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Do You Know How California Defines a “Significant Discrepancy”?

california-significant-discrepancies

California has become a region of critical importance for the recreational cannabis industry since voters approved Proposition 64 in 2016. As the most populous U.S. state and the world’s fifth-largest economy, California’s cannabis industry will likely offer a model for other states to follow.

As a result, California’s cannabis industry is subject to a higher level of oversight and scrutiny from regulators. Dispensary owners in California must pay close attention to the regulatory landscape of the burgeoning commercial sector.

The California Bureau of Cannabis Control is empowered to assess fines of up to $30,000 for Records violations of the state’s Adult Use of Marijuana Act, Section 26160 (f). For dispensaries with tight margins, these fines can prevent dispensaries from paying employees or turning a profit.

At Green Bits, our customer’s compliance is our primary focus. We offer a free Metrc Readiness Assessment for California dispensaries to help them expose blind spots to the complex California laws. Our previous assessments show that 55% of California dispensaries don’t know what a significant discrepancy is, and 67% of retailers don’t know how to fix a significant discrepancy if they find one.

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Significant Discrepancies Defined for California Dispensaries

There is a reason why cannabis dispensary owners don’t know how to define significant discrepancies. The state’s cannabis laws don’t define the term – the Adult Use of Marijuana Act only references it.

For a definition of a significant discrepancy, we must turn to the California Business and Professions Code, Section 26013. This regulatory document defines significant discrepancy for all regulated businesses in the state:

A significant discrepancy in inventory means a difference in actual inventory compared to records pertaining to inventory of at least 3 percent of average monthly sales of the licensee.

The regulatory code goes on to clarify that average monthly sales are calculated as the per-month average of the last six months of sales. It also specifies the value of cannabis products by their acquisition price rather than their retail price.

This establishes a scalable foundation for calculating inventory discrepancies. Large dispensaries with high monthly sales will have a larger absolute value to keep track of than smaller ones. Because cannabis products tend to be uniformly priced, this places greater stress on large dispensaries than small ones.

How Regulators Identify Significant Discrepancies

California cannabis dispensary owners must track and trace all of their inventory through the state’s seed-to-sale tracking system, Metrc. This system gives regulators a granular view of the entire supply chain -- literally from seed to sale.

The State of California employs data analysts to review Metrc data and look for signs of non-compliance. Metrc includes a built-in notification system that will warn dispensary owners who are out of compliance and give them three business days to submit a report explaining the issue and what is being done to resolve it.

If regulators aren’t satisfied with the report, they can make an unannounced visit to your dispensary and shut it down to perform an inventory audit. During this process, regulators will compare your physical Metrc package tags with a snapshot of your account and may even ask you to weigh your entire inventory in front of them.

Metrc’s data analysts have partnered with agricultural commissioners in many of the state’s counties. This makes it relatively simple for regulators to see when there is a discrepancy between the amount of cannabis coming into a dispensary and the amount going out.

California dispensaries need to regularly compare their sales figures to their reported inventory figures. If a discrepancy of more than 3% appears, dispensary managers should expect state regulators to be aware and take immediate steps to resolve the situation.

How to Prevent Discrepancies From Occurring

In order to prevent discrepancies, cannabis dispensary owners need to establish robust solutions for inventory management. Standardizing inventory data and using a first-in, first-out (FIFO) inventory management system can help prevent discrepancies from occurring.

Dispensaries that rely entirely on manually inputting inventory figures into Metrc expose themselves to non-compliance risks. A highly integrated point-of-sale system that automatically generates Metrc data vastly reduces the chance of errors creeping into the system.

With an automated system in place, dispensary managers can readily determine whether unreported cannabis sales are occurring. This verification and inventory reconciliation process should be a daily process.

Additionally, dispensaries that haven’t appointed a compliance officer should do so as soon as possible. Concentrating regulatory responsibilities in a single person or team is critical to preventing discrepancies resulting from lapses in communication.

With a compliance officer in charge of maintaining the dispensary’s key compliance documents (waste logs, Metrc adjustment logs, and manifests), regularly verifying and reconciling compliance materials becomes possible. Your compliance team should select one or two product types per day and run them through an audit to ensure Metrc data accurately reflects the physical quantities of product available on location.

What If a Discrepancy Has Already Occurred?

If your compliance manager notices an inventory discrepancy of more than 3% of your monthly sales before the regulators do, you may stand a chance at resolving it before regulators step in.

Both timing and efficiency are critical in this situation as the state’s data analysts could report the discrepancy at any moment. In most cases, you will need to either run your own audit and generate a comprehensive report detailing the discrepancy’s cause and resolution or hire a reputable consultant for the purpose.

If the cause of non-compliance is simple – a manual data entry error, for instance – there is a good chance that the dispensary can avoid incurring a $30,000 fine. Complex structural problems are harder to account for in the timeframe that regulators require.

California regulators offer a three-day window for non-compliant dispensary owners to explain their findings. This is not enough time to undergo a full-scale transition to an integrated point-of-sale solution, which makes hiring outside help a practical necessity.

Being proactive is key. Try our free Metrc Assessment today.

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