Banks may not want marijuana’s money, but the state of California does.
California’s Board of Equalization — the nation's only elected tax commission — is developing a proposal that would allow it to serve as something of a bank for the state’s legal marijuana sector.
Fiona Ma, a member of the board, which handles tax policy administration and tax collections, envisions the state’s cannabis businesses depositing money into an account with the board. Those businesses would be able to draw from those accounts to pay employees and taxes through wire transfers.
“That should be the minimum until the federal government acts,” she said. “This is a big problem.”
The move comes as California, which in 1996 became the first U.S. state to legalize medical marijuana, is expected to vote on legalizing recreational cannabis and as the nation's growing legal cannabis sector continues to struggle with a lack of access to banking services.
Since 1996, 23 U.S. states have legalized some form of marijuana. Four states — Colorado, Washington, Oregon and Alaska — and the District of Columbia have legalized marijuana for recreational use. But because of hazy banking laws, marijuana-related businesses in those areas are largely forced to operate as all-cash enterprises.
Last month, a Colorado credit union that had aspired to serve that state’s industry was denied the administrative approvals it needed from the Federal Reserve to be able to open its doors. It has filed a lawsuit, but in the meantime, most businesses are struggling to find banks willing to accept their business.
When money's not worth the hassle
As of August 2014, 105 banks in the U.S. were known to be doing business with marijuana-related businesses, the director of the Financial Crimes Enforcement Network said in a speech.
But those businesses —despite a well-publicized Justice Department memo regarding banking for the marijuana sector— are operating in a gray area, said Chris Pippett, a partner at Pennsylvania law firm Fox Rothschild LLP.
"Those memos basically state the government is not going to devote resources to prosecution.
This is not permission," he said.
Financial institutions willing to take the risk — often small credit unions — can expect to find themselves saddled with additional paperwork. "It’s a lot more work than most banks and credit unions are probably used to doing," Pippett said.
During a recent public hearing in California, Janet Sanchez, senior vice president of the Community Credit Union of Southern Humboldt, said her credit union had opened just a handful of cannabis-related accounts. “The due diligence, the ongoing monitoring, the granular reporting, the incredible financial and staff time it takes to monitor and deal with these accounts is overwhelming and not worth it,” she said at the hearing.
All cash and no paper trail
Ma estimates that 35% of the 300 cannabis businesses in her district are paying taxes to the tune of about $28 million a year. “That means 65% are not paying taxes; we as an agency have not gone out and enforced the law,” she said.
But without banking and the paper trail it leaves, enforcement is tough.
“How do we go out and audit a dispensary when they don’t have any accounts, when there are no bank, credit card wire transfers?” Ma said.
Of course, paying taxes without a bank account isn’t exactly easy, especially since the IRS doesn't accept cash.
A system like the one she imagines could be one way around those challenges.
"I think we can create some sort of system to deal with some of the cash," Ma said. "As a state, we're not subject to [Federal Deposit Insurance Corporation] or [National Credit Union Administration] rules. What are they going to do, shut down the state?"