Cannabis and Banking – an Accounting Nightmare
Cannabis recently became sanctioned for adult-use consumption by the state of California, and for the first time, the state imposed a tax on cannabis—creating a taxation nightmare. A recent article in The Economist explains. “The state treasury estimates that sales in 2018 will reach $7bn. But it will not collect its fair share, because [cannabis] taxes, it turns out, must be paid in cash. This makes tax collection “a nightmare”, as the Treasury has described it.” The article continues, “Businesses restricted to cash are “targets for assaults” that endanger the public…” [B.S, 1/22/2018, The Economist, https://www.economist.com/the-economist-explains/2018/01/22/why-marijuana-retailers-cant-use-banks].
Why Must Cannabis Taxes Be Paid in Cash?
Unfortunately, because cannabis remains prohibited in any form of consumption at the Federal level, banks and other financial institutions that are federally insured are not allowed to accept monies associated with the cannabis industry.
While the Federal government has made some attempts to remedy the situation, it’s still not a clear path forward for the financial institutions, explains a Forbes article. “In 2014, under the Obama administration, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a memo outlining how banks can open accounts for cannabis businesses without triggering federal enforcement actions. But because the document did not change overarching federal laws, many banks have remained reluctant to work with [cannabis] providers,” [Tom Angell, 3/8/2018, Forbes, https://www.forbes.com/sites/tomangell/2018/03/08/senate-could-vote-to-let-marijuana-businesses-use-banks-this-week/#75bf2a42cdd4].
What is the Solution for Cannabis Banking?
In California, recent legislation was introduced at the state level to create a separate class of financial institutions. The San Francisco Chronicle reports that the legislation “would allow the creation of a special class of state-chartered banks and credit unions, regulated by the Department of Business Oversight, that could process deposits, withdrawals and other financial transactions by licensed cannabis merchants,” [Catherine Ho, 4/25/2018, San Francisco Chronicle, https://www.sfchronicle.com/business/article/Bill-to-create-banks-for-cannabis-businesses-12864628.php].
If approved, the law in California would allow cannabis professionals to transition away from a cash-only model, allowing for greater safety for workers—and a more natural way for the state government to collect its taxes.