Congratulations! Your permit to open a dispensary or cannabis lounge just came through after months of anxious waiting. Ready to sell to happy potential customers? Not just yet. As in all retail, you can’t do it by yourself. Managing the vendors and providers of the ancillary services you’ll need to operate your business requires attention to detail in selection of and agreements with vendors and engaging the right advisors to help you navigate this service provider maze.
In these early days, the cannabis industry is beset with more regulations and oversight than almost any public-facing retail area, and this causes many retailers, distributors, and growers to elide many of the basic elements of retail business, some of which require special considerations and a lot more time than, say, opening a clothing store.
Of course, your establishment will require Commercial General Liability insurance (i.e., coverage for property damage and personal injury) and Crime and Workers Compensation coverage. But in most states, dispensaries and lounges must also verify customers’ ages, medical marijuana prescriptions (health information protected by federal and state laws), and addresses. Additionally, businesses must prove that they have done so and that means they will be storing personal information that is the subject of laws in all fifty states. Privacy, Cybersecurity, and Technology Errors and Omissions coverage (collectively “Technology Insurance”) is necessary, then, so that there is coverage in the event of a cyberattack or other breach of this information. Typically, this insurance will also be required by investors in your cannabis business as a condition of their investment and by business partners such as landlords, suppliers, and service providers.
While dozens of insurance carriers will write and offer this coverage to retailers generally, very few will offer it to those in the cannabis industry while cannabis remains illegal at the federal level. Worse, the market for Technology Insurance has tightened and contracted dramatically in the months since the COVID-19 pandemic, making this insurance difficult to obtain for almost everyone. Insurers often request highly detailed information on electronic data privacy and cybersecurity controls across as many as seven or eight supplemental insurance applications that will then be reviewed by underwriters to determine whether the carrier will offer you insurance at all and, if so, the limits of that coverage and the premiums the carrier will charge.
To put a fine point on the above, insurers will view cannabis applications for coverage, especially Technology Insurance, more strictly than they will applications for other industries because of the uncertainty cast by the conflict between federal and state laws. The dispensary’s technology house must be in order before the insurance applications are submitted. Software for point-of-sale, inventory control, and customer verification must be well understood, with the privacy and security controls for that information implemented and documented. Privacy and security incident response plans (i.e., for cyberattacks and data breaches) should be drafted, implemented, and tested. Data backups, segregated digitally and physically from active data, must be implemented so that in the event of a ransomware attack, your systems can be restored quickly. Finally, you should consider Business Interruption insurance so that you can be covered for losses in the event of a delay in restoring systems after a cyberattack. The application for this coverage will require submission of a business plan with anticipated profits and losses for a twelve-month span.
Software License and Service Agreements
You didn’t think you’d record all your plant buys, product sales, employee salaries, and customer verification in a spiral notebook, did you? Not with the myriad state information reporting obligations reminiscent of French bureaucracy at its finest or, worse, the departed Soviet Union. Software for inventory control, sales, employee wages and hours, and (perhaps) benefits information is available for license from software developers via license agreements and provided through service agreements that should also include provisions for consulting and support services. In general, License Agreements with detailed and balanced provisions are far preferable to on-line Terms of Service, which are usually one-sided in favor of the provider. Terms and protections of these agreements—including shifting of risks of breaches and attacks; insurance coverage by the developer/licensor in the event you make a claim; and representations and warranties for privacy and security controls—are all critical to the successful operation of your cannabis business. These should be reviewed carefully with your legal advisor, working with your accountant.
Business Formation and Tax Advice
Rest assured that the taxing authorities, including the federal government, will require payment even though your business is cash-based. The amount of tax and the means by which you will pay it will be influenced by the nature of your business entity. Your tax advisor can and should discuss with you the form of your cannabis business, whether a Limited Liability Corporation, C Corporation, or other entity, and your legal advisor can prepare and file the corporate entity papers and advise on potential benefits and liabilities of the corporate entity options.
Are your budtenders and other workers employees or independent contractors? How will the government view that characterization? How will you make required payments for state Workers Compensation and employee benefit programs? These and other employment questions should be asked of employment counsel before you open the doors.
Can you protect your dispensary’s catchy logos that others may want to copy from your bags, clothing, hats, etc. with trademark or copyright? Can you protect the design and text of your website? If so, do these protections apply to all your products or only certain categories? Again, this is an area in which legal advisors can and should assist.
Yes, these issues are complex, but they can be managed with the right advisors, and with proper management, the potential risks of working with partners and vendors will be reduced and benefits enhanced. Engage your advisors before you open your doors. If you have any further questions regarding cannabis law and requirements, please contact a member of our cannabis law team.