Being a business lawyer in Silicon Valley, I have seen new industries develop and bloom overnight. Last November, California voters created the State’s newest green industry by adopting the Control, Regulate and Tax Adult Use of Marijuana Act of 2016. The initiative is California’s attempt to follow the leads of Colorado and Washington and allow for the recreational use of cannabis. Although voters were certainly motivated by reasons other than revenue, the pro-use campaign argued that cannabis taxes could contribute to the state’s coffers.
The problem with cannabis is that while states have legalized medical, and increasingly, recreational use, the federal government continues to characterize cannabis as a Schedule 1 drug. This means that cannabis is included in a category that includes such drugs as heroin, Quaalude, and GHB (often referred to as the “date rape” drug). These types of drugs are thought to be so dangerous and lacking in medical efficacy that federally licensed, or chartered, institutions can’t have anything to with them. These institutions include banks, whether they exist on the national level, or for the benefit of a small community on Main Street. As a result, banks cannot process any payments that arise out of the sale of cannabis. It is no surprise that much of the cannabis business, whether you are a purchaser or a business advisor, is done in cash.
So, what is a law abiding grower in the Emerald Triangle (the name used for the growing regions within Mendocino, Humboldt and Trinity Counties) to do? The poor grower can’t just write a check to pay their taxes. Banking large amounts of cash when you are trying to pay taxes is often impossible due to bank reporting requirements concerning cash deposits. The amounts required to be paid are not insignificant. It was recently reported by the general counsel of the California Cannabis Industry Association that some cannabis businesses can run up tax bills of up to $1,000,000. What’s worse, cultivation often occurs in rural areas, far from the government infrastructure and agencies that can accept large amounts of cash payments. Transporting large amounts of cash is not only inconvenient, it can be conspicuous and subject a poor farmer to theft or worse.
California has recently sought to address these concerns. Senate Bill 148, the Cannabis Safe Payment Act, introduced by Senators Wiener and Atkins, seeks to allow county agencies to collect cash tax payments on behalf of the State. The bill specifically authorizes the State Board of Equalization, or a country agency, to collect cash payments owed by a cannabis-related businesses to a state agency that administers any fees, penalties, or other charges for these types of businesses. This allows the green business person to make their payments at their local county office without having to schlep thousands of dollars of greenbacks to the appropriate state office in a major urban area or Sacramento. As State Board of Equalization Fiona Ma said recently in a prepared statement, “Driving around the State with bags of cash is not the safest method of paying your taxes, but it’s generally the only way the cannabis industry can pay what they owe until we can bank the industry.”
The take away from all of this is that the State, and the movers and shakers of California’s newest legal industry, will be constantly searching for solutions to solve the cash management problem faced by cannabis businesses. It is likely the legislature will do everything it can to make tax payment easy. The final solution, however, to the cash problems facing the industry will remain elusive until a suitable banking structure is found which circumvents existing federal restrictions.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.