6 Under-the-Radar Legal Traps You Need to Know About

Cannabis businesses face a wide variety of hurdles in getting established and starting operations, many of which can be difficult to navigate without the assistance of a legal expert. Here’s a set of tips and information you’ll want to know to help your company run smoothly. Whether you’re a cultivator, manufacturer, or retail dispensary operator, you can learn more to avoid a loss of insurance and revenue.

Insurance blacklists exist

A cannabis business owner who does not disclose the existence and extent of the business when buying insurance can stand to lose coverage entirely. The insurance company can also blacklist a customer for failing to share such information. This is because the insurer will have trouble writing a policy that covers the risks and liabilities of the business without such information. A cannabis cultivator, manufacturer, or retailer should ask colleagues which insurers are open to working with cannabis businesses, locally and within the state. Then the business owner can freely ask about different types of policies. They can also easily discuss risk mitigation measures like upgrades for electrical wiring, security, and fencing.

Be careful with trademark and service mark applications

Applying for a state trademark can be risky. A cannabis business may not want to disclose its address if it is involved in any operations that would be considered illegal. Further, it may not want to disclose the owners or key officers of the company if these people are engaged in illegal activities. Depending on the state, it may be possible to have the attorney for the business file the application. The attorney will be careful not to disclose more information than necessary for the application. The attorney will also have experience in keeping certain information private and understanding what information is protected by the attorney-client privilege.

Even a state that has long allowed the operation of cannabis businesses, like California, is likely to require that a trademark or service mark match the classification of goods and services adopted by the U.S. Patent and Trademark Office. This means federal classifications determine whether a business can register a cannabis-related product and obtain a trademark or service mark from the state. That can disqualify some businesses from getting a trademark or service mark for certain products. For example, the U.S. Patent and Trademark Office will refuse registration for a cannabis-related trademark that deals with a food or beverage product. This means that the California Secretary of State will refuse registration for such trademarks as well.

When in doubt, it’s a good idea to have an attorney do research to investigate the potential for a trademark or service mark. An attorney can ask questions without divulging unnecessary information about the business. For example, an attorney can inquire about the definition of a cannabis-related product or service, giving examples from their client’s proposed or submitted application. The attorney can also ask how to amend the application to limit the goods or services covered in the application.

Limit dealing with cash

Dealing with cash leaves businesses open to numerous problems like theft and expenses for on-site security. It can be hard to get a claim paid for concerns like a fire due to faulty wiring or theft of cannabis and cash received from a sale, following a burglary of the business. The coverage for policies can go up, leading to a denial of coverage or blacklisting.

Cannabis businesses can address some of these issues by lowering the amount of cash they handle and finding other ways to reduce the risk of theft and dealing with counterfeit bills. Strategies include hiring employees through a cannabis-business-friendly staffing agency. This simplifies payroll and avoids concerns involving cash payments. Cannabis businesses should look for a lending institution such as a credit union that will take cannabis businesses as clients. Businesses can deposit cash with the credit union and work with it to get loans to reduce the amount of cash the businesses have on the premises.

Cannabis businesses that work with delivery services could incentivize customers to pay ahead of time. The potential for product and vehicle theft will still exist, but the risk may be lower.

Avoid civil suits

Any type of civil action, even an overtime dispute, can tie up employees of the business in court. Lawsuits also incur attorneys’ fees. A business can benefit from working with an industry-focused attorney who has experience in cannabis defense and employment law. If a cannabis business owner is experiencing issues with neighbors, like concerns about the smell of cannabis in rural cultivation or the operation of a metropolitan brick-and-mortar storefront, they should consult a property law attorney. They should look for one with knowledge of the local area and judges. Together, the team can determine points of concern for the business, including defamation and loss of goodwill. These legal professionals can also help come up with preventive strategies to avoid litigation. They should also map out paths toward a settlement, like potential payment plans.

One of the most common issues for cannabis businesses is licensing. States and localities often modify licensing requirements. For example, in April 2022, California began requiring cannabis business operators to comply with the California Environmental Quality Act before becoming eligible to be awarded a cannabis state license.  The right lawyer will be a significant asset. The attorney can ask what new requirements may arise for a previously granted provisional license, as well as deadlines, costs, options, and consequences for noncompliance.

Avoid criminal court

Criminal lawsuits can be expensive and time-consuming. They can invite scrutiny into a cannabis business’s operations and put sensitive information in the public record. Further, they can increase negative attention for the business and its employees. A cannabis business should keep in regular communication with a cannabis defense attorney who has experience in criminal law. The attorney can identify potential traps for the operator’s category of business.

Pay business taxes

In September 2020, the IRS published tax guidance for cannabis business owners. Income from a cannabis business is taxable and all transactions in cash must be reported. A cannabis business that does not have a bank may make cash payments. A cannabis business that’s a small business may be required to make quarterly estimated tax payments.

A cannabis business that “traffics marijuana in contravention of federal or state law” is not allowed to take federal income tax deductions for business operating expenses other than the cost of goods sold. This means a cannabis business operator should talk to a certified public accountant (CPA) about how to complete their income tax forms with the appropriate deductions allowed. A cannabis business owner should consult their CPA or a tax attorney if they are confused about other aspects of their tax forms or have outstanding tax debt. Usually, the job of a tax attorney involves negotiating an arrangement for an individual or business to make regular payments on their outstanding tax debt.

A cannabis business may not be eligible for debt forgiveness through bankruptcy. The problem for the business can also disadvantage its employees, leading to different circumstances for an employee of a cannabis business as opposed to a non-cannabis business. For example, an employee of a cannabis business may not be able to file for Chapter 13 bankruptcy, or wage earner’s bankruptcy, while an employee of a non-cannabis business would be able to do so.

The cannabis business operator should talk with a bankruptcy attorney to understand the ramifications of bankruptcy court decisions for their federal circuit.

One of the pertinent decisions regarding Chapter 13 has been In re Blumsack, a January 2023 decision. In this case, the U.S. Bankruptcy Court for the District of Massachusetts held that cannabis employment involved handling a controlled substance in violation of federal law. As a result, the employee’s W-2 income was associated with illegal activity. The cannabis business employee could not use income received from the business to make payments under a bankruptcy plan. The instant case pertained to a Chapter 13 bankruptcy, also known as a wage earner’s plan. A Chapter 13 bankruptcy is only open to an individual, not a business.