Audit Could Lead to Increased Oversight of Medical Cannabis Industry in Colorado, Other Changes

Lawmakers across the country often hold up Colorado’s medical marijuana program as a model for the rest of the nation, lauding the state’s comprehensive set of rules and regulations on cannabis businesses.

But everyone who gets involved in the local medical marijuana industry quickly learns a dirty little secret: The state doesn’t do a very good job of enforcing some of these rules. As a result, the regulatory system is not as tough as it appears to outsiders given the lack of oversight.

A 100-page performance audit released this week by the state shines the public spotlight on the issue, highlighting numerous shortcomings of the Medical Marijuana Enforcement Division (MMED) – the unit of the Colorado Department of Revenue tasked with overseeing the industry.

In a nutshell, the report concludes that the MMED “has not adequately defined the oversight activities it must perform or determined the resources it needs to implement the regulatory system envisioned by the General Assembly to oversee Colorado’s emerging medical marijuana industry.”

The findings are expected to usher in changes that will affect medical marijuana businesses, including those awaiting licenses and those skirting the rules or toeing the line. These changes could include everything from a shorter licensing process and higher fees to a redoubling of efforts to ensure dispensaries pay sales tax.

The audit team made numerous recommendations for how the division can improve – all of which the MMED agreed to address.

Recommendations include:

– Ensuring that only eligible medical marijuana business applicants receive licenses.

– Speeding up the entire licensing process.

– Improving monitoring and oversight.

– Creating a system to set fees on MMJ businesses that ensures the division can cover its costs.

– Improving processes for seizing and disposing of unauthorized cannabis from MMJ businesses.

– Bolstering controls over expenses and staff use of state vehicles.

Dropping the requirement that employees obtain licenses to work at medical marijuana companies.

The report urges the division to develop “a comprehensive strategic plan.” The fact that it doesn’t have one speaks volumes about MMJ oversight in Colorado.

As a result of the audit, the division will try to ramp up enforcement to the levels called for in the state’s medical cannabis laws. But how much it can do so in the near-term is still questionable given that it faces issues tied to budget and resources.

The audit highlighted numerous issues with the MMED and oversight of the industry. One of the biggest: The state’s highly hyped “seed-to-sale” system – which is supposed to track cannabis from the beginning of the cultivation process to the time it lands in a patient’s hands – isn’t even up and running (something any dispensary owner or grower could have told you a long time ago). The MMED spent $1.1 million getting the system ready but didn’t have the additional $400,000 required to complete the project, so it put those plans on hold. The division has said it will start the system by the end of this year.

The MMED has also been inconsistent and somewhat lax when it comes to disciplining medical cannabis businesses that are not following the rules, according to the audit.

Other issues highlighted in the report:

– The division does not have adequate budgeting and expense-control systems in place, as evidenced by huge revenue shortfalls and the fact that the MMED posted financial losses for 19 consecutive months.

– The MMED has taken an average of nearly two years to issue final licensing decisions on applications submitted before August 2010. It has also done a poor job of vetting applicants in some cases.

– The division under-reported tax revenues from 56 dispensaries to the tune of $760,000 over a two-year period and failed to correctly identify 56 MMJ dispensaries as medical cannabis businesses in its sales tax system. The audit team also “found no evidence that 16…dispensaries had obtained a sales tax license” – meaning they may not be paying the state its due. Another 11 dispensaries did not file sales taxes in the 2011 and 2012 fiscal years, while a dozen have never paid sales taxes in any year.

– The MMED has no controls to ensure unauthorized medical marijuana seized by the state is disposed of properly.

– At the time of the audit, the division had “not taken new occupational licensing appointments in the previous 6 months, which creates a burden because individuals cannot legally work at a medical marijuana business without a license.”