Cannabis Startups Pay Taxes the Hard Way

Charity Gates phones her contact each month to make an appointment. When the time comes, she and a colleague drive around Denver, collecting stacks of $20 bills she has stored in various safes since the last delivery. She counts the cash and places it in small duffel or sling bags, carrying up to $20,000 at a time.

She then drives to a gray two-story office building downtown and parks on the street or in a pay lot nearby. Gates fears being robbed, so the two dress simply to avoid attention and use different vehicles and delivery days to vary their routine. “We hold our breath every time we go,” Gates said.

Passing armed guards in the lobby, Gates walks into a room and hands her bags to a group of people waiting to run her money through counting and counterfeit-detection machines.

This is how she pays her taxes.

Gates runs Colorado’s Best Dabs, a company that processes cannabis to extract concentrated oils that are used to create marijuana-infused “edibles” like brownies and teas. She is among the growing number of entrepreneurs who find themselves operating in legal gray zones, as more states around the United States move to legalize marijuana while the federal government still regards it as an illegal substance on par with heroin and LSD.

People may be able to open stores and sell their products to customers in the 30 states that have legalized the drug for medicinal or recreational use, but they find themselves without access to banks to provide them with loans or checking accounts.

“We can get fined for moving a light switch without telling the city building department, but we can’t get a bank account,” Gates said.

What has resulted is a cash economy, with many like Gates making monthly and annual tax payments in hard currency instead of with checks or electronic transfers.

Companies that grow, process or sell cannabis products reported an estimated $12.9 billion in revenue in 2017, according to BDS Analytics, an industry group in Boulder, Colorado. Up to $4.7 billion was collected in related taxes.

For most other businesses, paying taxes often means using the Electronic Federal Tax Payment System, an online portal run by the Internal Revenue Service that allows people to transfer funds from a bank account to the Treasury Department. But without access to banks, marijuana entrepreneurs are left to pay in a decidedly more manual way.

“Imagine feeding $20,000 of cash through a machine, one $20 bill at a time,” said Gates of the tax payment process. “It can take two or three hours each time.”

The federal government has a history of taking a hard-line view of this industry. In 2015, the Federal Reserve Bank of Kansas City likened Colorado’s legalization of marijuana to allowing “trade in endangered species or trade with North Korea.”

But that hard-line is beginning to change, which could mean that down the road, federal regulations might loosen up.

Sen. Chuck Schumer, D-N.Y., said last month that he would introduce a bill decriminalizing cannabis. And President Donald Trump recently suggested that he would be open to signing a law that would allow states to control their cannabis industries without threat of federal prosecution.

A business group, the National Cannabis Industry Association, recently produced a video encouraging citizens to ask Congress to “support legal small businesses that are successfully replacing the criminal marijuana market.” More than 200 of its members will visit Washington starting Monday to lobby Congress on issues including banking and taxes. John Boehner, the former speaker of the House who had been one of the most staunch opponents of legal marijuana, said his views have changed. He recently joined the advisory board of Acreage Holdings, an investment firm dedicated to the cannabis industry. Bill Weld, the former Republican governor of Massachusetts who also has joined the Acreage advisory board, said he believed cannabis could help wean people off opioids.

Shutting off access to the federal banking system presents a variety of risks, said Peter Conti-Brown, an assistant professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business. The chance of income being underreported increases, he said, as does the chance of employee theft or even armed robbery as large amounts of cash move through the business ecosystem.

“Marijuana businesses and banks are caught in the crossfire,” Conti-Brown said.

Some credit unions and small banks that are chartered by their state, not the federal government, have tried to fill the void by offering basic banking services to the cannabis industry. George Allen, president of Acreage Holdings, said the companies he has invested in have been able to find banking in the 11 states where they operate, which has, among other things, allowed them to pay taxes electronically or by check. Tai Cheng, the chief operating officer for Aloha Green Apothecary in Hawaii, a state where marijuana is legal for medicinal purposes, runs his company almost completely in cash.

Aloha Green grows cannabis plants, processes harvests and sells a variety of marijuana products at a dispensary in Honolulu. Cheng says he has been unable to find any bank or credit union in the state that will open a bank account for his cannabis company.

Places like Hawaii have begun trying technological solutions in the absence of a legislative ones. The government has been allowing dispensaries to use CanPay, a mobile payment system for medical marijuana patients run in partnership with a Colorado-based credit union. Dispensaries can use money paid via CanPay to write checks or make electronic payments that pay taxes and other bills. But so far for Cheng, not enough patients have used the system to make it a reliable source of electronic funds.

Cheng says he just wants to operate like any other business. When he pays his taxes, Cheng has private security teams accompany him to the state office. He says he has studied the government building’s different entrances and exits, and shows up at different times and days to make himself less of a robbery target. (Linda Takayama, the director of Hawaii’s department of taxation, said that no incidents have been reported so far.)

“We dutifully pay our taxes, and the government happily accepts it,” he said. “It’s ridiculous to have to jump through all these hoops.”