Taxes

Marijuana Dispensaries Put Colorado Banks in a Bind


Marijuana Dispensaries Put Colorado Banks in a Bind

Photo illustration by 731

Every month, Elliott Klug or one of his business partners walks into the Colorado Department of Revenue with a messenger bag holding thousands of dollars in cash and waits as state employees start counting. Klug, co-founder of PinkHouse Blooms, a chain of five medical marijuana dispensaries in Denver, has to pay his sales taxes in cash because federal law bars banks from offering accounts to pot shops, even though they’re legal in Colorado. “It highlights the awkward situation we’ve been placed in,” Klug says. “We are paying taxes, but despite our best efforts to be good citizens, we’re still paying in cash.”

Colorado is among 18 states that allow medical use of marijuana and 11 that permit sales through dispensaries like Klug’s. Yet federal law labels the drug a controlled substance and requires banks to report pot-related transactions as suspicious. The inconsistency creates a gray area for dispensary operators, who have to run as cash-only businesses susceptible to robbery. The conflicting rules are “encouraging cash operations, which are a threat to public safety and much more difficult to track and audit,” says Aaron Smith, executive director of the National Cannabis Industry Association. “We’re just looking for a solution where we can bank legitimately like any other industry.”

Klug says he had checking accounts until 2011 with Wells Fargo (WFC), which “welcomed us with open arms and then changed their minds.” The company “opted not to bank these businesses in view of the complex and inconsistent legal environment,” Jim Seitz, a bank spokesman, wrote in an e-mail. Klug now uses cash to pay about $45,000 a year in licensing fees and about $35,000 a month in sales taxes. Colorado lawmakers in May approved legislation to regulate and tax recreational pot purchases. A task force recommended that the general assembly consider all alternatives to help businesses access banking services.

Dispensaries sometimes get around the rules by setting up a shell business with an innocent-sounding name and not divulging its ties to medical marijuana, according to Dale Gieringer, director of the California office of the National Organization for the Reform of Marijuana Laws, a pro-pot group. (California was the first state to legalize medical marijuana use in 1996.)

Banks could lose their deposit insurance or their federal charter if they violate the law, according to Robert Rowe, senior counsel at the American Bankers Association, an industry trade group. Under federal law aimed at preventing money laundering, says Rowe, “one of the expectations is banks will do some checking into their customer and what kind of business they are doing.” Financial institutions may look the other way. “There are some locally owned banks that medical marijuana companies are utilizing,” Daria Serna, a spokeswoman for the Colorado revenue department, wrote in an e-mail. That might be risky.

In Washington State, where voters last year legalized recreational use of marijuana, the Washington State Liquor Control Board is designing a regulatory framework for the new industry that includes a 25 percent tax on producers, processors, and retailers. Businesses paying in cash would present a security issue, according to Brian Smith, a spokesman for the board. “Do we suddenly have to have armored truck service?” he says. “That’s a potential.”

Once recreational marijuana retailers open shop, there will be some small banks that will accept their business either publicly or through “willful blindness,” says Robert McVay, a lawyer with Harris & Moure of Seattle, which has helped medical marijuana dispensaries open in the state. “The business is there, and whoever steps into it is going to do well,” he says.

Scott Jarvis, director of the Washington State Department of Financial Institutions, took the issue to regulators at the Federal Deposit Insurance Corp. and the Federal Reserve in March. Says Jarvis: “The purpose was to let my federal counterparts know that we had passed the initiative, that the state was moving forward in fulfilling the will of the people, and that when push comes to shove, money has to go somewhere into the banking system.”

The bottom line: Shut out of banks, a medical marijuana store co-founder uses cash to pay about $35,000 a month in sales taxes.

Vekshin is a reporter for Bloomberg News in San Francisco.

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