It’s probably no surprise that a cannabis business in the U.S. doesn’t really operate like a “normal” small business does. Mostly this has to do with loans, banking and insurance, as many American financial institutions are hesitant to involve themselves with marijuana industry clients – even ones that operate fully within the boundaries of the law.
Of course, many cannabis businesses across the U.S. are thriving and making very good money, so this begs the question — who do they bank with, and what do they do with their cash? Are American banks even allowed to associate with cannabis businesses, even if they wanted to?
In this article, we set out to answer these questions.
Marijuana Tax: How Does it Work?
One of the great anomalies of the cannabis industry is that legal marijuana businesses have to pay federal income taxes to the IRS, just like any other business or private entity does who collects a paycheck.
The anomaly, of course, is that cannabis in all forms is still highly illegal at the federal level; classified as a strict Schedule I narcotic along with the likes of heroin, LSD, and ecstasy. In an interesting “loophole” of sorts, federal tax from dispensaries (and other pot-based entities) must be collected under IRS code 280E, which is the same code used for the taxation of illegal drug trafficking.
In other words, to say that it’s hypocritical for the federal government to refute the medicinal and therapeutic uses of cannabis, yet collect millions of dollars each year in taxes from marijuana-based business operations, is putting it nicely.
Regardless, thousands of marijuana dispensaries and other cannabis-based organizations do exactly that each year – that is, dish out tens or hundreds of thousands of dollars to the federal “taxman,” even though they essentially get nothing back in return (at least in terms of legislative protection).
In fact, many of these cannabis business organizations are resorted to having to pay their taxes – and in fact conduct all matters of their public and private business – in cash.
This is due to legislation that, according to the New York Times, makes any kind of marijuana transaction between a federally-backed bank and a private business organization an act of money laundering – which is a serious federal crime.
Is it Really Illegal for Banks to Associate with Marijuana Companies?
According to an article published by Pew Charitable Trusts, the Federal Reserve Bank of Kansas City claims that even the simple act of “transporting or transmitting funds known to have been derived from the distribution of marijuana is [federally] illegal.”
So yes, according to current legislation, it is absolutely illegal for any bank or financial organization backed by the Federal Deposit Insurance Corporation (FDIC) to associate or receive deposited funds from a marijuana-based business.
Moreover, since most major credit cards are linked with FDIC-backed financial institutions, many cannabis dispensaries and similar business entities are unable to even take credit cards as a viable form of payment.
So what are they left to do?
Well, most are left to deal strictly in cash, which leads to a host of problems in its own right – namely in the form of increased risk of burglary. And with increased risk of burglary comes increased difficulty of trying to acquire requisite insurance to cover their business operations.
What’s more, it makes the simple act of paying employees a bigger problem than it should have to be, as cash-only recipients are unable to set up direct deposit with their checking accounts. This can lead to a host of problems including being disqualified from purchasing a home, renting a house or apartment, or even financing a vehicle.
Honestly, it’s like a series of tragic comedies that just keeps revolving around and around in a never-ending circle.
Of course, we shouldn’t be portraying all cannabis business operations as the pitiable “victims” here – most operations are doing extremely well financially, and most business owners will have gone into their respective “potrepreneur” ventures knowing full well the risks and complications that would be at stake.
Federal Legislation in 2014 Should Have Made it Safe for Banks to Associate with Weed Companies, but…
Few people know that back in 2014, the Obama Administration’s Treasury Department issued guidance to FDIC banks that more or less allowed them to associate with marijuana dispensaries and other legal cannabis organizations, without the risk of federal prosecution.
However, due to the limited legal scope of the “guidance,” very few banks took advantage of the “opportunity” to work with pot companies – even highly reputable and established ones in states like Colorado, Washington, and California.
And to make matters worse, in December 2017 one Mr. Jeff Sessions (current U.S. Attorney General) announced that the federal government would be doing what they could to abolish the Treasury Department’s “safety guidelines” for federally-backed banks:
“It’s my view that the use of marijuana is detrimental,” he said, “and we should not give encouragement in any way to it … it represents a federal violation, which is in the law and is subject to being enforced.”
So are cannabis businesses back to square one in terms of finding a bank that will accept them — and their slew of “dirty marijuana money?”
Well, yeah pretty much.
There has admittedly been a substantial increase in the number of smaller organizations (state-chartered banks, credit unions, etc) that are willing to accept money and lend financial services to cannabis businesses, but the majority of larger institutions (i.e. Chase, Wells Fargo, etc) still will not go anywhere near a client that is knowingly affiliated with the cannabis industry.
Better News Could be on the Horizon…
The good news out of all of this (if you can call it “good news”), is the fact that a large number of U.S. representatives consider the current cannabis banking crisis to be of relatively high concern in Washington.
In fact, according to a March 2018 publication in Forbes, a group of Democratic and Republican senators was taking action to try and implement legislation that would allow for cannabis business organizations to legally deposit their profits in FDIC banks – just like any other small business would.
“I assure you that we don’t want bags of cash [coming in to local tax offices and being stored in retail stores],” said U.S. Treasury Secretary Steven Mnuchin. “We want to find a solution to make sure that businesses that have large access to cash, have a way to get [it] into a depository institution for it to be safe.”
So will the legislation actually pass — or even make onto a house vote?
Well, that’s another thing altogether, and with Mr. Sessions at the helm as U.S. Attorney General, marijuana companies shouldn’t be holding their breath – or getting too excited any time soon.