Why Marijuana Retailers Can’t Use Banks

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Recreational marijuana has been legally sold in California since the start of the year. The state treasury estimates that sales in 2018 will reach $7bn. But it will not collect its fair share, because pot taxes, it turns out, must be paid in cash. This makes tax collection “a nightmare”, as the treasury has described it. The predicament of Oregon, where recreational pot became legal in 2015, is a case in point. Sellers who declare sales have had to bring tax payments in cash every month to a guarded, bulletproof site in Salem, the state capital, no matter the distance they must travel. Operating only one such “cash-transaction unit” saves the revenue department money, but it also reduces the number of sellers who declare sales. So why can’t tax payments be made electronically?

Nearly two-thirds of America’s states have legalized pot sales for certain uses, but the federal government still classifies marijuana as a “Schedule 1” drug, on a par with heroin. Banks that handle marijuana money can be charged with money laundering. Pot businesses, therefore, are on the whole stuck working with cash, which causes problems for more than just tax collection. For starters, cash operations are inefficient. To pay its staff of 200 in cash, CannaCraft, a Californian maker of marijuana products, requires four employees who would otherwise be unneeded. Businesses restricted to cash are “targets for assaults” that endanger the public, laments California’s treasury. And as firms accumulate untraceable cash, some will offer bribes for operating permits, says Fred Timpner, head of the Michigan Association of Police. He expects recent arrests for such corruption in his state to be followed by more.

It may sound like a nightmare for law enforcement. But police are generally happy to keep marijuana money out of banks. That is because “asset-forfeiture” laws allow them to seize cash and, astonishingly, pocket much of it for their departments, even if they merely suspect it of including proceeds from crime. (Cars, homes, and other goods can also be taken, but cash requires less paperwork.) The police do not need to prove that the cash is from crime, or charge that a crime has been committed. Police in Detroit now take so much cash from Michigan’s pot dispensaries that their number has fallen from roughly 500 two years ago to about 200 today, says Rick Thompson, owner of the Michigan Cannabis Business Development Group, a conference organizer in Flint. Sometimes the money can be recovered, but this requires a lot of time and money, as well as a judge who can be amenable to the victim of the asset forfeiture. Pot businesses are only “legal” at state levels, so cash from marijuana is by definition illegal federally. Mr Timpner says that police departments broadly respect state laws and will not routinely seize assets from legal marijuana dispensaries except for those which have cut corners. But Mr Thompson also points out that Michigan and California have the most “police-friendly” asset-forfeiture laws in the country.

This sort of asset forfeiture is set to continue. Jeff Sessions, the attorney-general, has directed the Department of Justice to craft seizure policies that increase the cops’ take. Few expect the federal government to reclassify pot, or Congress to protect banks that handle marijuana money, as California’s treasury wishes. Some reckon crypto-currencies like bitcoin may help to solve the problem. But they are volatile and, for many, tricky to use. In the absence of transparent law enforcement and sound legislation, states are left to come up with their own solutions. The California treasury’s Cannabis Banking Working Group is advising government agencies to hire armored couriers for the collection of businesses’ taxes and permit payments.

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