Arizona Proposition 203 – Legalization of Medical Marijuana

On November 2, 2010, Arizona voters will vote yes or no on Proposition 203, the medical marijuana law.  If approved, Prop 203 will legalize the prescription, sale and cultivation of marijuana  in Arizona for  approved medicinal purposes.  Doctors will be able to issue prescriptions for an “allowable amount” of marijuana to a “qualifying person” who suffers from a “debilitating medical condition.”  The term “debilitating medical condition” means one or more of the following:

• cancer, glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency syndrome, hepatitis c, amyotrophic lateral sclerosis, crohn’s disease, agitation of alzheimer’s disease or the treatment of these conditions.
• a chronic or debilitating disease or medical condition or its treatment that produces one or more of the following: cachexia or wasting syndrome; severe and chronic pain; severe nausea; seizures, including those characteristic of epilepsy; or severe and persistent muscle spasms, including those characteristic of multiple sclerosis.
• any other medical condition or its treatment added by the Arizona Department of Health Services (“DHS”).

A qualifying person is a person who has been diagnosed with a debilitating medical condition.   The allowable amount of marijuana that a qualifying person may acquire and use is:

• 2.5 ounces of “usable marijuana,” which is defined as “the dried flowers of the marijuana plant, and any mixture or preparation thereof, but does not include the seeds, stalks and roots of the plant and does not include the weight of any non-marijuana ingredients combined with marijuana and prepared for consumption as food or drink; and
• if the qualifying patient’s registry identification card states that the qualifying patient is authorized to cultivate marijuana, twelve marijuana plants contained in an enclosed, locked facility except that the plants are not required to be in an enclosed, locked facility if the plants are being transported because the qualifying patient is moving.  An “enclosed, locked facility” is defined as a closet, room, greenhouse or other enclosed area equipped with locks or other security devices that permit access only by a cardholder.

For patients who are not able to acquire or administer allowable amounts of marijuana, they may use the services of a “designated caregiver” which is defined as a person who:

• is at least twenty-one years of age.
• has agreed to assist with a patient’s medical use of marijuana.
• has not been convicted of an excluded felony offense.
• assists no more than five qualifying patients with the medical use of marijuana.
• may receive reimbursement for actual costs incurred in assisting a registered qualifying patient’s medical use of marijuana if the registered designated caregiver is connected to the registered qualifying patient through the department’s registration process.  The designated caregiver may not be paid any fee or compensation for his service as a caregiver.

The amount of allowable marijuana a designated caregiver may possess, cultivate or transport for each designated patient is the same as for the designated patient.

If approved, Proposition 203 provides that within 120 days of its effective date, the Arizona Department of Health Services must promulgate rules and regulations governing nonprofit medical marijuana dispensaries, for the purpose of protecting against diversion and theft without imposing an undue burden on nonprofit medical marijuana dispensaries or compromising the confidentiality of qualifying persons and caregivers.

Proposition 203 also would allow for the creation of Arizona medical marijuana dispensaries that must be Arizona nonprofit entities.  Qualifying parties and designated caregivers who do not cultivate grow their own personal weed, will be able to buy it from a DHS approved medical marijuana dispensary.

What is an Arizona Medical Marijuana Dispensary?

Unfortunately, Proposition 203 contains some unanswered questions for people contemplating creating an Arizona medical marijuana dispensary (“MMD”).  The proposition defines “nonprofit medical marijuana dispensary” as “a not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses marijuana or related supplies and educational materials to cardholders.”  As an Arizona attorney who has formed over 2,600 companies, including many nonprofit corporations, I don’t know what the proposition means when it uses the term “not-for-profit entity.

Arizona statutes provide for the creation of limited partnerships, limited liability limited partnerships, general partnerships, business trusts, limited liability companies, for profit corporations and nonprofit corporations.  The term “entity” is a general term that applies to all of the previously mentioned types of business organizations.  Any of these organizations could be operated on a not-for-profit basis, but  the  corporation is the only type of nonprofit entity expressly provided for under Arizona statutory law.

Proposition 203 contains this provision:

A registered nonprofit medical marijuana dispensary shall be operated on a not-for-profit basis.  The bylaws of a registered nonprofit medical marijuana dispensary shall contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.  A registered nonprofit medical marijuana dispensary need not be recognized as tax-exempt by the Internal Revenue Service and is not required to incorporate pursuant to Title 10, Chapter 19, Article 1.

The good news for the future owners of Arizona MMDs is that the Arizona nonprofit medical marijuana dispensary need not be an IRS approved tax-exempt organization, but this provision further muddies the waters.  What does operated on a not-for-profit basis mean?  Must the entity operate at a loss or plan its affairs so that its annual income is exactly equal to its annual expenses?  What happens if the MMD has a loss in year one and a profit in year two?  Does DHS net the profits against the losses and revoke the MMD’s license if it has a profit?  What if it has losses two out of five years?  How are profits defined?  Can the people who form the entity, officers, directors and employees be paid sufficient compensation to zero out the profits each year?  If so,could a member of the board of directors who attends a few board meetings during a year be paid $150,000 and would that payment reduce the entity’s profits?

The provision quoted above refers to Bylaws that must contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.”  Does this language imply that the MMD must be a corporation?  In general Bylaws is a governing document used by corporations.  Other types of entities can adopt “Bylaws,” but Bylaws are not one of the governing documents used or adopted by non-corporate entities.

As an Arizona lawyer who has drafted the organizational documents for many nonprofit corporations, I don’t have a clue what Prop 203 means when it says the Bylaws must “contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.”  The nonprofits I create do not have any such provisions, nor are these types of provisions required under Arizona’s nonprofit corporation statutes.  Hopefully the DHS will tell MMD’s what this provision means so they can modify their organizational documents to contain the required provisions.

Nor does it help that Proposition 203 says MMDs are not required to incorporate pursuant to Title 10, Chapter 19, Article 1.  The statute cited concerns only Arizona nonprofit corporations formed as cooperative marketing associations.  Chapter 19 also applies to electric cooperative nonprofit membership corporations, fraternal and benevolent societies and nonprofit electric generation and transmission cooperative corporations.  The reference to Title 10, Chapter 19, Article 1 in the language of the proposition is baffling because most Arizona nonprofit corporations are formed under other chapters of Title 10 of the Arizona Revised Statutes.  Why did the drafters cite only this one little used type of Arizona nonprofit corporation?

The $64,000 Question about MMDs

Proposition 203 creates a big problem for people who are contemplating creating an MMD?  The $64,000 question is must an Arizona MMD be created as an Arizona nonprofit corporation or can it be one of the types of entities typically formed to make a profit, but operated as a nonprofit entity?  We will not know the answer to this question until DHS gives us the answer or it approves MMDs that are not Arizona nonprofit corporations.  The answer to this question is important because of a fundamental difference between Arizona nonprofit corporations and all of the other types of entities mentioned above.  This fundamental difference is:

• Arizona nonprofit corporations do not have owners.  This means that if the nonprofit corporation becomes valuable, there are no owners who can easily (or perhaps lawfully) put that value in their pockets.
• Arizona limited partnerships, limited liability limited partnerships, general partnerships, business trusts, limited liability companies and for profit corporations have owners who can sell the business and keep the money.

For more see “Prop. 203: Legalization of medical marijuana” and “Text of Prop 203 that Would Legalize the Prescription and Sale of Medical Marijuana in Arizona.”

How to Hire Arizona Business Attorney Richard Keyt to Form an Arizona Nonprofit Corporation

To learn about forming and operating Arizona nonprofit corporations, see the Arizona Corporation Law Library.  To hire Arizona medical marijuana attorney Richard Keyt (aka the Arizona medical marijuana lawyer) to form an Arizona nonprofit corporation, read my articles called “How to Form an Arizona Nonprofit Corporation” and “Arizona Nonprofit Corporation Formation Service” or just complete my online Nonprofit Corporation Incorporation Questionnaire.