Oregon Cannabis Compliance: Three Common Problems

25 Oct Oregon Cannabis Compliance: Three Common Problems

An Oregon Liquor and Cannabis Commission (OLCC) licensee must comply with all rules stemming from ORS 475B. There are a lot of them. These rules have been in a constant state of flux since 2015, and they are buttressed by other sets of permanent rules, temporary rules, proposed rules, bulletins and guidance. In my experience, most licensees are good about complying with these rules; others not so much.

Today I want to take a minute and talk about three common rules violations I keep seeing. I want to highlight these particular, random issues because they implicate rules that have been on the books for quite some time; yet people continue to trip on them. These rules violations surface for us occasionally when a client or potential client receives a Notice of Proposed License Cancellation, but more commonly they arise when someone asks us to draft or revise an agreement, or requests advice on a proposed course of action. The three violations below are also tied together in a certain sense.

Financial Interest Rules in the Business Sale Context

This is a serious problem. It became acute in the year leading up to the 2018 “pause” of license application processing, and remained acute until the Commission streamlined licensing last year. It’s a little better now but it’s still a poor compliance area.

Here is the issue. When someone is selling an Oregon cannabis business, it typically takes two or three months – and can take more — from the time the buyer submits its OLCC application until its license is issued. During that period, many buyers and sellers enter into some form of “management agreement” where the buyer begins to run the seller business. For compliance reasons — but also many other reasons, which could be the subject of another post — we generally advise people to steer clear of these arrangements.

The OLCC “financial interest” rules start at OAR 845-025-1015(29). Related rules on “ownership interest” begin at OAR 845-025-1045(5) and the Commission has published certain guidance (with our assistance), which is updated from time to time as the rules change. All of these rules are clearer and better written than they used to be, but people continue to end up on the wrong side of things. Usually it’s accidental but we’ve come across buyers who have no interest in complying with these rules whatsoever. It’s come to the point where our law firm will not work on transactions involving those individuals— even where we represent a potential seller.

But I digress. High level and generally speaking, the rules don’t allow a prospective owner to start taking money out of a business, or to “control” a business, until that person or entity become licensed. It’s hard to manage one of these businesses in the way most buyers would like and stay on the right side of these rules. From a seller perspective, it’s an enormous compliance hazard and risk having someone else run your shop. If people were doing this right, sellers would demand significant security, indemnity and sizable escrowed sums from buyer-operators. But it almost never happens that way.

Subleasing

OAR 845-025-1230(13) provides that “a licensee may not sublet any portion of a licensed premises.” Super simple. But we keep coming across subleases, “space use agreements” and the like. In some cases, I think people aren’t aware of the rule. It’s relatively obscure. They simply are not using a space and someone else has need for it (and, the sublessee may not even be a cannabis business). So the parties do the normal business thing and sublet. Other times, this violation ties into the “financial interest” morass, and the sublessee is actually operating a cannabis business on the sublessor’s Metrc, but without a license or even a pending application. In any case, the OLCC is strict about who can be in a licensed premises and for what activity, and an unlawful sublet could trigger license cancellation proceedings.

Not Paying the Man

OLCC retailers are required to charge a retail sales tax of 17 percent for all recreational marijuana sold. In most cases, retailers must also charge customers an additional 3 percent. The retailer must then pay the set-aside tax through to the Oregon Department of Revenue (DOR), monthly, with a voucher, plus file a quarterly tax return. This is all the state’s money but the retailer holds it in custody a short while.

There are over 750 licensed marijuana retailers in Oregon today. I believe most of them pay the tax. But some of these businesses are not performing well, and when businesses fail they tend to stop paying people, from vendors to employees to the Man himself. In other cases, we have seen bad actors take over stores as mentioned above, seemingly with no intention to pay DOR from the start. This can result in serious consequences for the licensee, its owners and officers.

When a licensee fails to pay sales tax through to DOR, the agency starts with warning letters. A few years back, DOR also started requesting that OLCC send warning letters, and move deadbeats into license cancellation proceedings. The rules were amended to make intentional nonpayment a Category I violation (the default penalty for which is license revocation); and to make unintentional nonpayment a Category III violation. OAR 845-025-2890(3-4). There’s a wrinkle as of this year with newly minted Senate Bill 408, where license revocation is optional and not mandatory; but keeping the state’s money is still a poor decision. Aside from license exposure, distraint warrants and even homeowner liens are in the mix. Best to pay the tax!