As soon as California began selling recreational cannabis on January 1st, it became the largest retail cannabis market in the world. According to New Frontier Data, the California market is expected to surpass $7 billion in a few years. The entire legal market in the United States was $6.6 billion in 2016, for perspective. All of this sounds awesome, and it is, but there’s one looming question for everybody in the industry, especially those here in California. Where is the $7 billion in cannabis revenue housed, since banks are still hesitant to open accounts for the industry?
There have been plenty of ideas floating around for the past few years, some noticeably worse than others. Government officials have floated remote ATM depositories throughout the state. Now I don’t know about you, but have you ever tried to deposit more than a few bucks cash in an ATM? I’ll pass on trying to deposit a $100,000. More entrepreneurial ideas include former military protecting the money in some huge safe somewhere, which sounds like the potential plot of Fast and the Furious 12; and Burying $7 billion in the backyard isn’t happening either.
So the reality is, everybody will to have to find their individual solution. A solution that works best for their business and for their safety. Until the federal government legalizes cannabis, banks will be hesitant and businesses in this industry will be primarily cash based. Attorney General Sessions’ recent rescission of the Cole Memo won’t make anything easier for the industry’s banking woes either.
I’m confident the industry will find a way to continue to progress, as it always has, but I’m writing this to make sure everyone steers clear of something that was brought up in a conversation that I had with a cannabis attorney only a few weeks ago.
If you find a bank that is aware that you operate a marijuana related business and they are willing to open your account, pat yourself on the back. But if you created another non-cannabis business for the purpose of obtaining a bank account and solving your banking problems, the only thing you’ve figured out is how to be at risk for two federal crimes (sale or distribution of cannabis and money laundering) rather than one.
Let me illustrate this point further with the following example:
I’m heading into our conference room at my office to meet with a cannabis business owner who is having difficulty paying his taxes because, at the time, district offices for the Board of Equalization would not take the large sums of cash he was required to pay. We’re talking about hundreds of thousands of dollars in this case. Eventually the district office acquiesced, but don’t forget, payments in cash over $10,000 have a 10% penalty as well.
The guy just wanted to pay his sales tax, and it seemed like everybody was giving him hell for trying to operate a legitimate business. I genuinely felt his frustration. We asked how he managed to pay his payroll and other tax obligations. What he said next made us all sit up a little straighter and lean in a little closer. He told us he set up another company and that all of the workers at his dispensary were actually hired by the non-cannabis company. “Banking was easy and tax obligations weren’t a problem”, he said with a straight face.
Here’s the thing ladies and gentlemen, that’s money laundering, plain and simple. We admired his ingenuity for a moment then we told him he needed to stop (we don’t handle criminal enforcement).
I share this story to make something abundantly clear for everyone operating a business within this booming industry. State governments have legalized cannabis with the expectation of generating a massive amount of tax dollars. In order to do that, they’ve created different licenses, taxes, fees, and agencies for administration and regulation of the industry. Because of all of the filing and licensing processes involved, state administrators are aware of your business operations, and owning a successful dispensary that does an excessive amount of business with a totally unrelated business, like a children’s bookstore or something, is sure to bring unwanted attention.
Don’t get me wrong, owning two businesses could be great. If you want to, go for it. Just don’t try to bank the cannabis money through a separate, unrelated business. It may seem easier to manage your money and your taxes, but the penalties you would receive are grave and extremely damaging.
Office of the Board Member
Board of Equalization, 3rd District