Marijuana Businesses, Particularly In California, Struggle To Navigate A Thicket Of Regulations

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The term “marijuana millionaire” was coined amid the emergence of the legalized cannabis industry as new business owners spoke about their piles of cash. It was a tantalizing picture.

The reality is that running a cannabis business doesn’t always mean the owners are actually getting to keep those piles of money as income. Tax payments are higher than in other industries, and companies can’t claim typical business deductions. Retail dispensaries, like any other retail operation, produce low margins. Producers find they are spending more and more on marketing as hundreds of new products enter the industry every month, and the price of marijuana is dropping. And on top of all that, there’s the mountain of rules and regulations to comply with.

According to Adherence Compliance, a Denver-based company that specializes in cannabis compliance, about 76% of all operators fail at least on inventory requirements, 72% on security and surveillance requirements, 67% on labeling and packaging, 64% on business records and 53% on transport and storage. “Compliance is the coming storm in California. Without operational compliance, everything is at risk,” said Steve Owens, CEO of Adherence Compliance.

Owens notes that hundreds of millions of dollars are being invested in the cannabis industry ― a lot of money at risk by not being able to comply with many layers of rules.

His company has taken predictive analytics and machine learning and applied it to the cannabis industry to determine where a licensed business may fail next. By doing hundreds of compliance inspections with cannabis businesses that range from dispensaries to cultivation centers to manufacturers that make vape pens or edibles, Adherence Compliance has identified some specific failure patterns.

“How will a medical marijuana dispensary or cultivation center in San Jose, California, fail tomorrow or next week? That’s the question that can save a business owner tens of thousands of dollars in fines, penalties and corrective actions,” Owens said. The California market is filled with existing owners trying to wrap their heads around a slew of new regulations that can vary by state and municipality.

Currently, Adherence has determined that Illinois is the most compliant state, averaging a score of 97.1 out of 100. Illinois has not legalized adult-use marijuana and is a fairly young, smaller program that has a strict regulatory environment.

Colorado scores on average 82.9 out of 100, but it has an older, much larger program with both medical and recreational use, which creates many more rules and regulations to abide by. Colorado has more than 3,200 operational licenses and 22 regulatory investigators.

California is the least compliant state. “Operators in California average more than 16 compliance infractions per inspection, with average compliance scores of 74.4 out of 100,” Owens said. “California’s market has been mostly unregulated since inception, but all businesses must be dually licensed and compliant by Jan. 1, 2018. There’s not much time.”

One rule that California growers may find especially difficult is not exporting product out of the state. Joseph Devlin, chief of cannabis policy and enforcement for  Sacramento, said he has heard California production estimated at five times the state’s consumption. If growers stick to the rules, they will be forced to scale back.

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