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Cannabis Business in Arizona: The Basics

What to know in the wake of Prop 207

On November 3, 2020, Arizona voters passed Proposition 207 with nearly 60% of the vote. The initiative legalizes the adult use of recreational cannabis and allows for marijuana to be taxed on the state and local levels.

Justin M. Brandt, who handles cannabis law and real estate matters at Bianchi & Brandt in Scottsdale, wasn’t surprised that Prop 207 passed. “All the polls that we were seeing, particularly in Arizona, indicated that it had a lot of support,” he says. “In the past three to five years, we've seen this seismic shift in public perception of marijuana in general.”

In the days after the passing of the ballot measure, Brandt received many inquiries from his existing clients—who had focused on medical marijuana, already legal in Arizona—as well as new potential clients hoping to get a jump on the early application process for adult recreational use licenses, which opens on January 19, 2021. “There’s kind of a mad rush to get everything going right away,” he says.

For parties who may be interested in getting into the cannabis business in Arizona, Brandt says it’s important to note that Arizona, unlike a state like California, has a vertically integrated licensing structure. “What that means is that a license holder has complete control over the production, processing, and retail distribution of marijuana.

“Vertical integration has benefits in that theoretically you can cut costs, have better margins, and more efficiency from an operational standpoint.”

But that can also mean high costs to get rolling. “Generally, it requires a significant amount of initial capital either to expand your existing business or to bring on another arm or branch of your business that will enable you to have that complete control over the production path,” Brandt says.

Vertical integration can also mean that liability rests with the license holder, no matter the aspect of the operation. “So, for example, if you have a contractual relationship with a third party to assist with your cultivation, if there's some sort of adverse thing that happens where they're not complying with the Arizona Medical Marijuana Act or the recently certified Smart and Safe Act, that liability falls on the license holders,” he says. “In the eyes of the regulators, they don't differentiate any third-party operators from the actual license holder. That’s often one of the most significant drawbacks.”

Brandt stresses the importance of knowing the ins and outs of the regulations. “And not only at the state level. A lot of local municipalities have unique regulations that are different from neighboring cities.”

Beware the handshake deal. “For whatever reason, it comes up quite often, although it's getting better,” Brandt says. “When the program first became live, we were dealing with a lot of those kind of handshake deals—nothing's documented, nothing's memorialized in any sort of writing. And 9 times out of 10 that causes problems down the road.”

That’s one of the reasons it’s important to bring a knowledgeable attorney onboard to assist. “Particularly in this industry that is so highly regulated—and it's a newer industry so you're getting a lot of unknown challenges,” Brandt adds. “We don't have the same precedent that we have for other legitimate businesses. The sooner that you get a competent attorney involved, the better.”

For more information on this area of law, see our overview of cannabis law.

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