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What to expect from routine state audits and inspections

published on May 19, 2021
by James Hammer

Operating a small business comes with an endless stream of challenges. In the case of owning a dispensary, the complicated legal framework can introduce some challenges that most common shop owners don’t have to deal with. Failure to remain compliant can cause severe penalties, jail time, and even losing your business licenses.

The cannabis industry is periodically changing its regulation, which means cannabis business owners need to remain vigilant about remaining compliant with state laws. Even the most minor of breaches can cause a business owner to deal with severe consequences. That is why you need to be aware of what to expect during a route state audit and inspections.

The cannabis industry is subject to all sorts of varying auditors and inspectors, such as the Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA), the state’s cannabis licensing authority, insurance companies, building inspectors, fire marshals, labor departments, water authority, and much more.

Dealing with these agencies is a typical routine for traditional businesses. Of course, having to constantly keep your dispensary compliant with these regulations can be exhausting. Even so, you must remain on top of these regulations to ensure the inspections and auditing can be smoothly accomplished.

For this post, let’s go over what to expect from routine state audits and inspections.


Types of audits and inspections

It should be noted that some agencies are required to inspect your business during operational hours. These are usually local businesses such as the health department or building department. Some agencies will inspect your business regularly. For example, the local fire and health inspectors will come on a rotating schedule.

Certain agencies will pay a visit to your business without announcing themselves for no particular reason. Usually, they do this to ensure that business owners do not have time to hide anything from them. These agencies may also visit in response to complaints from either a customer, employee or other individuals. Immigration inspectors from ICE, OSHA inspectors, and ADA inspectors respond to complaints from customers and employees. IRS auditors or state payroll tax auditors could potentially respond to complaints from an independent contractor.


Unannounced inspections

As an operator of a dispensary, there will be times when you have to deal with unannounced inspections and audits from certain agencies. OSHA inspectors are known for coming into business unannounced. However, they require a valid search warrant to inspect your business, which means you do not have to allow them to look around. If you are not entirely sure of what to do, ask the inspector to return with a search warrant. The IRS is another agency you need to concern yourself with since they visit the taxpayer’s business or home.

Local authorities also require a search warrant to inspect your business unless the situation is an emergency or pressing. Federal law does exist for this, and states may contain their own as well. Wage and Hour inspectors from the Department of Labor may also decide to visit your business without any announcement. ICE inspectors also start their inspections without announcing themselves ahead of time.



Every state that has legalized marijuana in some fashion has specific record-keeping requirements. Business owners need to prepare for any upcoming audit by keeping meticulous records. Similar to any other business, a dispensary needs to keep a detailed record of every aspect of the business, such as employment, environmental compliance, purchases, taxes, inventory management, sales, legal, and transportation.

However, unlike other traditional businesses, a dispensary needs to keep every source of documentation. For instance, purchases of goods and services need not only the support of master goods and service contracts but transaction-level invoices. These bank statements need to have the check and detailed deposit slips. Just make sure you document everything with as much detail as possible.

Business owners need to start performing inspections and audits of their own to identify any potential problems in their recording keeping or other compliance problems. These self-audits permit your marijuana business to tackle these issues as soon as possible. Frequent self-audits also offer you the opportunity to improve not only regulatory compliance but improve other areas of your business, such as enhancing customer service and revenue.

Every state differs with how long records need to be maintained. For example, Washington requires business owners to have records archived for three years. California requires business owners to keep records archived for seven years. Regardless of how long a state requires a cannabis business to keep its records properly archived, it is ideal to archive records in electronic format when possible.


License processing

Licensing requirements differ from state to state, but there are some similarities between them. These can include licenses for dispensaries, retailers, cultivation, and transportation. Business owners are the ones responsible for ensuring that the retailers and suppliers they are working closely with are entirely licensed. If not, there is a significant chance that your entire operation will be shut down.

Furthermore, employees need to remain up-to-date with any required working permits per state and local laws. For instance, Colorado requires potential workers to acquire MED employee licenses if they wish to work in the cannabis industry. Regulators will perform audits on your employees, and if any of them are working with expired licenses or without a license, you will end up with legal issues.

That can be avoided if you take the time to conduct route audits yourself. That way, you can ensure that everyone you’ve hired is remaining up-to-date with the state requirements.


Remain calm

There will be a time when cannabis regulators send you a notification stating that your cannabis business is under audit. The latter will specify the list of records you need to provide for this particular audit. Every state with regulated marijuana markets has wide ranges to inspect records and your business location. For instance, regulations from Washington say that a marijuana business needs to have a wide variety of documents and needs to be made available for inspections if requested by the auditors.

The business owner shall have no standing right to challenge a regulatory agency’s right to demand and inspect the archived records. The best thing to do when placed in this situation is to accumulate the records requested by the agency. These records will need to be handed over to the audits promptly, so business owners need to immediately prepare the documents when requested.


Disclosure and transparency

Several states have some strict sanctions for marijuana businesses that fail to provide documents to the regulators. For instance, failing to provide the documents may result in the cancellation of the owner’s license. The majority of these states have strict sanctions for misrepresentation of fact to a regulator. That misrepresentation will severely impact you, from losing your license to paying a high fee.

Business owners need to understand that every document provided and statement made to the regulators will remain “on-the-record,” Cannabis business owners should never speculate or make guesses when responding to the questions asked by the regulators.


Age verification

Every dispensary operator needs to be aware that some states allow inspecting agents to use an underage decoy to make sure that dispensaries are verifying the age of every customer. The Bureau of Cannabis Control in California is one of these agencies that use this tactic to inspect a dispensary. Receptionists that are responsible for checking over new and existing patients need to validate that every customer is over 21. Training your staff members to regularly check for proof of age or medical condition from every walk-in should become essential for remaining compliant.


Employee training

Dispensary owners need to recognize the significance of strictly following compliance requirements. However, not every staff member will come on board with that same understanding. Obvious mistakes tend to occur because of staff members not being trained to properly remain compliant.

Every process required to operate a business comes with a particular set of rules and procedures that ensures legal compliance. So, business owners need to make the training process thorough as possible. Updating the standard operating procedures frequently is ideal for this situation. Business owners also need to explain the reasoning behind these specific rules and guidelines so employees can understand the consequences of these mistakes.

For instance, when shipping out some cannabis, the weight recorded by the dispensary needs to match the weight of the shipping manifest. However, if a staff member improperly stores the cannabis, it can get affected by the humidity of the room it’s in. which could cause the cannabis to fluctuate in weight. That results in some severe penalties for both the supplier and dispensary, from paying a hefty fine to losing licenses.

Business owners need to ensure their team is trained to prevent issues from arising during an audit or inspection. Doing so will improve the business chances of remaining safe and compliant in the long run.


Security system

Another integral piece in remaining compliant is maintaining a quality standard of security at your dispensary. When agents are inspecting your dispensary, they will want to see your video surveillance systems and ensure it is accessible through the internet. Dispensary security is necessary, and cameras to be mounted in critical spots, such as limited access areas, entrances, exits, the sale floor, security room, the room where your cannabis is weighed, packed, stored, loaded, and unloaded.



Business owners need to remain vigilant with their dispensary and ensure that everything is operating optimally. Auditors and inspectors will check every nook and cranny of your business to ensure that it’s operating in compliance with state laws. If you managed to mess up in one area, chances are you will be paying a significant price for it.