SEPTEMBER 2011

Medical Marijuana in Arizona: The Dispensary Application Process

For would-be operators of an Arizona medical marijuana dispensary, the application process and eligibility requirements are generally straightforward, with one glaring exception: operating the dispensary on a non-profit basis


Steve Benson		Mike Rooney

We continue our survey of the issues surrounding the AMMA by providing an overview of the dispensary application requirements and discussing what it means to operate as a “non-profit” entity.

Opening a dispensary is generally a two-step process: (1) applying for and receiving one of the approximately 126 dispensary registration certificates to be awarded in the initial implementation, and, (2) once the certificate is obtained, receiving DHS approval to operate.

It should come as no surprise that both steps require significant paperwork. This article will focus on the first step: the dispensary application process.

Personal Information

To be eligible to operate a dispensary, an individual (or the principals or board members of an entity) must be at least 21 years old and have been an Arizona resident for three consecutive years preceding the date of the application. A complete dispensary registration application must include the entity’s legal name, the proposed physical address, the name and license number of the medical director, and the names of the principal officers and board members.

For each officer and board member, the application must state whether that person:

was a principal/board member of a dispensary that had its dispensary registration revoked;
is a physician providing written certifications to qualifying patients;
is a law enforcement officer;
is an employee or contractor of DHS;
has submitted Arizona income tax returns in the preceding three years;
is current on child support and taxes;
has any unpaid judgments;
has defaulted on government-issued student loans;
filed for personal bankruptcy; and
was the principal officer in an entity that filed for bankruptcy.

Entity Information

For dispensaries operating as an entity (rather than a sole proprietorship), the application must include the entity’s operating documents. Applicants must provide copies of the dispensary policies for inventory control, record-keeping, security, and patient education and support. The application also must include a business plan showing that the dispensary will be viable and operate on a non-profit basis, and that it has complied or will comply with all local zoning requirements. Finally, applicants must attest to the accuracy of all statements contained in the application.

Importantly, an applicant must provide evidence of access to $150,000 in start-up capital. The evidence must be dated within 30 days of the date of the application. In addition, there is a $5,000 filing fee, $1,000 of which is refundable if the application is complete but a registration certificate is not awarded to the applicant.

As was noted in our June 2011 article, there will be one authorized dispensary for each of the 126 community health analysis areas (CHAAs) in Arizona. If a CHAA has only one completed application, that applicant is awarded the certificate. If a CHAA has more than one completed application, the dispensary registration certificate will be awarded randomly. Given the limited number of dispensaries, competition is expected to be intense, and, in all likelihood, most certificates will be awarded at random from a pool of qualified applicants.

Meeting the Non-Profit Requirement

The application process and eligibility requirements are generally straightforward, with one glaring exception: operating the dispensary on a non-profit basis. Here is what we know: a dispensary does not need to meet the stringent non-profit criteria of Section 501(c)(3) of the Internal Revenue Code, and it is allowed to receive payments sufficient to cover its operating expenses. Outside of these two items, however, it is unclear what it means to operate on a non-profit basis.

Additional guidance can be found in Arizona’s Non-Profit Corporation Act. For example, the Act would permit a dispensary to maintain its non-profit character while having members who provide capital contributions. Unfortunately, there is a risk that, under the Non-Profit Corporation Act and related regulations, the return on the investment would not occur until the corporation dissolved or the entity repurchases the member’s interest.

Furthermore, any direction provided by the Non-Profit Corporation Act is limited, as it would not apply to a sole proprietorship, LLC or partnership. A possible alternative for these entities would be to place all employees, directors and/or members of the dispensary on salary, with the ultimate goal of having zero taxable income.

Conclusion

Undoubtedly, the litigation over the AMMA has created significant uncertainty for potential dispensary owners, investors, qualified patients and caregivers as to whether and to what extent the AMMA will be implemented. Nonetheless, we believe that, after the legal dust settles, DHS will resume the dispensary application process.

If you have any questions about the issues discussed in this article or other legal topics related to medical marijuana, please contact Steve Benson or Mike Rooney. ■

These materials are designed to provide general information prepared by professionals in regard to the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. Although prepared by professionals, these materials should not be utilized as a substitute for professional service in specific situations. If legal advice or other expert assistance is required, the service of a professional should be sought.