Extras on Excise: Is Cannabis Commerce Destined to Remain Cash Only?


Recreational marijuana use is now legal in Colorado, but traditional financial institutions have not been opening their doors to the marijuana industry because marijuana remains illegal at the federal level. Marijuana-related businesses continue to operate on a cash only basis, which is vulnerable to crime and abuse and provides little transparency for officials looking to track marijuana revenues for tax purposes. To solve these problems, Colorado recently enacted the Marijuana Financial Services Cooperative Act, creating “cannabis co-ops,” financial services cooperatives that give legal marijuana-related businesses access to the financial marketplace, allowing greater safety and transparency.  

Colorado was the first state to legalize the sale of marijuana for recreational use, beginning in January 2014, and the state expects to generate a lot of additional revenue. Recreational marijuana is subject to a 15 percent excise tax, 10 percent special state sales tax, 2.9 percent sales tax, and applicable locality taxes (Denver’s is 3.5 percent). All those taxes add up to an estimated $98 million per year in additional revenue, according to Colorado Gov. John Hickenlooper’s budget proposal.  

Recreational marijuana sales in Washington are set to begin in July 2014. Washington imposes a 25 percent excise tax on producers, processers, and retailers, in addition to other state and local taxes. Washington estimates marijuana taxes could possibly generate as much as an additional $1.9 billion in revenue over the next five years.  

While Colorado and Washington are eager to use marijuana tax revenues for projects like school construction, the problem is that pot sales have traditionally been a cash-only business. There has been no way to accurately track the real amount of money that marijuana businesses have been generating. Some businesses disguise their marijuana ties, operating under innocuous names or spraying cash with air freshener to hide the smell. Marijuana-related businesses are also prime targets for robberies and burglaries because of the large amounts of cash kept on site.  

With the legalization of recreational marijuana use, marijuana-related businesses have been unable to transition into normal banking relationships with financial institutions because banks are reluctant to get involved with any activity that would subject them to federal prosecution and sanctions. Financial institutions have been looking to the federal government for guidance about the extent they can do business with legal marijuana-related businesses, but the guidelines issued thus far have offered little comfort or reassurance to the financial services industry.  

Guidelines issued in August 2013 and February 2014 by the Financial Crimes Enforcement Network (FinCEN) and the Justice Department were meant to enhance the availability of financial services for and transparency of marijuana-related businesses. But financial institutions remain reluctant to handle the accounts of marijuana-related businesses because the guidelines are merely a guide to the exercise of investigative and prosecutorial discretion, not an exemption from legal action. They include following a rigorous due diligence process for every marijuana-related business client and filing a variety of “suspicious activity reports” for every transaction associated with marijuana business clients. Even after following the guidelines, financial institutions may still be subject to prosecution for participating in illegal activity.  

“Cannabis co-ops” are Colorado’s solution. Supporters argue that “cannabis co-ops” will operate like traditional financial institutions, while giving marijuana-related businesses access to the financial marketplace. Marijuana-related businesses can have normal bank accounts, make deposits and withdrawals, and have access to investment and loan products. This also means increased financial transparency, allowing the state to better track and independently verify the accounting of such businesses, which means verifying that marijuana-related businesses are paying the correct amount of taxes.  

Yet many believe that “cannabis co-ops” are destined to fail. They must receive federal approval before they can open their doors, which is unlikely. Even if they are approved, they will still be subject to federal regulations. They will also have to follow the guidelines described above. All the same, the Marijuana Financial Services Cooperative Act “will likely be [successful] at sparking further debate about the need for the federal government to act to solve the marijuana banking problem,” wrote Zane Gilmer, an associate in Perkins Coie’s Denver office, in an article in Bloomberg BNA’s Banking Report.  

In late May, the governors of both Colorado and Washington asked for additional guidance from bank regulating agencies about how to do business with legal marijuana-related businesses. Officials from both states are determined to find a legal and safe way for marijuana-related businesses to operate within the financial marketplace, allowing greater financial transparency among the industry, and allowing the state to better track tax revenue. But until that guidance comes, or until changes are made at the federal level, it seems that cannabis commerce will remain cash-only.

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