Colorado audit of medical marijuana enforcement

7/29/2019 Colorado audit of medical marijuana enforcement

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OFFICE OF THE

STATE AUDITOR

Medical Marijuana Regulatory System

Part I

Department of Revenue

Department of Public Health and

Environment

Performance Audit

March 2013


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LEGISLATIVE AUDIT COMMITTEE

2013 MEMBERS

Representative Angela WilliamsChair

Senator Steve KingVice-Chair

Senator Lucia Guzman Representative Su Ryden

Senator Owen Hill Representative Jerry Sonnenberg

Representative Dan Nordberg Senator Lois Tochtrop

OFFICE OF THE STATE AUDITOR

Dianne E. RayState Auditor

Michelle ColinActing Deputy State Auditor

Eric Johnson

Legislative Audit Manager

Jenny Atchley

Nina Frant

Beverly Mahaso

Nathan WhiteLegislative Auditors

The mission of the Office of the State Auditor

is to improve government for the people of Colorado.


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Dianne E. Ray, CPAState Auditor

Office of the State Auditor

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TABLE OF CONTENTS

PAGE

Report Highlights .............................................................................................................. 1

Recommendation Locator ................................................................................................. 3

CHAPTER 1: Overview of Colorados Medical Marijuana Regulatory System. .... 13

History of Medical Marijuana Legislation ......................................................... 14

Patient Access to Medical Marijuana ................................................................. 16

Oversight of Medical Marijuana Businesses...................................................... 16

Fiscal Overview ..................................................................................................... 20

Audit Purpose, Scope and Methodology ............................................................ 21CHAPTER 2: Licensing and Monitoring. .................................................................... 25

Licensing ................................................................................................................ 26

Monitoring ............................................................................................................. 47

Disposition of Unauthorized Marijuana............................................................. 53

Sales Tax Administration .................................................................................... 57

CHAPTER 3: Financial and Strategic Management. ................................................. 61

Fee-Setting ............................................................................................................. 63

Expenses ................................................................................................................ 68

Strategic Planning ................................................................................................ 76

Performance Measurement ................................................................................. 78

Reporting ............................................................................................................... 81

CHAPTER 4: Compliance with Federal Marijuana Laws. ....................................... 85APPENDIX SMART Government Act .................................................................... A-1


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For further information about this report, contact the Office of the State Aud

303.869.2800 - www.state.co.us/aud

Dianne E. Ray, CPAState Auditor

MEDICAL MARIJUANA REGULATORY SYSTEM,

PART IPerformance Audit, March 2013

Report Highlights

Department of Revenu

KEY FACTS AND FINDINGSx The Division has taken an average of about 23 months to issue

final licensing decisions on applications submitted by August 12010, the effective date of a 2-year moratorium on new medicalmarijuana businesses. The shortest approval time was 436 dayswhile the longest approval time was 807 days.

x Of the original business license applications the Division receivedby August 1, 2010, 41 percent were still pending as of October2012 and have not received final licensing decisions.

x For 13 (37 percent) of 35 new business application files wereviewed, we found evidence of potentially disqualifyinginformation about the applicants. Ten licenses were issuedhowever four were questionable based on this evidence.

x At the time of our audit, the Division had not taken newoccupational licensing appointments in the previous 6 monthswhich creates a burden because individuals cannot legally work ata medical marijuana business without a license.

x The envisioned seed-to-sale model for regulating Coloradosmedical marijuana industry does not currently exist. The Divisionplanned to develop a marijuana plant tracking system, spent about$1.1 million in Fiscal Years 2011 and 2012, but was unable to paythe remaining $400,000 and implement the system due tofinancial difficulties. The Division reports that it will implementthe system by the end of Calendar Year 2013.

x The Division does not use the prescribed statutory process whentaking marijuana related to disciplinary actions against medicalmarijuana businesses. Additionally, the Division has inadequatecontrols to ensure that seized marijuana is destroyed properly.

x The Division has not developed a systematic process for settingfees that correspond to its costs of providing regulatory oversight.

x The Division laid off a majority of its staff in Fiscal Year 2012due to revenue shortfalls. Specifically, in Fiscal Years 2011 and2012, the Division experienced 19 consecutive months of netlosses, including a loss of about $2.3 million in June 2011because of large capital purchases, such as furniture, computerequipment, and software for a marijuana plant tracking systemWeaknesses in the Divisions fee-setting, strategic planning, andexpense controls contributed to its funding problems.

x The Department of Revenue did not identify all medicalmarijuana businesses in its sales tax system and underreportedsales tax revenue generated by 56 dispensaries by about $760,000for Fiscal Years 2011 and 2012 combined.

BACKGROUNDx In 2000, Colorado voters approved

Amendment 20, a constitutional amendmentthat legalized the medical use of marijuanafor patients diagnosed with certaindebilitating medical conditions.

x The Division was established in July 2010to license and regulate businesses that grow,cultivate, and sell medical marijuana andproducts infused with marijuana.

x As of October 2012, the Division oversawabout 1,440 medical marijuana businesses.

x The Divisions funding comes primarilyfrom medical marijuana businessapplication and licensing fees.

x Since the Divisions inception, its fundinghas fluctuated significantly. From FiscalYears 2011 through 2012, revenue declined

by 56 percent from $8.6 million to $3.8million, respectively. At the same time,expenditures increased by 11 percent from$4.7 million to $5.2 million.

OUR RECOMMENDATIONSThe Department of Revenue should ensure thatthe Division:

x Only licenses eligible medical marijuanabusiness applicants and improves thetimeliness of its licensing processes.

x Evaluates discontinuing its occupationallicensing program.

x Improves its monitoring activities.x Improves its processes for seizing and

disposing of unauthorized marijuana frommedical marijuana businesses.

x Improves its fee-setting practices.x Improves controls over expenses and staff

use of state vehicles.

x Develops a comprehensive strategic plan.The Department agreed with all of ourrecommendations.

PURPOSEAssess how effectively the Medical MarijuanaEnforcement Division (the Division) haslicensed and regulated medical marijuanabusinesses.

AUDIT CONCERNThe Division has not adequately defined the oversight activities itmust perform or determined the resources it needs to implementthe regulatory system envisioned by the General Assembly tooversee Colorados emerging medical marijuana industry.

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RECOMMENDATION LOCATOR

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Overview of Colorados Medical

Marijuana Regulatory System

Chapter 1

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Report of the Colorado State Auditor 21

However, in Fiscal Year 2012 the Divisions revenue declined by 56 percent to$3.8 million. At the same time, the Divisions expenses increased by11 percent, from $4.7 million in Fiscal Year 2011 to $5.2 million in Fiscal Year

2012. The following table shows the Divisions revenue and expenses from FiscalYear 2011 through the first half of Fiscal Year 2013.

Medical Marijuana Enforcement Division

Revenue and Expenses

Fiscal Years 2011 Through 20131

(In Millions)

2011 2012 20131

Beginning Balance - $3.9 $2.5

Revenue $8.6 3.8 2.0

Expenses 4.7 5.2 0.9

Year-End Balance 3.9 2.5 TBD1

Source: Office of the State Auditors analysis of data from the Colorado Financial ReportingSystem.

1 Reflects only the first 6 months of Fiscal Year 2013 (i.e., July through December 2012). Theyear-end balance will be determined in June 2013.

According to the Division, several factors contributed to the $4.8 million decreasein revenue between Fiscal Years 2011 and 2012. For example, the moratorium onnew medical marijuana businesses between August 2010 and July 2012 resultedin large collections of application fees at the beginning of Fiscal Year 2011 but noapplication fee collections at all in Fiscal Year 2012. In addition, prior to April

2012, the Division did not collect annual licensing fees from any medicalmarijuana businesses that had a pending application. We discuss the Divisionsfunding issues in more detail in Recommendation No. 7.

In Fiscal Years 2012 and 2013, the Division was appropriated $5.7 million and55.2 full-time equivalent (FTE) staff. However, as of February 2013, the Divisionemployed only 15 FTE. As we discuss in more detail in Chapter 3, the Divisionexperienced funding shortfalls that resulted in a large layoff of staff toward theend of Fiscal Year 2012. The 15 remaining FTE include management;administrative staff; and investigators who conduct pre-licensing inspections atmedical marijuana businesses, process business license applications, and

investigate complaints.

Audit Purpose, Scope, and Methodology

We conducted this performance audit pursuant to Section 2-3-103, C.R.S., whichauthorizes the State Auditor to conduct audits of all departments, institutions, andagencies of state government. Audit work was performed from August 2012through March 2013. This report is the first of two audit reports we plan to issue


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22 Medical Marijuana Regulatory System, Part I Performance Audit - March 2013

with findings and recommendations related to Colorados medical marijuanaregulatory system. The first report focuses primarily on the Divisions businesslicensing and regulatory activities. We anticipate issuing the second report later in2013; it will focus primarily on the Department of Public Health andEnvironments role in the States medical marijuana regulatory system. Weacknowledge the cooperation and assistance provided by staff at the Division andPublic Health.

For this first audit report, our primary objective was to assess how effectively theDivision has licensed and regulated medical marijuana businesses. Specifically,we evaluated:

x The efficiency of the Divisions business licensing process and whetherthe Division licenses only eligible individuals and medical marijuanabusinesses.

x The adequacy of the Divisions enforcement activities to help ensure thatmedical marijuana does not enter the black market and vice versa.

x The Divisions fee-setting and financial management practices.x The adequacy of Revenues processes for ensuring that medical marijuana

businesses pay sales tax.

x The security and integrity of medical marijuana business licensing datacontained in the Divisions My License Office system.

We assessed the effectiveness of those internal controls that are significant to theaudit objectives described above. Our conclusions on the effectiveness of thosecontrols are described in the audit findings and recommendations. We notedcertain other matters that we reported to Revenue and Division management in aseparate letter dated March 5, 2013.

To accomplish our audit objectives, we:

x Reviewed relevant federal and state laws, rules, regulations, policies, andprocedures related to the Divisions business licensing and regulatoryactivities.

x Interviewed management and staff at the Division and revieweddocumentation to determine the Divisions processes for licensing andregulating medical marijuana businesses. We also observed Division staffconducting business inspection activities.


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Report of the Colorado State Auditor 23

x Interviewed staff at Revenue and reviewed documentation to determinethe States processes for collecting appropriate sales tax on the sale ofmedical marijuana.

x Reviewed and analyzed business licensing files to assess filecompleteness, eligibility of license applicants, sufficiency of theDivisions background check process, and timeliness of applicationprocessing.

x Reviewed and analyzed data related to program funding and businesslicensing fee rates to assess the sufficiency of the Divisions fee-settingpractices.

x Reviewed and analyzed payment data to assess the Divisions processesand procedures for authorizing and justifying Division expenditures.

x Reviewed and analyzed sales tax information from Fiscal Years 2011 and2012 and sales tax audits conducted by Revenue to determine whethermedical marijuana businesses paid sales tax.

x Interviewed industry stakeholders around the state, including four lawenforcement agencies, four local governments, and six medical marijuanabusinesses.

x Reviewed basic medical marijuana program information from 18 statesand the District of Columbia, all of which have passed laws legalizing theuse of marijuana for medical purposes.

We relied on sampling techniques to support our audit work as follows:

x We selected a nonstatistical judgmental sample of 70 Divisionexpenditures from Fiscal Years 2011 and 2012. The sampled expendituresincluded a range of low- to high-dollar amounts and totaled about$1.2 million. We designed our sample to provide sufficient, appropriateevidence for our evaluation of the Divisions financial managementpractices.

x We selected a nonstatistical random sample of 40 business licenseapplication files. The sample included files for 10 dispensaries, 10 growoperations, and 10 medical marijuana-infused products manufacturers.The sample also included five license renewal applications and fivelicense applications submitted after the moratorium on new medicalmarijuana businesses ended in June 2012. The renewal and post-moratorium sample items included all types of medical marijuana


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24 Medical Marijuana Regulatory System, Part I Performance Audit - March 2013

businesses. We designed our sample to provide sufficient, appropriateevidence for our evaluation of the Divisions licensing process.

xWe selected a nonstatistical random sample of 25 occupational licenseapplication files. The sample included five applications for key employeelicenses and 20 applications for support employee licenses. We designedour sample to provide sufficient, appropriate evidence for our evaluationof the Divisions licensing process.

The results of our sample testing were not intended to be projected to the entirepopulation. Rather, sampled items were selected to provide sufficient coverage ofareas that were significant to the objectives of this audit. Specific details about theaudit work supporting our findings, conclusions, and recommendations aredescribed in the remainder of the report.

We conducted this performance audit in accordance with generally acceptedgovernment auditing standards. Those standards require that we plan and performthe audit to obtain sufficient, appropriate evidence to provide a reasonable basisfor our findings and conclusions based on our audit objectives. We believe theevidence obtained provides a reasonable basis for our findings and conclusionsbased on our audit objectives.


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Licensing and Monitoring

Chapter 2

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Status of Medical Marijuana Business License Applications Received Since Divisions

Inception

Application Category

TotalApplications

Received

Approved

Licenses

Pending

Applications

Denied orWithdrawn

Applications

Revoked orSurrendered

Licenses

Pre-Moratorium

Applications Received

by August 1, 20101

Post-Moratorium

Applications Received

on or after July 1, 20122

Total 2,379 478 986 913 2

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Documents

Colorado audit of medical marijuana enforcement