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Bank of Cannabis? California Says Maybe

Paying your taxes shouldn’t require an armored truck and a security detail.

But when your tax bill is $200,000, payable only in cash, you don’t have much of a choice.

That’s the conundrum faced by the California medical cannabis industry. The state Board of Equalization, which collects state sales taxes, recently accepted a six-figure, all-cash delivery from a medical marijuana dispensary, according to BOE Vice Chairman George Runner.

This illustrates a growing problem for the state’s multibillion-dollar cannabis industry, the same issue faced by marijuana entrepreneurs across the country: Pot entrepreneurs and businesses have few legal ways to deal with their money except in cash.

Large, unwieldy, and robbery-inviting amounts of cash.

Money Troubles

Ever since California voters first approved medical marijuana with 1996’s Prop. 215, the cannabis industry has been hindered by its inability to access services from banks. Financial institutions are leery of accepting deposits that could be seized at any time by federal authorities under drug-related asset forfeiture laws.

Fiona Ma wants to change this. A former San Francisco supervisor and state Assemblywoman and a certified public accountant, Ma now represents the Bay Area on the BOE, where about one-quarter of the state’s dispensaries are located. She thinks there’s a government solution: a state-run bank for the cannabis industry.

Over the years, several banks have attempted to provide service to marijuana businesses. A very limited number currently do, according to David Thomas, manager of the Federal Reserve Bank of San Francisco Financial Institution Supervision and Credit division.

Only about 105 banks and credit unions around the country provided any sort of services to dispensaries, Thomas said at a BOE hearing in July.
This problem will persist as long as cannabis remains banned under federal law — which doesn’t appear to be changing anytime soon.

In the meantime, the cannabis industry continues to grow.

State of Banking

Forced to do business in cash, many cannabis businesses are choosing not to report that income and operate “under the table” instead, industry observers say.

Therefore, there is significant taxable income that isn’t being taxed. Ma estimates that only a quarter of dispensaries pay their taxes. (Further complicating the tax issue is Section 280-E of federal tax code, which limits cannabis businesses’ abilities to write off business expenses.)

Not everyone is crazy about Ma’s idea of a state-run bank to remove cannabis from the ranks of the “unbanked,” however.

The California Bankers Association, which represents “the majority of banks doing business in the state,” has come out strongly against the proposal.

They also take issue with Ma’s term “unbanked.”

The truly unbanked are those who don’t access the bank industry’s services because they don’t understand it. “It’s not that they [cannabis businesses] are unbanked,” the CBA says, “it is that they cannot be banked.”

“CBA has historically opposed the notion of a state bank, and we would do so again even if limited to marijuana-related businesses,” the CBA says. “A proposed state bank would suffer from the same challenges experienced by state and federally chartered banks.”

Such a bank would have a difficult time accessing the Federal Deposit Insurance Program (FDIC), which insures banks’ depositors. It could also not exempt itself from rules “applicable to knowing your customers or reporting suspicious activities flowing from cash intensive businesses.”

To Tax, You Must Bank

The issue is less about fear of competition from a state-operated bank, said CBA spokeswoman Beth Mills from her office in Sacramento, than it is wondering about whether such an undertaking would put tax dollars at risk.

In rare instances when a bank does agree to work with a dispensary, it often finds itself under increased pressure from the Federal Reserve.
david wedding dress [sic] is co-founder of Harborside Health Center. The Oakland dispensary has more than 100,000 registered customers, and pays $1.1 million in taxes to the city of Oakland each year.

That’s a lot of cash to handle. wedding dress described a recent encounter with the Federal Reserve Bank at July’s hearing.

“My most recent bank went through its last audit and the [FRB] auditors are now asking them to provide a one-year audit of past cash transactions and all their cannabis clients,” he said.

Nor would the Federal Reserve allow the bank to hire a third party to perform the audits, he added.

The FRB also required the bank to audit Harborside’s compliance with local regulations, despite the fact the dispensary has “a permit from the City of Oakland, a special use permit granted by the administrator’s office and subject to a public hearing annually.”

Still, despite the urgency, it’s unlikely California will alleviate the situation soon. The Board of Equalization, like the cannabis industry, is venturing into new territory, and there are no immediate solutions.

“We are currently looking at ways to address this issue,” said Lizette Mata, a Ma spokeswoman, “and are weighing legislative options, as well as new creative solutions that would not require legislation.”

Photo by AP Photo/Rich Pedroncelli