Cash-only pot taxes a conundrum for California
Los Angeles — California should use armored cars to transport hundreds of millions of dollars in cash tax payments expected next year with the state’s legal marijuana market, the state treasurer said Tuesday.
The state on Jan. 1 will enter a new era with cannabis when recreational sales become legal and join the long-standing medical industry in what will become the largest U.S. legal pot economy.
But the new market estimated to grow to $7 billion annually has a troubling flaw: Marijuana remains illegal under federal law, so most banks won’t do business with pot growers, manufacturers or retailers. That means many marijuana companies typically operate only in cash.
Among California’s new state taxes that will go into effect next year is a 15 percent levy on all marijuana purchases by consumers, including medical marijuana. Currently, for legal medical pot, there is no specific state tax on cannabis.
State Treasurer John Chiang formed a task force to work on a solution for gathering the money because the state expects to collect hundreds of millions of dollars from legal pot sales.
The armored car tax collection solution came about amid fears that operators carrying large bags of cash could be targets for theft and create problems for the state workers collecting and counting the money.
“It is unfair and a public safety risk to require a legal industry to haul duffel bags of cash to pay taxes, employees and utility bills,” Chiang said in a statement.
He added that the marijuana industry’s “reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”
In a report based on the findings of the state’s Cannabis Banking Working Group, Chiang also said that changes are needed in Washington to either legalize pot in the U.S., or shield financial institutions that serve the cannabis industry from possible prosecution.
But that seems unlikely anytime soon, so the report recommended:
—The state should work with banks to contract an armored courier service to collect tax payments made in cash from businesses, and shuttle those payments to a secure counting facility before it’s eventually deposited in state accounts. “Armored courier services would eliminate the need to directly handle large sums of cash at branch offices or open deposit accounts at financial institutions,” the report said. It wasn’t immediately clear who would pay for the service.
—Conducting a study on the potential to create a public cannabis bank or other financial institution to serve the industry. The report warned that the obstacles to creating a public financial institution are “formidable,” including unknown startup costs, the probability of losses for several years or more that taxpayers would have to cover and trouble obtaining federal regulatory approval.
—Forming a group of cannabis-friendly states, businesses and banks to push for changes in Washington for improved banking access for the industry that would reduce or eliminate the need for marijuana businesses to use cash.
—To encourage greater access to banks, state and local governments should create an online portal to collect data on cannabis businesses. It would be designed to help banks assess potential customers and include licensing and regulatory information, data on key personnel, sources of supply and financial records.
Chiang warned in a letter accompanying the recommendations that “the clash between state and federal law threatens to cripple legal California cannabis businesses before they even get up and running.”
“The inability of cannabis operations to get banking services means that many of them may remain in the underground economy and not become transparent, regulated, tax-paying businesses, as California voters intended,” he said.
During the Obama administration, the Justice Department issued guidelines to help banks avoid federal prosecution when dealing with pot businesses in states where the drug is legal.
But most banks don’t see those rules as a legal protection against charges that could include aiding drug trafficking. And they say the rules are hard to follow, in effect placing the burden on banks to determine if a pot business is operating legally.
Colorado tried in 2015 to set up a credit union to serve the marijuana industry but was blocked by the Federal Reserve.
The number of banks and credit unions willing to handle pot money is growing. But they still represent only a tiny slice of the industry.
Elsewhere, the landscape has been shifting.
In Washington state, which inaugurated its legal marijuana industry in 2014, officials soon became squeamish about cash tax payments being walked through the lobby of the Liquor and Cannabis Board — millions of dollars every month. So in 2016, the state began requiring that businesses pay their pot taxes electronically or by check, unless they obtained a waiver explaining why they had to pay in cash.
The state has had no issues with that approach, board spokesman Mikhail Carpenter said. In September, more than two-thirds of the state’s pot businesses paid electronically, and one-fourth paid by check or by money order. Just 6 percent — 28 out of 441 businesses — paid in cash after obtaining waivers because of banking trouble.