Marijuana Industry Taxation: Marijuana, Banking Policies and Tax Collection
Conflicting federal and state laws concerning the production and distribution of marijuana has created a confusing environment—for marijuana dispensaries and for banks as well. Although the Bank Secrecy Act and the Anti-Money Laundering Act were both enacted to prevent money laundering, restrictions on state-legal marijuana dispensaries are creating the opposite effect.
The Bank Secrecy Act and marijuana-related businesses
On February 14, 2014, the Financial Crimes Enforcement Network released guidance to financial institutions regarding their obligations under the Bank Secrecy Act when providing banking services to marijuana-related businesses. These obligations include:
- Conducting enhanced customer due diligence under the “Cole Memo” guidelines and state law. The Cole Memo guidelines are primarily directed to law enforcement and include eight points or assurances, including that the dispensary is not making distribution of marijuana to minors, is protecting the product from eventual distribution to criminal enterprises, is keeping the product from entering states where it is legal, and is preventing drugged driving and other adverse public health consequences. Banks must also verify that all state licensing requirements have been met by the dispensary.
- Filing suspicious activity reports. Financial institutions must file reports on all marijuana-related businesses and must classify the business as either in compliance with the Cole Memo (“Marijuana Limited”), in violation of state law or of one of the Cole Memo’s eight points (“Marijuana Priority”). Banks must also file reports when they terminate a relationship with a marijuana-related business (“Marijuana Termination”).
These enhanced due diligence requirements obviously add to bank operational costs and do not preclude future legal action against the financial institution for providing bank services to the marijuana-related businesses. As a result, banks are refusing to provide services to marijuana-related businesses and dispensaries are being forced to operate as cash-only businesses.
Allgreens takes the IRS to court
Allgreens LLC, a medical marijuana dispensary in Denver, Colorado, recently filed a petition in the US Tax Court claiming that the 10% IRS penalty for failure to pay quarterly federal employee withholding taxes by bank wire is unfair. Allgreen’s bank account was closed in late 2012 and the dispensary was unable to find another bank willing to take on its business. The result was a whopping $20,000 in penalties for making cash payments from December 2012 through December 2013. Allgreen’s request for a waiver of the penalties was met by the IRS’s alternative of payment through a third party, which may be considered money laundering and is a potentially unlawful activity. The result of this case may have far-reaching implications on marijuana business banking and we will be following this case closely in the coming months.