Compliancy with tax laws is a popular complaint and challenge among business owners at this busy time of tax preparation. Compliancy might be difficult for you, as the CEO of your company. However, check out the true life extremes Zack Lazarus goes to. Like any business owner, he’s only seeking compliancy with state, local and federal regulations. But Mr. Lazarus must pay his taxes in a far different manner than you or me. He’s in the very cash-heavy business of supplying legal state dispensaries with cannabis in his home state. As you read his story below, be aware, this supply is 100% legal at the state level in his state.
Compliancy to the Letter of the Law
He explains, “We have a security detail with weapons that help us to get to the right destination to pay our taxes. Because everything’s in
cash we have to drive to our local IRS offices and pay.”
You might have guessed it from the word “cash,” but Zack Lazarus is in one of America’s fastest growing niche industries. (No pun intended.)
“He is the Chief Operating Officer of A Green Alternative Dispensary, a cannabis dispensary in San Diego. “He pays city, state and federal taxes in bags of cash that smell like marijuana.” And he arrives at the IRS office with the strictest security, flanked by armed guards.”
Why the Unique Tax-Paying Scenario?
No, the government does not require payment of taxes in cash. In fact in previous times, they penalized companies for paying in cash—10 percent. Back in those days they did not have to pay the penalty if they had approached a bank and been denied an account. However, the federal government prohibits marijuana, even if the state permits it. Thus, for a long time banks could not legally to provide financial services to cannabis or cannabinoid businesses. Such businesses were only legitimized at the state level. By the way, even in some states where banking is available, it is grossly over-priced.
Banking, Cash and Compliance
“If you open a checking account in this industry, it’s going to cost you $3,000-$5,000 a month…And all you get is a checking account; no lines of credit, no merchant services, no mortgages. It’s really not full banking services, so some people choose to stay on a cash basis.”
Therefore, the lack of banking access forced many legal dispensaries to utilize cash.“Many marijuana business owners are in the same predicament.” In fact nearly a third of the taxpaying small business enterprises were unable to get bank accounts in 2017. However change is coming. Many pundits in the industry believe online banking will open new financial opportunities for the beleaguered dispensaries and their investors.
As a side-note, we are sure you dislike the level at which the federal government will tax your small business. However, state, local and federal taxes can quickly rack up the dollars for cannabis company compliance. This often leaves many small businesses with over 50% in tax payments, slashed from their bottom-line. Only costs of goods sold are deductible, by the way.
IRC §280E provides:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law.”
Compliance without Legitimacy
Did you know that although cannabis is federally considered an illegitimate industry, the owners of small dispensaries continue to pay
federal taxes? By the way, Richard Auxier, research associate with the Tax Policy Center stated, “If you’re making money illegally, that’s still income, and that money is supposed to go to the IRS.”
According to the IRS, “The federal taxes come under the under the tax code called 280E, which requires drug dealers to pay taxes even on prohibited substances.”
Cannabis business owners across the U.S. will owe at least $2.8 billion in taxes to the federal government, based on estimates from New Frontier Data. And yet—given the federal position, it can easily be seen why banks with their decidedly federal interests, would be reluctant to support this business.
Trying to Keep Up With Regulation: Being Over-Compliant in the Face of Super Regulation
Likewise, compliance is strict and expensive for the little legal dispensaries, medical suppliers and recreational dispensaries in some states.
Just like the banking industry, the accounting industry has been reluctant to offer support to the cannabis enterprises. However, at Gavrilov & Co. we have seen that beginning to change.
Many accountants are noticing that a large majority of legal dispensaries are firmly intent on proper compliance.Equipped with a specialized skill set and sophisticated financial knowledge, some CPAs have the opportunity to enter a burgeoning market—projected to reach an economic impact of $70 billion in the U.S. by 2021—where they can access a new realm of clients in dire need of their help, not to mention a substantial new source of revenue for their firms.
Historically, many of these new small businesses lacked legal knowledge to balance their books. You see, on the one hand, they must interpret the gray areas of the federal law. On the other hand, they need a tax accountant’s education to create appropriate bookkeeping for state and local laws as well.
Accounting and Technology are Stepping Up to Support the Industry
Across the US, some medium and small accounting firms are now opening their doors to the new breed of intrepid entrepreneurs and investors in the cannabis and cannabinoid industries in some states.
In an age of ever-changing regulation, many accountants believe in making the cannabis industry absolutely over-compliant. And that’s a good thing.
Accounting firms are combining with the security, and the soft-ware technology companies to help this new industry shake off the dust of its shady past. Accountants know what compliance means, what HIPPA demands. And we understand the roles of investors in this new arena in which data security is of the highest importance.
Last Year the State of Washington was the Home of Important Legislation in this Regard.
On March 15, Governor Jay Inslee signed into law Engrossed Substitute Senate Bill 5928, “Making financial services available to marijuana producers, processors, retailers, qualifying patients, health care professionals, and designated providers as authorized under chapters 69.50 and 69.51A RCW.” And here we critical support for the cannabis industries and the companies which want to support them: “ESSB 5928 adds a new section to Chapter 9.01 RCW stating that financial institutions, CPAs, and CPA firms do not commit a crime under Washington State law solely for providing financial services to licensed marijuana businesses.” Your state might not have this legal protection for companies servicing the cannabis industry, so be sure you check.
Of Special Note: Take-Aways and Taxing Thoughts on Cannabis and Tax Compliance
Some of the highlights of this article bear summary and repetition:
- At least 30 states across the country now allow marijuana to be sold for medicinal purposes.
- In four states, it is legal for recreational purposes.
- Special Note to Our Fellow Accountants: New businesses in this industry are seeking the services of CPA’s. As such, CPA’s must continue to refer to their state boards of accountancy to determine if providing services to businesses in the marijuana industry is permissible.
- So, it entirely depends on your state laws at this time.
- But be aware both government and banking officials are warning us that nationalization and regulation are coming with laws to unite this industry federally.