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4 Ways California Dispensaries Can Get Shut Down

There are four areas where California dispensaries might be tested for compliance, and potentially lose their license:

  1. Track and trace

  2. Customer eligibility

  3. Transaction limits

  4. Excise taxes

Track and Trace

Overview of track and trace in California

All states where cannabis is legal require strict seed-to-sale tracking, which is also known as “track and trace” in California and “traceability” in other states. Metrc is a traceability system commonly used in the United States and is what we’ll use as an example in this article.

The state government must keep track of all inventory, sales, and transactions from when the seed is placed into the soil to when it’s sold through your point of sale. If every movement of the cannabis in the store isn’t accounted for, you’re likely to fail an inspection.

What will happen in a random track and trace audit?

In a random inspection, auditors will typically pull something from the inventory that you claim to have in stock, and you must prove that you do physically have it. If your inventory doesn’t match, you’ll receive a violation. They’ll keep coming back until you pass, or until you accumulate enough violations that you lose your license.

Why is track and trace necessary?

Metrc allows state governments to track all cannabis inventory in the state in real time from seed to sale. Metrc, and other seed to sale services, allow for transparency in the cannabis supply chain. This granular tracking also guards against black market cannabis product from making its way into legal retail stores.

Every sale, down to the gram, must be reported properly. If even a small amount of product goes missing, it needs to be recorded in inventory. A lot of shop owners find this aspect of the regulation particularly difficult and discrepancies can lengthen an employee's shift by 1-2 hours.

4 Compliance Basics for California Dispensaries

What exactly is tracked in track and trace?

The state tracks by individual plant, and not by product. For example, you might view each pre-roll as its own product—ten joints on the shelf with one gram of flower in each one. The government, however, sees this as ten grams of flower in weight.

And although all the joints are the same strain of cannabis, they may have come from different plants. The state tracks every single seed and how much flower each plant yields. For example, if you have ten joints of OG Kush, and four come from plant A, but six come from plant B, those sales need to be correctly tracked.  Although customers and employees might view it all as being the same strain, it comes from different plants and therefore must be reflected in the inventory. It sounds excessive, but it’s the only way the state can guarantee they have accurate records of all plant matter being sold.

Does track and trace create more work for dispensaries?

Yes. The more product a dispensary carries, the more complex the mapping of product gets. Some retailers carry 300 different products. There might be up to five plants behind each of those products at any given time. Now imagine a store is doing 500 to 1,500 transactions a day with six different salespeople. All that information must be reported and translated properly.

Customer Eligibility

Why ensuring customers are legally able to buy is important.

Selling to someone who is not a legitimate medical patient (if you’re a medical dispensary), or is not of legal age, is the fastest way to get a license revoked. All regulatory agencies do undercover work to see if you’re willing to sell to someone with an incorrect patient registration, or someone with an ID that says they are under 21. The first violation is usually a fine. For example, the State of Washington pulls licenses after the third violation.

The risks of underage selling.

Violating age minimums or patient registration requirements are major ways dispensaries risk losing their licenses. States are required to ensure that retailers are selling to legitimate patients, or to people over the age of 21. If this is not being regulated, it’s not just the state who will have a problem; the Federal Government will take notice too. Fines for violations can reach up to $10,000.

In the US, the legal age to use cannabis recreationally is 21. For medical necessity, each state has different rules. Some states require a doctor’s recommendation, while others have an official registry. In states with a registry, patients are issued a state card and a license. Cashiers need to validate the card and track the patient’s ID when making a sale. In states that only require a doctor’s recommendation, stores themselves need to register the patient in a database and track them. This requires keeping records of IDs, medical cards, and expiration dates.

Be sure you have a robust system in place to guard against selling to underage people and non-patients. At the end of the day, it will be budtenders who must enforce most of these rules.

Transaction Limits

What are transaction limits in track and trace?

Sometimes known as purchase limits, transaction limits refer to how much you can sell to a single person in a specific period. Limits can be determined by something as simple as an ounce of flower per transaction, but are often more complex.

Why are transaction limits important?

With legalization comes a fear of diversion. Critics have worried that people will buy large quantities of cannabis in California and then resell it in other states. As a result, transaction limits were enacted. States now limit the amount of cannabis a person can purchase in a given period of time. Each state determined the reasonable amount that would make sense for personal use. Any purchase that exceeds that amount points to the possibility of diversion.

Do transaction limits differ for medical and recreational patients?

Yes, limits differ for recreational and medical users. In California, a medical user can buy 8 ounces of flower per day, while the recreational limit is 28.5 grams of flower. Some states limit the amount per day while others, like Washington State, limit the amount per transaction. Some states have a rolling window, something like 6 ounces per 21 days, so record keeping in those places is exceptionally important.

For example, you might encounter a limit of 5 ounces of product per person over a 21 period. Places like Colorado will often require dispensaries that sell other cannabis products, like oils, to convert the amount of concentrated THC to a flower amount. So 10 milligrams of THC oil might equal 1 gram of flower. This is the kind of math and regulation that budtenders will need to enforce.

Remember, overselling is an easy way to lose your license.

Transaction limits vary by person and product.

If you think about it, an ounce of flower does not equal an ounce in other forms like oil, drinks, or brownies. In many cases, you’ll see flower by the ounce, edibles by milligrams of THC, liquids in liquid ounces, and extracts in milligrams. The important thing to realize is that these limits all vary by person, transaction or product type. These combined factors make transaction limits extremely difficult to manually calculate. You don’t want to risk your license on your budtenders’ mental math. The potential for mistakes is too high, and is easily avoidable with the proper use of technology and specific software.

Excise Taxes

Finally, there are complex tax codes. While your business probably won’t lose your license over one instance of improper taxing, it can cause a major headache come tax season.

Most states have a standard sales tax for retail, another tax for cannabis products, and yet another excise tax. In most states, the retailer collects all three taxes from the customers directly. The retailer then holds the money on the government’s behalf and pays it to the state at tax time.

In California, per the CDTFA, "the cannabis excise tax is imposed upon purchasers of all cannabis and cannabis products at a rate of 15% of the average market price when purchased at retail. Retailers are responsible for collecting the cannabis excise tax from purchasers at the time of the retail sale and for paying the tax to the distributor. The distributor reports and pays the cannabis excise tax to the CDTFA."

Each type of product is taxed differently, too. In Colorado taxes vary based on each product. Cannabis will have one tax rate, while paraphernalia used to consume cannabis will have a distinct, different tax. Non-cannabis related products will have yet another tax level.

To further complicate the system, rules on excise tax can vary. In some states certain medical patient’s purchases are exempt from sales tax but not excise tax. Cities and counties might also levy their own taxes on top of the state taxes.

Track and trace, customer eligibility, transaction limits, and excise taxes can make or break your business.

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