View original publication on AccountingToday.com.
Is there such a problem as having too much cash? The marijuana industry says yes. Because the industry is largely unbanked, it conducts most of its dealings in hard currency; and while the IRS is mandated to take tax payments in any form of legal tender, the high volume of cash coming in from taxed cannabis sales has proven difficult for the agency to handle.
Take the 800 active dispensaries and countless other marijuana-related businesses like growers and distributors in California alone: Most, if not all, want to pay their taxes today, but are having a hard time doing so. Their volume of business often means that they can owe the IRS hundreds of thousands of dollars and the agency currently does not have the consistent physical capability to process such large amounts of cash which requires in-person delivery, labor hours, secure rooms, and security. Now, the IRS is trying to solve that problem, joining the effort tech companies have been spearheading for years.
Recognizing the cash problem that faces not only the marijuana industry, but millions of unbanked individual taxpayers, the IRS is dipping its toes into more cash payment options. Last year, in partnership with payments solutions OfficialPayments.com and the PayNearMe Company, the agency launched an initiative for individuals to make a payment without a bank account or credit card at certain 7-Eleven store locations. However, the option is only available at select locations in 34 states, and there is a daily payment limit of $1,000. Thirteen dispensaries made it to the state of California’s most recent list of biggest corporate tax delinquents. The Kinder Meds Patient Collective Group, which owes the least amount in taxes, is on the line for $411,938. The biggest delinquent, the Compassion Center of Santa Barbara, owes $2.3 million. At $1,000 a day, it would take the Compassion Center six years and four months to pay off that debt.
Marijuana dealings remain all-cash, as they were before state-by-state legalization, because the drug is still federally illegal. FDIC-insured banks must adhere to federal regulations, and have to ensure that none of the money they handle comes directly from the sale of illegal substances. There are workarounds, and there are some banks beginning to work with cannabis-related businesses in states like Colorado and Oregon, but these operations tend to be very hush-hush because the financial institutions don’t want trouble. According to a 2015 industry survey, only about 30 percent of companies that come into direct contact with the marijuana plant (like growers), and 51 percent of ancillary businesses, have a bank account. This problem, which is directly related to the tax payment problem, will not be fully solved until federal marijuana laws open up.
Colorado, where marijuana is legal for medical and recreational use, has made strides in the past three to four years to help marijuana-related businesses pay their taxes. Today there are five banks in the state that work with marijuana businesses, Denver-based accountant Bernie Taillon of Triad Financial Services explained. These banks work under very tight controls, examining the businesses’ sales tax returns, doing due diligence to see that all the incoming and outgoing money matches up and that no money is being banked that isn’t being reported and taxed. Partly responsible for this shift is software provided by the startup Hypur, which sorts through all kinds of legal documents such as state licenses, financial statements, tax returns and property leases to paint a picture of legitimacy for a company. Being banked reduces the cash problem when companies have to pay their taxes, but it’s still very hard for a marijuana-related business to get a bank account.
Nick Richards, a former IRS attorney and current partner at the law firm Dill Dill Carr Stonebraker &Hutchings in Denver, provides legal services to cannabis-related businesses in Colorado. This month, he gave a tour of a grow facility to local IRS representatives to demonstrate the high level of compliance that growers and other marijuana-related businesses are already meeting.
“The IRS was here specifically because they understand the cash problem and they want to solve it,” Richards said.
Getting technological help
For its part, the industry is not operating in the shadows as it once did. Marijuana-related businesses know that if they operate legitimately and follow the rules, they have a much stronger chance of financial success. Companies use all kinds of technology, like the aforementioned Hypur, to remain compliant in every way they can.
Wurk, for example, provides the cannabis industry HR and compliance software that can perform tasks such as managing employee schedules, benefits and training, and payroll. The company’s payroll tax calculator helps companies remain compliant on income taxes, and it is technology such as this that has helped marijuana-related businesses avoid being over-represented on California’s list of entities that are delinquent on payroll taxes.
“This used to be a fear-based industry,” explained Keegan Peterson, Wurk founder and CEO. “It made decisions based on what was absolutely needed to survive. We’re in the middle of a transition now, and people are moving towards an opportunistic model. Now they think about how to drive efficiencies, acquire locations and grow.”
In Colorado, cannabis-related businesses have been able to pay their taxes in cash for some time by making an appointment with the local IRS office and bringing in the money. The agency is now taking steps to further facilitate this process by making secure rooms more regularly available for cash counting as well as other, more permanent security measures, based on suggestions from interested parties like Dill & Dill’s Richards. In an e-mail to the attorney following his grow facility tour, IRS representative Tracey Walker reported that the agency, in response to his and others’ efforts, had quickly received approval to have cash counting rooms available in Denver and Seattle for the entire filing week. Large cash depositors were asked to make an appointment scheduled no later than April 7 “to allow [IRS agents] time to put adequate resources in place.”