Looking at Marijuana Dispensaries

California Attorney General Jerry Brown published guidelines for legally qualified patients and state law enforcement in August 2008, which give specific instruction to medical cannabis (marijuana) patients and law enforcement about how to comply with California's medical cannabis laws. While these guidelines are not binding in court, they do represent the policy of the state's highest-ranking law enforcement officer as to what rights and responsibilities medical cannabis patients have under existing state law, and what police officers should do to uphold the law.
Recently, The Los Angeles District Attorneys Office announced that they will prosecute and shut down all medical marijuana dispensaries in Los Angeles County. All owners, caregivers, employees, and patients are at risk. We see this as an attack on our constitutional rights and an irresponsible approach by prosecutors in Los Angeles.
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At our law offices, we have represented numerous dispensaries, collectives, and thousands of Medical Marijuana patients throughout the years. Our firm has earned a reputation as an aggressive and zealous law firm devoted to the constitutional rights and protections of the accused. You may have seen Mr. Tabibian on the Medical Marijuana Documentary "Super High Me" or may have listened to his radio program. We are always advocating for patient's rights and Attorney Sean Tabibian is also a contributing member of NORML (National Organization for the Reform of Marijuana Laws).
Having our firm on retainer prior to a bust or charges being filed is extremely advantageous. It is important to protect yourself and your freedom by having an advocate at your time of need.
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What Is a Medical Cannabis Collective or Cooperative?
California Health and Safety Code Section 11362.775 allows qualified patients and their primary caregivers to associate together collectively and cooperatively to grow medicine for the patient-members' personal medical use. In its simplest form, a medical cannabis collective or cooperative is a member owned or operated garden where two or more patients and their caregivers, where applicable, grow medicine together. However, the large majority of medical cannabis patients can not cultivate their medicine, alone or in an association, nor do they have a caregiver who can grow it for them.
Most of California's legal patients obtain their medicine from a storefront facility operated by a medical cannabis collective or cooperative, sometimes referred to as a "dispensary" or "cannabis club." The medicine provided by a dispensing collective or cooperative is cultivated by members of the association, sometimes in a central location and, more commonly, in numerous smaller gardens operated by individual members at locations other than the storefront. The association receives medicine from the members who grow it, and provides medicine to members in need. Thus, the collective or cooperative operates as a closed circuit, isolated from the illicit market in cannabis. There are hundreds of these associations operating storefront facilities in California as of August 2008. An increasing number of facilities offer additional services for their patient membership, including such services as: massage, acupuncture, legal trainings, free meals, or counseling.
The legal status of medical cannabis collectives and cooperatives is evolving in step with California law, and the Attorney General's guidelines are an important part of this process. Cities and counties have adopted a patchwork of ordinances regulating facilities, and statewide regulation may be in the future. In the meantime, collective and cooperative operators must be diligent about staying informed and in compliance with changing laws and local regulations.
Business Forms
It is unclear whether or not lawmakers intended to specify a formal structure for a patients' group when they adopted California Health and Safety Code 11362.775 authorizing patients and caregivers to "associate within the State of California in order collectively or cooperatively to cultivate marijuana for medical purposes." The guidelines, however, recognize two organizational structures for patients' associations that are legally growing or distributing medicine: collective and cooperative.
A cooperative can refer to a grower cooperative or a consumer cooperative as described and organized under California Corporations Code Sections 12201 and 12300. These types of cooperatives are statutory entities, which must be duly incorporated as cooperatives and follow strict operational rules. These operational rules include, in part, electing a Board of Directors and reporting financial contributions from members. Patients and caregivers who wish to form a statutory grower or consumer cooperative should consult with a qualified and experienced attorney to be sure they organize and operate under the law.
A collective is the more typical type of patients' association recognized under the guidelines. The term "collective" is not defined under state law, and can refer to any membership-based association, regardless of its formal organization. The Attorney General describes a medical cannabis collective as "an organization that merely facilitates the collaborative efforts of patient and caregiver members - including the allocation of costs and revenues." Because the term collective does not imply a specific legal structure, the guidelines state that "as a practical matter [the collective] might have to organize as some form of business to carry out its activities." [italics added]
The definition of a collective in the guidelines leaves broad organizational latitude as to the legal entity that will carry out the activities of the patient and caregiver collective. Operators can use any common business form, including a sole proprietorship, corporation, partnership, limited liability company, or nonprofit corporation. It is important that the collective operators follow all the usual procedures for establishing and operating whatever business form they choose. It is prudent to consult with an attorney and accountant before establishing a business to carry out the activities of the collective, and to maintain a working relationship with both to ensure legal operation on an ongoing basis.
Non-profit Operation
California Health and Safety Code Section 11362.765(a) says that nothing in the law authorizes the cultivation of medical cannabis for profit. The Attorney General's guidelines are very brief on this topic, stating "Nothing in Proposition 215 or [Senate Bill 420] authorizes collectives, cooperatives, or individuals to profit from the sale or distribution of marijuana." There is no reason to assume that this brief passage from the guidelines mandates the establishment of a statutory nonprofit corporation as described in California Corporations Code Section 5000, et seq. However, operators may chose to organize a medical cannabis collective as a California nonprofit corporation, as discussed in greater detail below.
Regardless of the organizational structure, a medical cannabis collective should operate in a "not-for-profit" manner to comply with the Attorney General's guidelines. Not-for-profit operation describes the behavior of a business or association that is not operated for a commercial purpose, or to generate profits for its owners. Any business, regardless of its formal structure, can operate in a not-for-profit fashion by reinvesting excess revenue (after salaries and other overhead) in services for members, advocacy for patients' rights, or other noncommercial activity.
Operating in a not-for-profit manner does not mean that patients and caregivers who own or operate a collective can not be paid a reasonable wage for their services. Patients operating not-for-profit collectives should be aware, however, that the perception of excessive profits is what motivates this provision of the guidelines. Paying reasonable salaries is acceptable, but other indicia of excessive profits should be avoided - bonuses, dividends, conspicuous spending, etc.
The term not-for-profit is sometimes confused with the term nonprofit. A nonprofit corporation is a specific statutory entity organized under California Corporation Code Section 5000, et seq ., to carry on a non-commercial activity. Nonprofit corporations include churches, schools, some hospitals, social clubs, and service organizations. The principal differences between a nonprofit corporation and a for-profit business for these purposes are that (1) a nonprofit has no owners or shareholders, only an elected Board of Directors (can be self-electing); and (2) the proceeds of a nonprofit (not including salaries paid) may never inure to the benefit of any private party.
Some nonprofits are exempt from federal and state taxes because they do educational, religious, or charitable work. The Internal Revenue Service will not recognize providing medical cannabis as a tax-exempt activity, and state tax-exemption is contingent on federal approval. Therefore, a medical cannabis collective organized as a nonprofit corporation will report and pay tax like a traditional C-Corporation. It is important to remember, however, that a corporation is still a legitimate nonprofit organization under California law, even without tax-exempt status.
Many collective operators choose to incorporate their collectives as California Nonprofit Mutual Benefit Corporations , as described under California Corporations Code 7110, et seq . Doing so gives the collective a bona fide nonprofit identity, something that resonates with elected officials, law enforcement, media, and neighbors. This is a sensible choice for most operators, and increasingly the norm for new facilities. Creating and operating a nonprofit corporation is more difficult than doing so with a commercial business model, and may present special issues around taxation and transfers in ownership. Operators should seek the advice of a qualified business attorney with experience in nonprofit law.
Business Licenses, Sales Tax, and Seller's Permits
Medical cannabis collectives and cooperatives should obtain all necessary licenses and permits, and pay all taxes due. Licensing and permitting rules vary from one jurisdiction to another. It is the collective operator's responsibility to know what local licenses or permits are needed for a storefront facility that provides medicine to members. ASA strongly recommends working with a qualified and experienced land use attorney if there is any uncertainty in a given city or county.
Over the objection of ASA, the California Board of Equalization (BOE) has determined that medical cannabis transactions are subject to sales tax. Every collective or cooperative should complete Form BOE-400-SPA to apply for a California Seller's Permit, and collect and pay sales tax as required by state law. You can download a copy of Form BOE-400-SPA online at www.boe.ca.gov or visit a BOE field office near you. Medical cannabis collectives and cooperatives may obtain a "Waiver for Incomplete Application" from a BOE field office if they do not wish to disclose what product is sold or the identities of the member-cultivators from whom they obtain medication.
The BOE is aggressively enforcing this policy, and the consequences for failing to pay can be severe for patient-operators. ASA strongly advises that operators seek the assistance of a qualified professional if they are unclear on how to comply with sales tax requirements or receive a notice from the BOE.
Membership Application and Verification
A medical cannabis dispensing collective or cooperative is a membership-based organization. Associations can not make a credible claim to be a collective or cooperative if they do not have a process through which patients and caregivers' legal status is verified and recorded. Best practices dictates that the collective will review an original copy of the doctor's letter of recommendation, verify the letter with the doctor or staff, and check with the medical board to be sure the doctor is duly licensed to practice medicine in California. Most verification of patients and doctors can be completed on the telephone and online, so there is no reason that a patient can not be verified before joining an association and receiving services. There are a variety of online verification options for collectives and cooperatives, which are particularly useful on weekend or in the evening when doctor's offices are closed.
The guidelines require collectives and cooperatives to maintain membership records that are reasonably available, but not necessarily on site. Digital records used on site can be secured using a variety of safety options, including encryption. Paper records not needed for daily operation can be stored off-site, perhaps with an attorney, and only made available to law enforcement following due process of law (typically a subpoena or search warrant) or after consultation with the collective's attorney.
The membership forms used to enroll new members should include a signed statement in which the member agrees not to redistribute medicine to anyone else or use the medicine for any non-medical purpose. The collective must use due-diligence in tracking expiration dates and in enforcing the rules of the facility. For a detailed explanation of best practices in registering new members and keeping records, see "Chapter 10. Registering Members" in the Appendix.
Collectives Should Acquire, Possess, and Distribute Only Lawfully Cultivated Cannabis
Medical cannabis collectives and cooperatives may only acquire medicine from their registered members, and provide it to other registered members for their personal medical use. Additionally, the Attorney General's guidelines anticipate that medicine destined for a collective will be transported by a registered member of that collective. These restrictions are designed to create a closed circuit of medicine inside the collective's membership, which is completely isolated from the illicit market. The guidelines do not authorize medical cannabis brokers or middlemen to buy commercial quantities of cannabis on the illicit market and then provide it wholesale to collectives. The guidelines also do not authorize collectives to provide medicine to members for the purpose of reselling it or to distribute it to other collectives.
The guidelines recommend that collectives and cooperatives keep records of transactions when they acquire or provide medicine. This may give some operators pause, as these records could be used as evidence in a federal case. However, a savvy operator can keep detailed operational records, which are necessary for business operation and tax purposes already, without incriminating anyone. Incoming and outgoing transactions can be recorded using a unique transaction or purchase order number that simply specifies that the transaction involved a duly registered member. Virtually every commercial point-of-sale system generates unique transaction and purchase order numbers. Smaller facilities can accomplish the same goal using off-the-shelf business forms available at any office supply store.
It is important to remember that transaction records and other financial documents need not be stored on-site, where they are subject to confiscation in a law enforcement raid. The records should be made available to law enforcement only following due process of law (typically a subpoena or search warrant) or after consultation with the collective's attorney.
Distribution and Sales to Non-members Prohibited
It should go without saying that collectives must take adequate steps to prevent medication from being diverted to non-medical use. Patient-operators must only provide medicine to registered members whose legal status has been verified, and diligently enforce non-diversion polices at their facilities. There is no gray zone on this issue. Medical cannabis provided at collectives and cooperatives must stay within the registered membership of that association and be used for the member's personal medical need.
It is the responsibility of the collective or cooperative operator to ensure that staff is trained to spot signs of diversion of medicine and respond to abuses. Signs of diversion might include, but are not limited to, frequent visits to the facility, acquiring relatively large quantities of medicine, comments indicating that medicine is intended for someone else, etc. Operators must take steps to correct suspicious behavior or exclude patients or caregivers from membership if they violate the facility rules.
Permissible Reimbursements and Allocations
The Attorney General's guidelines authorize collectives and cooperatives to be reimbursed for medication in four ways: (1) medication can be given to members for free, (2) members can trade labor for medication, (3) members can pay the collective a reasonable reimbursement to cover cost of the medicine and overhead, or (4) the member and facility can arrange any combination of the other three options. Which one or what combination of reimbursement options a collective uses is at the discretion of the operator, and no collective is obligated to distribute medicine for free or exchange labor for medicine under these guidelines. Collectives and cooperatives must collect and pay sales tax on any money received in exchange for medicine. ASA advises collective operators to consult with a qualified tax-attorney if you intend to exchange labor for medicine to avoid in unintended tax liabilities.
Possession and Cultivation Guidelines
The Attorney General's guidelines recognize that collectives and cooperatives can possess an aggregate quantity of medicine or cannabis plants to supply their members, based on the bar-to-arrest thresholds established under California Health and Safety Code Section 11362.77(a). Under that chapter, individual patients can possess up to eight ounces of dried cannabis (or the conversion thereof), and six mature plants or twelve immature plants. Therefore, a collective or cooperative could possess an amount of cannabis equal to the number of registered members multiplied by eight ounces. The same aggregate principal applies to cannabis plants.
Using aggregate possession limits to establish the maximum possession for medicine or plants may mean that a collective or cooperative could possess a substantial amount of either at any one time. Operators should remember that large amounts of medicine and large numbers of plants may be a security risk, or lead state law enforcement to misunderstand the nature of the facility (see "Enforcement Guidelines below). Furthermore, all possession and cultivation of cannabis remains illegal under federal law, and stiff mandatory minimum sentences and sentencing guidelines may apply if you are charged with possession or cultivation under federal law, where a defense under state medical cannabis law is unavailable. To avoid the most severe federal sentencing guidelines, collectives and patient-members should not cultivate more than 100 pants at any one location, or possess more than 100 kilograms of cannabis at one time.
Recent court decisions have called into question the bar-to-arrest thresholds established in Senate Bill 420, because courts and law enforcement have traditionally treated these thresholds as de facto possession and cultivation limits for patients. At this time, it is possible that the thresholds established by California Health and Safety Code Sections 11362.77(a) will be overturned as an unconstitutional amendment to a voter initiative. However, the final disposition of People v. Kelly (2008) and other similar cases in the state Courts of Appeal is far from clear at this time. What this means for aggregate possession limits at collectives is still uncertain.
Collectives, cooperatives, or individual patients who grow or transport medicine should have documentation establishing for how many patients they are doing so. This documentation does not necessarily have to be on-site or in possession of the transporter. The records should be made available to law enforcement only following due process of law (typically a subpoena or search warrant) or after consultation with the collective's attorney. A member detained or arrested while transporting medicine should refuse consent to a search, and assert his or her right to remain silent and speak with an attorney.
The Attorney General's guidelines require collectives and cooperatives to maintain adequate security to protect patients and the community. Safety for patients and the community must be a top priority at these facilities, so a compliant association will adopt a security culture to ensure safety. Security culture refers to a set of practices and strategies that work together to maintain safety. Security culture may involve the following elements:
Employing professional, trained security personnel
Staying alert to detect problems before they occur
Educating patients to be sure they know the rules
Implementing policies to prevent diversion
Restricting access to the facility to authorized persons
Using appropriate security technology and equipment to monitor and secure the facility during hours of operation and overnight
Maintaining communication with local law enforcement
Training staff to prevent and respond to emergencies
Educating staff and members as to their rights and responsibilities under the law
Some of the ASA Services for Collectives described in the Appendix may be useful in security culture training for staff at collectives and cooperatives.
Enforcement Guidelines: Storefront Dispensaries
One of the most important aspects of the Attorney General's guidelines for medical cannabis is that they specifically recognize that patient collectives and cooperatives authorized under state law can maintain storefronts to provide medicine to their members. The guidelines state: " It is the opinion of this Office that a properly organized and operated collective or cooperative that dispenses medical marijuana through a storefront may be lawful under California law " provided that the association substantially complies with the guidelines.
The recognition that storefront collectives and cooperatives can be legal is a watershed moment for California. By adhering to some basic operational guidelines, patients' associations can demonstrate compliance with the Attorney General's interpretation of the law, an important cue for local law enforcement and local government. This is a huge victory for patients and providers, but is also a boon for state law enforcement officers, who have been challenged in dealing with the relatively rare instances of abuse surrounding medical cannabis facilities. Giving local law enforcement clarity of what is legal and empowering them to address illegal activity may ultimately serve to reduce instances of local cooperation and instigation of federal raids in California.
The Attorney General specifies that collectives operating outside the guidelines may be subject to arrest and criminal prosecution. Specifically, the guidelines cite the example of an organization that merely has the client designate the business or operator as a primary caregiver before selling cannabis, without abiding by the letter of the law reflected in the guidelines. The Attorney General did not intend that these guidelines be used as a cue for a crackdown on lawful collectives, but those who operate outside the provision of the guidelines risk legal consequences.
Enforcement Guidelines: Indicia of Unlawful Operation
The guidelines spell out certain criteria law enforcement might consider when deciding if a collective or cooperative is legal under state law. Operators should make it a priority to avoid all indicia of unlawful operation, especially those listed in the guidelines:
Possession of excessive amounts of medicine, plants, or cash. What constitutes excessive is unclear under
current case law. Operators are advised to keep fewer than 100 plants and an amount of cannabis necessary to serve patients in a single day whenever possible.
Violating local and state laws, including licensing and permitting ordinances and applicable tax laws. Operators should consult with an accountant as to their liabilities under state and federal tax law. Be especially careful to display a valid California Seller's Permit, and to collect and pay sales tax.
The presence of any weapons or illegal drugs. Operators and staff should never possess weapons or illegal drugs at the facility. Doing so may result in a sentence enhancement or additional charges being filed in a criminal case. Furthermore, weapons and illegal drugs create a significant public relations problem for the collective and the grassroots campaign for medical cannabis rights. The legal issues surround contracted security personnel carrying weapons at a facility have not been explored in court. Operators should follow local ordinances, where applicable. In general, armed guards are undesirable at medical cannabis facilities.
Acquiring or providing medicine to anyone who is not a duly registered member. Operators and staff must not acquire medicine or provide medicine outside of the duly registered membership or the collective or cooperative. Doing so violates state law and makes the association vulnerable to local police raids.
Any inter-state activity acquisition of distribution of medicine. All medicine acquired and provided at a medical cannabis collective or cooperative should be grown by registered members who are legally entitled to do so inside the state of California. No medicine can come from outside California, and it is never legal to distribute medicine outside of the state. Operators should be aware that other factors can influence a police officer's evaluation of an association, and subjective interpretation may still lead to inappropriate law enforcement activity. ASA strongly recommends that operators, staff, and patients at collectives and cooperatives know and assert their constitutional rights when dealing with law enforcement.