Profit-Sharing vs. Fixed Fee Tolling in Regulated Cannabis
Cannabis tolling agreements have become a common operational structure in regulated markets, particularly for brands that lack licenses or capital-intensive infrastructure. Under these arrangements, a licensed cultivator or manufacturer processes cannabis on behalf of a third party, often a brand or investor group, using the license holder’s facilities and permits. While tolling can offer flexibility and speed to market, it also presents significant compliance challenges—especially when compensation models blur the line between lawful service fees and prohibited revenue sharing.
At the heart of compliance concerns is the distinction between profit-sharing models and fixed-fee models. Regulators across many U.S. states scrutinize tolling agreements to ensure that only licensed entities participate in cannabis revenue and decision-making. Any structure that allows an unlicensed party to share directly in cannabis profits can be interpreted as an illegal transfer of ownership or control.
Profit-sharing tolling models typically compensate the tolling partner with a percentage of net or gross sales. While attractive to brands because costs scale with performance, this model raises red flags in many jurisdictions. Revenue-based compensation may be viewed as granting an unlicensed party a financial interest in cannabis sales, which is prohibited in states that restrict ownership to licensed operators only. Regulators may interpret profit sharing as “hidden ownership,” particularly if the brand also influences pricing, production volumes, strain selection, or distribution strategy.
From a compliance standpoint, profit-sharing models increase exposure during audits and license renewals. Enforcement agencies often examine whether tolling partners exercise operational control or receive proceeds tied directly to cannabis revenue. If so, both parties risk penalties ranging from fines and corrective action plans to license suspension or revocation.
Fixed-fee tolling models, by contrast, are generally viewed as lower risk. In this structure, the licensed operator charges a predetermined fee—often based on weight processed, labor hours, or production milestones—regardless of the downstream retail performance of the product. Because payment is tied to services rendered rather than cannabis sales outcomes, fixed-fee arrangements more closely resemble traditional contract manufacturing, which regulators are more comfortable approving.
Fixed fees also simplify compliance documentation. Invoices, service agreements, and accounting records can clearly demonstrate that the licensed entity retains all cannabis revenue, while the tolling partner is compensated solely for operational services. This clarity can be critical during financial audits, ownership disclosures, and regulatory inspections.
However, fixed-fee models are not without compliance obligations. Agreements must still avoid provisions that grant unlicensed parties authority over cultivation practices, inventory decisions, or compliance reporting. Even under a fixed fee structure, excessive control or veto power can trigger allegations of indirect ownership. States increasingly evaluate not just how parties are paid, but how decisions are made.
Another compliance consideration is transfer pricing and fair market value. Regulators may question whether fixed fees are artificially low or high in ways that disguise profit sharing. Tolling fees should be commercially reasonable and supported by benchmarking or third-party valuations to withstand scrutiny.
Ultimately, cannabis tolling agreements must be designed with regulatory intent in mind. Compliance-first structures prioritize transparency, limit unlicensed involvement in cannabis revenue, and clearly define operational boundaries. As enforcement matures and states refine their rules, businesses that rely on aggressive profit-sharing models face growing legal uncertainty.
For cannabis operators, the choice between profit sharing and fixed fees is not merely financial—it is a licensing and compliance decision. Fixed-fee models, supported by well-drafted contracts and clean accounting practices, remain the most defensible option in an industry where regulatory tolerance is narrow and consequences are severe.