Cash-only pot sales irk state, owners

FORT COLLINS – Tax collectors are almost as frustrated as owners of pot shops as they wrestle with how to collect taxes in an ancient way – cash only.

Ginny Sawyer, policy and project manager for the city of Fort Collins, said the city expects to receive at least $700,000 annually from retail marijuana establishments after they get started.

But collecting all of that revenue may prove challenging if banking with cash-only marijuana businesses remains illegal.
“It’s a challenge,” she said. Cash-only business “probably lends itself to potential fraud.”

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Sawyer is one of many who have raised concerns about an absence of accountability in the marijuana industry since Colorado voters in November passed Amendment 64, which legalizes retail sales of small amounts of marijuana.

In Pueblo County, the first county statewide to report marijuana tax revenue figures, marijuana retailers are asked to call ahead of time before they bring their cash to pay taxes. Marijuana business representatives then bring backpacks full of cash as an armed security guard stands by – just in case.

The county now has five marijuana retail dispensaries, and county officials collect the taxes on behalf of the state. It’s not a perfect system, but so far it was worked well, said Gilbert Ortiz, Pueblo County clerk and recorder.

County officials would prefer the dispensaries mail them a check, but “until banks come online… here in Colorado,” Ortiz said, “we’re able to collect taxes safely when (marijuana business representatives) bring it in cash.”

$2 million in retail-tax revenue

Marijuana tax revenue has poured into state coffers. Colorado medical marijuana dispensaries paid $9.1 million in tax revenue to the state during fiscal 2013 – July 1, 2012, to June 30, 2013. Medical marijuana dispensaries paid nearly $6 million to the state in fiscal 2012. Medical marijuana is taxed at a rate of 2.9 percent.

Retail marijuana establishments are netting additional tax revenue, with a 10-percent additional tax on top of the 2.9-percent tax. A 15-percent retail excise tax is levied on the first sale or transfer of marijuana from a cultivation facility to a retail store. In January alone, retail marijuana generated nearly $2 million in tax revenue for the state. By contrast, medical marijuana netted slightly more than $900,000 in January. The state will release February retail sales tax figures this month.

Despite the added tax revenue, concerns remain about whether the state will receive its rightful share from the cash-only operations.
U.S. Rep. Jared Polis, D-Colo., said a lack of banking regulations makes paying taxes more difficult for marijuana businesses. Polis has co-sponsored a bill to allow banks to do business with marijuana companies in Colorado and Washington, the states where voters legalized recreational marijuana use last year.

“They certainly have accounting ledgers, but they’re a lot harder to audit and monitor without the transactions coming through the normal banking system like any other business,” he said.

Polis and U.S. Rep. Ed Perlmutter, D-Colo., worked with the banking industry on the bill, which bars federal regulators from punishing banks that provide services to marijuana businesses. A total of 18 Republicans and Democrats have sponsored the bill, which applies to states with retail stores and medical marijuana dispensaries.

If the bill became law, the banking industry’s hesitation about doing business with the marijuana industry would vanish, he said.

Many medical marijuana businesses have operated as cash businesses for years in Colorado.

Polis said a company can survive with only cash.

“But, again, the dangers are that it’s a lot harder to track compliance with the law,” he said. “It’s inconvenient for consumers, and it also puts operators at risk of violent crime because they have large quantities of cash in their possession.”
The state Department of Revenue believes it can effectively collect tax revenue from marijuana businesses.

“The department is doing everything it can to prevent fraud,” department spokeswoman Natriece Bryant said.

For example, on Jan. 1 the department started its Marijuana Inventory Tracking Solution program, an automated inventory tracking system run by Florida-based Franwell Inc. The company is using radio frequency identification tags placed on marijuana to track the product from its beginnings as a plant to its sale in stores. The state does not track marijuana after a dispensary sells it to consumers.

Unsatisfied with regulations

The U.S. Treasury and Justice departments issued recent guidelines to increase the availability of financial services to marijuana businesses, but banks felt those advisories did not go far enough in addressing their concerns.

The Federal Deposit Insurance Corp., the main banking regulatory authority, has not given banks the blessing to serve marijuana businesses.
Mark Bower, chief financial officer for Home State Bank, said he would like to do business with marijuana dispensaries. If he did so, however, he would be violating the Bank Secrecy Act.

“While the Department of Justice said they weren’t going to prosecute, it doesn’t mean that the FDIC doesn’t have all of their power and authority to fine us and put us in jail,” he said. “It’s going to take legislation at the federal level to fix this.”
Erica Freeman, co-owner of Choice Organics, Larimer County’s first retail marijuana store, agreed that federal regulators need to address the situation.

“A cash-only business is ridiculous,” she said. “There are many, many, many stores that can’t even pay their own taxes because they have to have a bank account to do it.”