for the development and dissemination of:

1. Educational materials for qualifying patients and designated caregivers that include:

a. Alternative medical options for the qualifying patient’s debilitating medical condition;

b. Information about possible side effects of and contraindications for medical marijuana including possible impairment with use and operation of a motor vehicle or heavy machinery, when caring for children, or of job performance;

c. Guidelines for notifying the physician who provided the written certification for medical marijuana if side effects or contraindications occur;

d. A description of the potential for differing strengths of medical marijuana strains and products;

e. Information about potential drug-drug interactions, including interactions with alcohol, prescription drugs, non-prescription drugs, and supplements;

f. Techniques for the use of medical marijuana and marijuana paraphernalia;

g. Information about different methods, forms, and routes of medical marijuana administration;

h. Signs and symptoms of substance abuse, including tolerance, dependency, and withdrawal; and

i. A listing of substance abuse programs and referral information;

2. A system for a qualifying patient or the qualifying patient’s designated caregiver to document the qualifying patient’s pain, cachexia or wasting syndrome, nausea, seizures, muscle spasms, or agitation that includes:

a. A log book, maintained by the qualifying patient and or the qualifying patient’s designated caregiver, to track the use and effects of specific medical marijuana strains and products;

b. A rating scale for pain, cachexia or wasting syndrome, nausea, seizures, muscles spasms, and agitation;

c. Guidelines for the qualifying patient’s self-assessment or, if applicable,assessment of the qualifying patient by the qualifying patient’s designated caregiver; and

d. Guidelines for reporting usage and symptoms to the physician providing the written certification for medical marijuana and any other treating physicians; and

3. Policies and procedures for refusing to provide medical marijuana to an individual who appears to be impaired or abusing medical marijuana.

E. A medical director shall not establish a physician-patient relationship with or provide a written certification for medical marijuana for a qualifying patient.

By |2011-02-12T08:51:04-07:00January 19th, 2011|DHS Rules, Legal Issues, Medical Directors, Questions People Ask|Comments Off on What is a Medical Director & Why Does Every Arizona Medical Marijuana Dispensary Need One?
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Beware of the Single Owner Arizona Medical Marijuana Dispensary

Question:  Should I be the sole owner of my Arizona medical marijuana dispensary?

Answer:  Probably not.  Although the Arizona Department of Health Services rules allow an Arizona medical marijuana dispensary to be owned by a single person (a sole proprietor) or a company that has only one owner, I strongly recommend that no dispensary owner be the sole owner of the business.  The reason every dispensary should have at least two owners is to prevent the lose of the valuable dispensary license if the sole owner were to die or to become ineligible to be an owner, officer or director of the business.

Two examples will illustrate the terrible consequences of having a sole owner dispensary business.

Example 1:  Homer Simpson is the sole owner of an Arizona LLC called Bart’s Greenies, LLC.  Homer invested $500,000 to get a dispensary license and open his dispensary in Scottsdale in the food court of the Fashion Square Mall and to set up his 20,000 square foot cultivation farm in Pine Top.  Homer unexpectedly dies from joy and pride while attending Bart’s graduation ceremony at the Penn State University Hershey School of Medicine where Bart received his M.D. degree.  Because the LLC no longer has an owner approved by the Arizona Department of Health Services to be an owner, the LLC’s dispensary license automatically evaporates and so does all of its value.  There is no LLC with a dispensary license to be inherited by Homer’s family.

Example 2:  Same facts as in Example 1 except Homer does not die.  Instead, Homer divorces Marge and defaults on his child support payments for Maggie.  Because Homer is no longer eligible to be an owner, officer or director of an Arizona medical marijuana dispensary the LLC’s dispensary license automatically evaporates and so does all of its value.

Solution:  I recommend that every Arizona medical marijuana dispensary organization have at least two owners so that if one of the owners were to die or cease to be eligible to own an interest in the business, the other owner could continue as the sole owner of the business so that the business does not automatically lose its dispensary license.  Although a husband and wife who jointly own a dispensary are technically do not have a sole owner business, they should consider having another nominal owner in case the husband and wife were killed in a common accident.

Caution 1:  The December 17, 2010, first draft of the proposed rules contains 18 requirements that must be satisfied for a person to become an owner, officer or director of an Arizona medical marijuana dispensary business.  If any owner, officer or director ever becomes ineligible to be an owner, officer or director, the business will automatically lose its license to operate the dispensary.  This risk of automatic termination is one very big reason why all entities that want to obtain a dispensary license need to purchase my Bylaws that contain provisions intended to protect against the loss of the license if an owner, officer or director ceases to be eligible to be an owner, officer or director.  For more about why all dispensaries need properly drafted Bylaws see “Bylaws for Arizona Medical Marijuana Dispensaries.”

Caution 2:  Whenever a business has multiple unrelated owners, the owners must enter into a buy-sell agreement that contains their exit strategy.  Medical marijuana dispensaries especially need a good buy-sell agreement that covers the automatic buy-out of any owner who ceases to be eligible to be an owner.

By |2012-05-13T16:24:48-07:00January 18th, 2011|Legal Issues, Questions People Ask|Comments Off on Beware of the Single Owner Arizona Medical Marijuana Dispensary
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Bylaws for Arizona Medical Marijuana Dispensaries

All Arizona Medical Marijuana Dispensaries Must Have Bylaws

Arizona law requires that all Arizona corporations (for profit and nonprofit) adopt Bylaws.  Since Proposition 203 became law on December 15, 2010, all organizations (not just corporations) that seek a license to own and operate a dispensary in Arizona must adopt Bylaws.  Arizona Revised Statutes Section 36-2806.A states:

“The Bylaws of a registered nonprofit medical marijuana dispensary shall contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.”

Bylaws is the name given to the policies and procedures that govern the internal operation of a business organization.  The Merriam-Webster dictionary defines bylaws as “a rule adopted by an organization chiefly for the government of its members and the regulation of its affairs.”

Before Proposition 203 became the law of Arizona Bylaws were used almost exclusively by corporations.  As an Arizona business attorney, I have formed over 3,200 Arizona limited liability companies since I started counting in 2002.  Not one of the LLCs I formed prior to Proposition 203 have Bylaws because the Arizona laws that govern Arizona LLCs do not require Arizona LLCs to adopt Bylaws.  Arizona statutory law requires that all Arizona corporations adopt Bylaws.  Arizona Revised Statutes Section 10-206 (for profit corps) and Section 10-3206.A (nonprofit corps) both contain the following corporate requirement:

“The board of directors of a corporation shall adopt initial bylaws for the corporation.”

If you are part of an organization (regardless of the type of entity) that will seek to obtain a license to own and operate an Arizona medical marijuana dispensary, you must make sure that your organization has Bylaws that contain the specific language required by Arizona medical marijuana law and the Arizona Department of Health Services.  If your organization does not have the required Bylaws, it’s application for a dispensary license will be rejected.

See my article called “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”

By |2017-02-12T07:10:46-07:00January 17th, 2011|Legal Issues|Comments Off on Bylaws for Arizona Medical Marijuana Dispensaries
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Alan Sobol Challenges Andrew Meyer to a Verbal Duel

I got an email message from The Consiglieri Group on January 10, 2011, in which Alan Sobol is asking Andrew Meyers of the Arizona Medical Marijuana Association to debate him.  Here’s the text of the challenge:

“The Challenge: Allan Sobol Vs. MPP Local Manager Andrew Meyer.   OPEN CHALLENGE TO ANDREW MEYER.  2 hour Debate/discussion on the contested issues concerning the implementation of the new Arizona Medical Marijuana Act.   Paid conference hall meeting with all proceeds going to AZDHS to offset the cost of applications for low income qualifying patients.  Lets See if Mr, Meyers will respond.”

I’d like to attend, but I’m guessing Mr. Meyer will not accept the challenge.

By |2011-01-15T09:15:00-07:00January 10th, 2011|Stories & Articles|Comments Off on Alan Sobol Challenges Andrew Meyer to a Verbal Duel
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Richard Keyt’s Suggested Changes to the DHS Rules

What follows is the text of the suggested changes to the Arizona Department of Health Services’ December 17, 2010, rules that I posted in the comment area on the DHS website today.  Tomorrow, January 7, 2011, is the last day to submit online comments.

1.  Eliminate the requirement for a medical director.  This greatly increases operational costs that will be passed on to the patients.  It’s not in Prop 203 and is unreasonable.  Is there any other retail business in Arizona that must have a medical director?  Do you know if a doctor’s malpractice insurance would cover services to the dispensary?  The doctor may not be covered by malpractice insurance because the insurance company may say that being a medical director for a marijuana dispensary involves an industry that violates federal law and/or does not involve the practice of medicine.

2.  If you retain the medical director, allow licensed pharmacists to be a medical director.

3.  Do not require dispensaries to get a certificate of occupancy.  Many cities (Mesa for example) do not provide a CO,.  It was only a few years ago the Phoenix started issuing them.

4.  Do not require Arizona residency.  It’s not in Prop 203 and is unreasonable.  I don’t believe there is any other type of business in Arizona that must be owned by an Arizona resident.

5.  Give dispensaries guidance on what criteria you will use to select licensees.

6.  Create a preliminary approval so dispensaries can determine they will be able to get a license before spending a large amount of money without any assurance they will actually get a license.  Dispensaries could then build tenant improvements, purchase equipment and hire personnel knowing that they have a good chance of getting the license.  Applicants that are rejected and that do not get preliminary approval, will be spared wasting their money.

7.  Ease up on the requirements for a patient to get a recommendation from a doctor.  As one local doctor wrote recently, doctors can see a patient once and prescribe any number of drugs that are potentially much more harmful than marijuana.

8.  Eliminate or greatly reduce the requirement that a dispensary grow at least 70% of the marijuana it sells.  This growing requirements causes dispensaries to fund and operate a retail business and a farm, both of which are time-consuming and expensive.  Let dispensaries that want to grow more than they sell do so.  It would reduce the capital required by other dispensaries.

By |2011-01-18T19:15:42-07:00January 6th, 2011|DHS Rules, Stories & Articles|Comments Off on Richard Keyt’s Suggested Changes to the DHS Rules
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What Legal Contracts Does My Medical Marijuana Dispensary Need?

Question:  What are the various types of contracts needed by all Arizona medical marijuana dispensaries?

Answer:  The following is a list of the contracts that all Arizona medical marijuana dispensaries need.  Because of the unique nature of the business and the risk that an improper action by an employee, independent contract or dispensary agent could cause the loss of a dispensary’s license, it is critically important that the dispensary have very tight contracts that protect the dispensary.  Each contract must be drafted by an attorney who is familiar with and takes into consideration the legal requirements imposed on dispensaries by Arizona’s medical marijuana law and the Arizona Department of Health Services’ rules.  Each dispensary needs:

  1. Lease for the dispensary site
  2. Lease for the cultivation site
  3. Application for Employment
  4. Employment Agreement
  5. Contract with the primary medical director (see “Clauses to Include in a Contract between a Medical Director & a Dispensary)
  6. Contract with the alternate medical director (see “Why Every Arizona Medical Marijuana Dispensary Must Hire a Primary & an Alternate Medical Director“)
  7. Contract with Marijuana Grower Personnel
  8. Authorization to Conduct Background Check
  9. Dispensary Agent Agreement
  10. Employee & Dispensary Agent MMD Law Knowledge Test
  11. Employee Policy Manual
  12. Nondisclosure & Confidentiality Agreement
  13. Independent Contractor Agreement
  14. Premises Security Agreement for security guards
  15. Information Technology Agreement for computer services
  16. Patient Registration Form
  17. Patient Disclosure Form with Receipt
  18. Retail Sales Contract Form with disclosures
  19. Contract to Purchase Marijuana from another Dispensary
  20. Contract to Sell Marijuana to another Dispensary
  21. Marijuana Delivery Contract for anybody who delivers marijuana
  22. Buy-sell Agreement for the Owners of the Dispensary (the exit strategy)

Richard Keyt is an Arizona business lawyer and Arizona medical marijuana attorney.  I’ve practiced business law in Arizona since 1980 and prepared thousands of business contracts.

By |2019-06-14T08:27:46-07:00January 6th, 2011|Legal Issues, Questions People Ask|Comments Off on What Legal Contracts Does My Medical Marijuana Dispensary Need?
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How Does My Dispensary Tie Up Land for its Retail & Cultivation Sites?

Question: Must I know my Arizona medical marijuana dispensary and cultivation locations before I file my application with Arizona Department of Health Services to obtain a dispensary license?

Answer:  Yes.  Arizona Revised Statutes Section 36-2804 states:

“Not later than ninety days after receiving an application for a nonprofit medical marijuana dispensary, the department shall register the nonprofit medical marijuana dispensary and issue a registration certificate . . . if . . . The prospective nonprofit medical marijuana dispensary has submitted . . . an application, including:

(i) The legal name of the nonprofit medical marijuana dispensary.

(ii) The physical address of the nonprofit medical marijuana dispensary and the physical address of one additional location, if any, where marijuana will be cultivated, neither of which may be within five hundred feet of a public or private school existing before the date of the nonprofit medical marijuana dispensary application.”

Therefore, Section 36-2804 requires that the application state the name of the dispensary owner and the actual address where the dispensary will sell to patients and where it will grow its marijuana.  Now is the time for all prospective dispensaries to be looking for an buying or leasing the premises where they will operate and grow.  Once you find a site, if the site makes sense and if the zoning allows for the use of the site for a dispensary or cultivation site, you must tie up the site, i.e., enter into a legally binding lease for the premises or a contract to buy it.

Note:  Before you find your site, you must have formed you limited liability company so that it can be the party that signs the lease or purchase contract.  You do not want the personal liability that goes with being the singer on a lease or contract.   If you need me to form your Arizona limited liability company, see the links near the top of the right column of this website.

Because no applicant will know if the applicant will actually receive a dispensary license, it does not make sense for the dispensary to enter into either a lease or a contract to buy unless the lease or contract contains provisions that are unique to the medical marijuana business.  For example, you want a clause in your lease or purchase contract that gives you the option to terminate the lease or purchase option if you do not actually get a license or if you get a license and later lose the license and cannot get it back.  You’ll want a use clause that is appropriate for the business as well as clauses that allow you to make tenant improvements and take actions inside and outside the premises that are necessary to comply with Arizona’s medical marijuana law and the ADHS rules.

By |2012-08-18T09:12:17-07:00January 6th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off on How Does My Dispensary Tie Up Land for its Retail & Cultivation Sites?
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Can I Get a License to Grow Medical Marijuana in Arizona, but Sell Only to Dispensaries?

Question:  Can I create a business in Arizona that only grows marijuana and sells it to licensed medical marijuana dispensaries?

Answer as of 1/31/11:  Yes.  The January 31,2011, second draft of the rules eliminated the requirement that all dispensaries grow any portion of the marijuana.  A condition to growing, however, is that the grower must have a license to operate a dispensary.  It is not possible to get a license to grow without operating a dispensary.

Answer Before 1/31/11:  Not unless the Arizona Department of Health Services changes its proposed rules.  Proposition 203 and the December 17, 2010, first draft of the proposed rules allow only licensed dispensaries to grow and sell medical marijuana.  The  proposed rules contains this provision:

“R9-17-307. Administration.  C. A dispensary:

1.  Shall cultivate at least 70% of the medical marijuana the dispensary provides to qualifying patients or designated caregivers;

2.  Shall only provide medical marijuana cultivated or acquired by the dispensary to another dispensary in Arizona, a qualifying patient, or a designated caregiver authorized by A.R.S. Title 36, Chapter 28.1 and this Chapter to acquire medical marijuana;

3.  May only acquire medical marijuana from another dispensary in Arizona, a qualifying patient, or a designated caregiver;

4.  May acquire up to 30% of the medical marijuana the dispensary provides to qualifying patients and designated caregivers from another dispensary in Arizona, a qualifying patient, or a designated caregiver; and

5.  Shall not provide more than 30% of the medical marijuana cultivated by the dispensary to other dispensaries.”

By |2011-02-01T07:02:29-07:00December 28th, 2010|DHS Rules, Questions People Ask|Comments Off on Can I Get a License to Grow Medical Marijuana in Arizona, but Sell Only to Dispensaries?
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Will Some Banks Refuse to Give My Dispensary a Bank Account?

Question:  I’ve formed my nonprofit entity and want to open a bank account in the name of the entity.  Will my bank refuse to open an account because the business is growing and selling medical marijuana?

Answer:  Maybe.  If your entity has the word “marijuana” in its name, you may be dead in the water with many banks.  Unfortunately, many banks and credit unions refuse to do business with a medical marijuana business.  You may have to search to find a bank that is willing to open an account for your medical marijuana business.

In a  May 20, 2010, letter six members of the  U.S. House of Representatives asked Treasury Secretary Geithner to help solve the problem of banks refusing to do business with state legal medical marijuana businesses.  The letter states:

“dispensary operators are finding it increasingly difficult to maintain accounts with financial institutions, due to what a spokesman for Chase bank called, ‘financial operational and compliance risk.’  Thus, it seems clear that legitimate state-legal businesses are being denied access to banking services, which does not serve the public interest. Among other concerns, the effects of this denial of service include: (1) an increased risk to public safety with potential theft or robbery that any cash-only or cash-reliant business faces; (2) a decreased likelihood that medical marijuana vendors will have the ability to accurately account for tax liability; and (3) an affront to fundamental fairness. since forcing businesses to operate with cash exposes the owners to greater legal risk under the Bank Secrecy Act.

we respectfully request that your office issue formal written guidance for financial institutions assuring that Department priorities do not include targeting or pursuing institutions whose account holders are involved in a business ostensibly operating in compliance with a state medical marijuana law.”

In a  July 30, 2010 letter to Congresswoman Zoe Loftgren, the Office of the Comptroller of the Currency, Office of Thrift Supervision, Office of Thrift Supervision, National Credit Union Administration responded to the May 20, 2010, letter to Secretary Geithner and politely said the equivalent of the federal government couldn’t care less.  Here’s the conclusion reached in the letter:

“The decision to open, close or refuse a particular account or relationship should be made by a depository institution without involvement by its supervisor. An institution must make its own assessment of whether or not to accept an account based on its business objectives, an evaluation of the risks associated with offering particular products or services to customers or members, as well as its capacity to effectively manage those risks.”

By |2015-04-06T18:49:24-07:00December 28th, 2010|Banking Issues, Questions People Ask|Comments Off on Will Some Banks Refuse to Give My Dispensary a Bank Account?
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Medical Cannabis Dispensaries: Minimizing the Cost of IRC Section 280E

Luigi Zamarra, CPA is the Chief Financial Officer of Harborside Health Center, recognized as one of the largest medical cannabis dispensaries in the United States.  Mr. Zamarra has written an interesting article entitled “Medical Cannabis Dispensaries: Minimizing the Cost of IRC Section 280E” that is a must read for all prospective owners of Arizona medical marijuana dispensaries.  The article explains how a medical marijuana business that is legal under state law can allocate its expenses between deductible and nondeductible expenses so as to comply with the Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue Tax Court case and also deduct a substantial portion of its “nontrafficking” expenses.  Mr. Zamarra says:

“Making a 280E calculation is a three-step process. First, allocate all occupancy costs between Retail (this term is used herein to denote those operations, a portion of which would ordinarily be considered “trafficking” as this term is used in Section 280E) and Non-Retail operations. Second, make the same allocation for all payroll-related costs. Third, apply the ‘Transactional Factor’.”

Circular 230 Notice:  Pursuant to 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  links, 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 |2015-04-06T18:49:23-07:00December 27th, 2010|Tax Issues|Comments Off on Medical Cannabis Dispensaries: Minimizing the Cost of IRC Section 280E
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Internal Revenue Code Section 280E

How to Calculate the Taxable Income of a Medical Marijuana Dispensary Business Under Section 280E of the Internal Revenue Code

In the U.S. Tax Court case of Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue, 128 T.C. No. 14 (2007), the issue before the court was whether the Petitioner (CHAMP) could deduct ordinary expenses of $213,000 incurred in its medical marijuana business, a business that was legal under California law.  The Tax Court held that Internal Revenue Code Section 280E prohibited the deductions.  Here are some relevant statements made by the Court in its opinion:

Accrual method taxpayers such as petitioner may generally deduct the ordinary and necessary expenses incurred in carrying on a trade or business. See sec. 162(a).

Items specified in section 162(a) are allowed as deductions, subject to exceptions listed in section 261. See sec. 161. Section 261 provides that“no deduction shall in any case be allowed in respect of the items specified in this part.”

The phrase “this part” refers to part IX of subchapter B of chapter 1, entitled “Items NotDeductible”. “Expenditures in Connection With the Illegal Sale of Drugs” is an item specified in part IX. Section 280E provides:

“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 context of section 280E, marijuana is a schedule I controlled substance. See, e.g., Sundel v. Commissioner, T.C. Memo. 1998-78, affd. without published opinion 201 F.3d 428(1st Cir. 1999). Such is so even when the marijuana is medical marijuana recommended by a physician as appropriate to benefit the health of the user.

As a result of the CHAMP case and Section 280E of the Internal Revenue Code, it is very easy to calculate the taxable income of a business that’s only business is growing or selling medical marijuana.  Here’s how it works:

Gross Income – Cost of Goods Sold = Taxable Income

By |2012-08-05T10:31:54-07:00December 27th, 2010|Tax Issues|Comments Off on Internal Revenue Code Section 280E
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Bylaws – We Don’t Need No Stinking Bylaws or Do We?

Question:  What are Bylaws & Must My Dispensary Adopt Bylaws?

Answer:  Black’s law dictionary defines Bylaws as “a rule or administrative provision adopted by an organization for its internal governance and its external dealings.”  Bylaws have traditionally been a set of rules adopted by the Board of Directors of a corporation to govern the internal affairs of the corporation.   In fact, Arizona Revised Statutes Section 10-3206 requires all Arizona nonprofit corporations to have Bylaws.

Arizona enacted its limited liability company laws in 1992, but nothing in the Arizona LLC Act refers to Bylaws or requires Arizona LLCs to adopt Bylaws.  As a result, Arizona LLCs that have Bylaws are exceptions to the general rule that Arizona LLCs do not have Bylaws.  The Operating Agreement is the Arizona LLC’s governing document that replaces corporate Bylaws.  Because the most commonly formed entity in Arizona today is the LLC, and because many people who seek to obtain a license to own and operate an Arizona medical marijuana dispensary may form an Arizona LLC for that purpose, the question is does an LLC that seeks a license to own and dispensary need to adopt Bylaws?

The answer to that questions is Yes!  Arizona Revised Statutes Section 36-2806.A states: “The Bylaws of a registered nonprofit medical marijuana dispensary shall contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.”  The rules of the Arizona Department of Health Services also require Bylaws and that the Bylaws contain certain provisions. Therefor, the law requires the dispensary to have Bylaws so you must make sure your nonprofit entity adopts ADHS acceptable Bylaws.

By |2012-05-13T16:26:38-07:00December 27th, 2010|Legal Issues, Questions People Ask|Comments Off on Bylaws – We Don’t Need No Stinking Bylaws or Do We?
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Possible Class Action Lawsuit vs. ADHS to Eliminate Arizona Residency Requirement

Possible Class Action Lawsuit Against the Arizona Department of Health Services

Several non-Arizona residents who want to apply for and obtain a license to operate a medical marijuana dispensary in Arizona have asked me if I would file a class action lawsuit against the Arizona Department of Health Services to force it to eliminate the requirement that all officers and directors of the dispensary be Arizona residents.  This requirement was invented by ADHS without any basis.  I am not aware of any other Arizona business that Arizona law requires that the owners be Arizona residents.

The people who have asked me about a lawsuit would like to share the cost of the lawsuit.  If you are interested in being a co-plaintiff in a class action lawsuit vs. the ADHS to eliminate the Arizona residency requirement, complete our comment form and I will contact you and put you on my list of possible co-plaintiffs.

By |2015-04-06T18:49:23-07:00December 23rd, 2010|Legal Issues|Comments Off on Possible Class Action Lawsuit vs. ADHS to Eliminate Arizona Residency Requirement
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Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Question:   Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Answer: Apparently not!  Although the text of Proposition 203 says that an Arizona medical marijuana dispensary must be a ““a not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses marijuana or related supplies and educational materials to cardholders,” and it refers to Bylaws (a corporate governing document), officers (typically associated with corporations) and directors (exclusively associated with corporations), the Arizona Department of Health Services expanded the definition of not-for-profit entity to include types of entities in addition to corporations.

The December 17, 2010, first draft of the proposed DHS rules states that an “Entity means a person as defined in A.R.S. § 1-215.”  Section 1-215 says that “Person” includes a corporation, company, partnership, firm, association or society, as well as a natural person.”  Since an Arizona limited liability company is a company, DHS apparently will allow LLCs to own dispensaries unless it changes the rules to eliminate LLCs.  Here is an additional provision in the first draft of the rules that sanctions the use of a limited liability company:

“R9-17-301. Individuals to Act for a Dispensary Regarding Requirements.  When a dispensary is required by this Article to provide information on or sign documents or ensure actions are taken, the following shall comply with the requirement on behalf of the dispensary: . . . 4. If the dispensary is a limited liability company, a manager or, if the limited liability company does not have a manager, a member of the limited liability company”

As an Arizona business and entity formation attorney who has formed over 2,800 Arizona entities, I am surprised, but very glad that DHS is not requiring that people form Arizona nonprofit corporations to own and operate medical marijuana dispensaries.  The only type of entity that is specifically recognized under Arizona as a nonprofit entity is the Arizona nonprofit corporation.  The big problem with an Arizona nonprofit corporation is that it does not have any owners.  It simply would not be right for the government to require people to spend substantial amounts of time and invest large amounts of money into a nonprofit corporation that does not have any owners.

If you want more background and analysis of this nonprofit entity issue, read my article called “Arizona Proposition 203 – Legalization of Medical Marijuana.”

Arizona Medical Marijuana Dispensaries Should be Arizona Limited Liability Companies

My recommendation is that all entities that seek to obtain a license to operate an Arizona medical marijuana dispensary be Arizona limited liability companies.  People who have already formed an Arizona nonprofit corporation with the intent to have it obtain the license should put the corporation on the shelf and form a new Arizona LLC to be the nonprofit entity that seeks and obtains the license.

I would love to form your Arizona LLC that will own and operate a medical marijuana dispensary.  My fee is $1,599, which includes the all important nonprofit LLC Bylaws.  See my articles called “Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?” and “Bylaws for Arizona Medical Marijuana Dispensaries.”

By |2017-02-12T07:05:51-07:00December 23rd, 2010|Legal Issues, Questions People Ask|2 Comments
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DHS Says Dispensaries Can Be Limited Liability Companies

Good news.  The first draft of the proposed Arizona medical marijuana rules issued by the Arizona Department of Health Services on December 17, 2010, says that the entity that owns and operates a medical marijuana dispensary can be a limited liability company (the preferred entity of choice in Arizona), a corporation, sole proprietorship (a mistake), general partnership (a mistake) or a limited partnership (not a mistake, but somewhat obsolete in Arizona).

Although the nonprofit corporation is the only type of entity recognized by Arizona statutory law as a nonprofit entity, the ADHS correctly did not interpret the language of Proposition 203 as requiring that medical marijuana dispensary nonprofits be Arizona nonprofit corporations.  The biggest problem with a nonprofit corporation used for a business is that nobody actually owns an Arizona nonprofit.  See my June 6, 2010, article  called “Arizona Proposition 203 – Legalization of Medical Marijuana” on whether MMD nonprofits must be Arizona nonprofit corporations in which I stated:

“Proposition 203 creates a big problem for people who are contemplating creating an MMD?  The $64,000 question is must an Arizona MMD be created as an Arizona nonprofit corporation or can it be one of the types of entities typically formed to make a profit, but operated as a nonprofit entity?  We will not know the answer to this question until DHS gives us the answer or it approves MMDs that are not Arizona nonprofit corporations.”

If you need an Arizona attorney to form your Arizona LLC, see the links on the right column of this website and hire Arizona medical marijuana attorney Richard Keyt, aka the Arizona medical marijuana lawyer, to form your Arizona LLC.

By |2011-01-18T19:26:35-07:00December 21st, 2010|Legal Issues, Stories & Articles|Comments Off on DHS Says Dispensaries Can Be Limited Liability Companies
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Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?

Question:  Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?

Answer:  No and thankfully no!  Arizona Revised Statutes Section 36-2806.A states: “A registered nonprofit medical marijuana dispensary need not be recognized as tax-exempt by the Internal Revenue Service.”  If Proposition 203 required dispensaries to become tax-exempt organizations, the IRS would deny every application because it would not allow any business engaged in violating federal law to become exempt from federal income taxes.  In addition, even if it were possible for a dispensary to obtain a tax exemption, the consequences would be disastrous for most dispensaries.  Tax-exempt organizations are prohibited from paying excess benefits to owners, directors, officers and insiders.  If excess benefits are paid, the tax penalties are severe – 100% of the excess benefit PER YEAR since the payment until the penalty is paid in full.

By |2017-02-11T17:03:09-07:00December 20th, 2010|Legal Issues, Questions People Ask, Tax Issues|Comments Off on Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?
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Department of Health Services Issues Proposed Medical Marijuana Rules

Proposed Arizona Medical Marijuana Rules / Regulations Issued by the Arizona Department of Health Services on December 17, 2010

Arizona Governor Jan Brewer signed a proclamation on December 14, 2010, that caused Arizona Proposition 203 to become law as of the following day.  The Arizona Department of Health Services now has 120 days ending on April 14, 2010, to prepare regulations that govern Arizona’s brand new medical marijuana patients and the dispensing and growing industry.  Today, December 17, 2010, DHS issued the first draft of its proposed Title 9, Health Services Chapter 17.Department of Health Services – Medical Marijuana Program.  Here are some of the interesting revelations I found in my quick skim through the proposed regulations:

  • “Entity” means a person as defined in A.R.S. § 1-215., which states:

“Person” includes a corporation, company, partnership, firm, association or society, as well as a natural person. When the word “person” is used to designate the party whose property may be the subject of a criminal or public offense, the term includes the United States, this state, or any territory, state or country, or any political subdivision of this state that may lawfully own any property, or a public or private corporation, or partnership or association. When the word “person” is used to designate the violator or offender of any law, it includes corporation, partnership or any association of persons.”

  • Each dispensary must have a “Medical director” who is a doctor of medicine who holds a valid and existing license to practice medicine pursuant to A.R.S. Title 32, Chapter 13 or its successor or a doctor of osteopathic medicine who holds a valid and existing license to practice osteopathic medicine pursuant to A.R.S. Title 32, Chapter 17 or its successor and who has been designated by a dispensary to provide medical oversight at the dispensary.
  • Dispensary registration fee = $5,000
  • Dispensary renewal fee = $1,000
  • Fee to change the location of a dispensary = $2,500
  • Fee to change the location of a cultivation site = $2,500
  • Fee to get or renew a qualifying patient card = $150
  • Fee to get or renew a designated caregiver card = $200
  • Fee to get or renew a dispensary agent card = $200
  • A registration packet for a dispensary is not complete until the applicant provides the Department with written notice that the dispensary is ready for an inspection by the Department.
  • Officers and board members of a dispensary must give DHS a copy of their Arizona driver’s license
  • Number of working days applicable to applications for a dispensary:  overall time frame = 90; time for applicant to complete application = 90; admin completeness 30; substantive review time = 60

Regulations Applicable to Arizona Medical Marijuana Dispensaries

  • Dispensaries can be individuals, corporations (for profit and nonprofit), limited liability companies, partnerships, joint ventures and any other business organization
  • “Each principal officer or board member of a dispensary is an Arizona resident and has been an Arizona resident for the two years immediately preceding the date the dispensary submits a dispensary certificate application.”  I am very surprised by this requirement.  Proposition 203 does not contain any language that restricts who can own a dispensary or that requires owners be residents of Arizona or any other state or country.
  • The application must state whether a principal officer or board member:

1.  Is a physician currently making qualifying patient recommendations

2.  Has not provided a surety bond or filed any tax return with a taxing agency – This does not make any sense.

3.  Has unpaid taxes, interest, or penalties due to a governmental agency.

4.  Has an unpaid judgment due to a governmental agency.

5.  Is in default on a government-issued student loan.

6.  Failed to pay court-ordered child support.

7.  Is a law enforcement officer.

8.  Is employed by or a contractor of the Department

  • The application must state the name and license number of the dispensary’s medical director
  • The application must state if the dispensary and, if applicable, the dispensary’s cultivation site are ready for an inspection by the Department
  • The application must state if the dispensary and, if applicable, the dispensary’s cultivation site are not ready for an inspection by the Department, the date the dispensary and, if applicable, the dispensary’s cultivation site will be ready for an inspection by the Department
  • The application must state the name and title of each principal officer and board member
  • The application must contain a copy of the business organization’s articles of incorporation, articles of organization, or partnership or joint venture documents, if applicable.
  • The application must contain an attestation signed and dated by the principal officer or board member that the principal officer or board member is an Arizona resident and has been an Arizona resident for at least two consecutive years immediately preceding the date the dispensary submitted the dispensary certificate application.
  • The application must include a copy of the certificate of occupancy or other documentation issued by the local jurisdiction to the applicant authorizing occupancy of the building as a dispensary and, if applicable, as the dispensary’s cultivation site.
  • The application must include a copy of the dispensary’s by-laws containing provisions for the disposition of revenues and receipts.
  • The application must include a business plan demonstrating the on-going viability of the dispensary as a non-profit organization.
  • The application must state whether a registered pharmacist will be onsite or on-call during regular business hours and if the dispensary will provide information about the importance of physical activity and nutrition onsite.
  • The dispensary must employ or contract with a medical director.
  • A dispensary shall cultivate at least 70% of the medical marijuana the dispensary provides to qualifying patients or designated caregivers.  This is a surprise and probably a problem and increased costs for many dispensaries.
  • A dispensary shall not provide more than 30% of the medical marijuana cultivated by the dispensary to other dispensaries.  Another surprise!
  • A medical director may only serve as a medical director for three dispensaries at any time.
  • The building used by a dispensary or the dispensary’s cultivation site shall have a flushable toilet with running water, soap in a dispenser and toilet tissue.
  • DHS will deny an application for a dispensary if a principal officer or board member:

1.   Is not a resident of Arizona or has not been a resident of Arizona for at least two consecutive years immediately preceding the date the application for the dispensary registration certificate is submitted.

2.  Is a physician currently making qualifying patient recommendations.

3.  Is a law enforcement officer.

4.  Is an employee of or a contractor with the Department.

  • The Department may deny an application for a dispensary registration certificate if a principal officer or board member of the dispensary:

1.  Has not provided a surety bond or filed any tax return with a taxing agency.

2.  Has unpaid taxes, interest, or penalties due to a governmental agency.

3.  Has an unpaid judgment owed to a governmental agency.

4.  Is in default on a government-issued student loan.

5.  Failed to pay court-ordered child support.

6.  Provides false or misleading information to the Department.

By |2017-02-12T07:05:50-07:00December 17th, 2010|Dept Health Services, DHS Rules, Legal Issues|Comments Off on Department of Health Services Issues Proposed Medical Marijuana Rules
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Phoenix City Council Approves Zoning Changes for Medical Marijuana Dispensaries

Phoenix City Council Approves Phoenix Medical Marijuana Zoning Ordinance

The Phoenix City Council voted on December 8, 2010, to approve its medical marijuana zoning ordinance.  Here are some of the requirements of the new zoning ordinance that apply to the retail dispensary location:

  1. The dispensary must obtain a use permit from the City of Phoenix Planning Department.
  2. The dispensary must notify Phoenix of the name and location of its grow facility.
  3. “A survey sealed by a registrant of the State of Arizona shall be submitted to show compliance with the distance requirements listed below if the proposed facility is within 110% of the minimum distance from the proposed facility.”  This doesn’t make any sense to me!
  4. The dispensary cannot grow marijuana at the location of its retail store.
  5. The dispensary “shall be located in a closed building and may not be located in a trailer, cargo container, or motor vehicle or similar structure or motorized or non-motorized vehicle.”
  6. The dispensary “shall not exceed 2,000 square feet of net floor area; this shall include all storage areas, retail space and offices.”  Wow!  This is very limiting.
  7. The dispensary “shall not be located within 5,280 feet of the same type of use or a medical marijuana cultivation or infusion facility.”
  8. The dispensary”shall not be located within 250 feet of a the following residentially zoned districts:  S-1, S-2, RE-43, RE-35, RE-24, R1-18, R1-14, R1-10, R1-8, R1-6, R-2, R-3, R-3A, R-4, R-4A, R-5, PAD-1 through PAD-15.”
  9. The dispensary “shall not be located within 1,320 feet of a preschool, kindergarten, elementary, secondary or high school, public park or public community center.”
  10. The dispensary “shall not be located within 500 feet of a place of worship.”
  11. The dispensary “shall have operating hours not earlier than 8:00 a.m. and not later than 7:00 p.m.”
  12. The dispensary many not have any drive-through services.

Here are some of the requirements of the new zoning ordinance that apply to the dispensary’s medical marijuana cultivation facility location:

  1. The dispensary’s medical marijuana cultivation facility must obtain a use permit from the City of Phoenix Planning Department.
  2. The dispensary’s medical marijuana cultivation facility must notify Phoenix of the name and location of its retail dispensary.
  3. “A survey sealed by a registrant of the State of Arizona shall be submitted to show compliance with the distance requirements listed below if the proposed facility is within 110% of the minimum distance from the proposed facility.”  Again, this doesn’t make any sense to me!
  4. The dispensary’s medical marijuana cultivation facility cannot sell marijuana at its facility.
  5. The dispensary’s medical marijuana cultivation facility “shall be located in a closed building and may not be located in a trailer, cargo container, or motor vehicle or similar structure or motorized or non-motorized vehicle.”
  6. The dispensary’s medical marijuana cultivation facility “shall not be located within 5,280 feet of the same type of use or a medical marijuana dispensary or infusion facility.”
  7. The dispensary’s medical marijuana cultivation facility “shall not be located within 1,000 feet of a the following residentially zoned districts:  RE-43, RE-35, RE-24, R1-18, R1-14, R1-10, R1-8, R1-6, R-2, R-3, R-3A, R-4, R-4A, R-5, PAD-1 through PAD-15.”
  8. “All closed buildings used for the cultivation of medical marijuana shall be setback 1,000 feet from all property lines.”  Yikes!  Does this mean that a square parcel that has property lines on four sides must have a cultivation facility that is at least 1,000 feet from all four property lines?  A square parcel with 1,000 foot setbacks means the property is a square with 2,000 foot sides and not less than 4,000,000 square feet, which is approximately 92 acres (4,000,000/43,560 fee per acre).  What am I missing here?
  9. The dispensary’s medical marijuana cultivation facility “shall not be located within 1,320 feet of a preschool, kindergarten, elementary, secondary or high school, public park or public community center.”
  10. The dispensary’s medical marijuana cultivation facility “shall not be located within 500 feet of a place of worship.”
By |2015-04-06T18:49:22-07:00December 9th, 2010|Stories & Articles, Zoning|Comments Off on Phoenix City Council Approves Zoning Changes for Medical Marijuana Dispensaries
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Q&A with Arizona State Director of the Department of Health Services on Medical Marijuana

The East Valley Tribune has a question and answer session with Will Humble, Director of the Arizona Department of Health Services, about Arizona’s new medical marijuana law.

By |2010-12-19T16:47:17-07:00November 15th, 2010|Stories & Articles, Will Humble Speaks|Comments Off on Q&A with Arizona State Director of the Department of Health Services on Medical Marijuana
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