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California Pot Money Takes Long, Strange Trip to Bank

Posted on February 1, 2018 by Wesley Elmore, Paul Jones

California tax officials have been quietly arranging for loads of cash to be deposited with Bank of America, a process that's frightened employees tasked with receiving money that reeks of marijuana.

Selvi Stanislaus, executive officer of the California Franchise Tax Board, confirmed January 30 that state tax authorities have been working with Bank of America to make it easier for cannabis businesses to turn over cash to comply with their state tax obligations.

According to Stanislaus, under the process worked out with the bank, at least two representatives each from the FTB, the California Department of Tax and Fee Administration (CDTFA), and the Employment Development Department (EDD) meet representatives of the cannabis businesses at the bank. Those taxpayers turn over what Stanislaus described as “boatloads of cash” to the state tax representatives, who then hand it over to bank employees for counting. Once it’s counted, the money is debited to the taxpayers’ state tax accounts.

Speaking at the University of Southern California Gould School of Law Tax Institute in Los Angeles, Stanislaus said her main concern with the process is employee safety. “I can tell you, my employees are so paranoid; they’re afraid to go with these people,” she said. “Also, as you know, cannabis money smells bad.”

The process devised with Bank of America is inefficient, Stanislaus acknowledged, and she noted that the bank doesn’t want the arrangement publicized.

But the cannabis business owners have made it clear they want to pay their taxes, she said, and the governor’s office is working on a statewide solution. Because federal law prohibits banks from accepting marijuana money, most cannabis businesses don’t have bank accounts and must pay their taxes in cash.

State Board of Equalization member Fiona Ma (D) told Tax Analysts on January 30 that before the creation of the CDTFA — essentially a splitting off of the board’s tax administration wing, which is now run independently — the board started a pilot program to accept cash sales tax payments from medical marijuana sellers.

“The Employment Development Department [has] been using this practice . . . meeting [taxpayers] at the bank” to essentially transfer cash tax payments of employee taxes from mainly marijuana businesses directly to the bank, rather than first receiving it through a state office, she said.

While the EDD used the handoff to accept cash payment of payroll taxes, Ma said, the BOE decided to test the method for collecting sales taxes on medical pot sales — at the time, only medical marijuana was legal in the state. After lawmakers and Gov. Jerry Brown (D) split off the newly created CDTFA from the BOE, Ma said she lost track of whether the pilot was continued or had been expanded or made permanent.

“They were doing a pilot project at Bank of America — it’s our bank for all cash deposits for sales taxes,” Ma said. “I think [it was] in Sacramento, and it was working.”

Bank of America did not respond to a request for comment by press time. A representative with the EDD said he couldn’t confirm whether the department had received cash payments at banks, and said that details of a plan by agencies for handling marijuana tax payments aren’t yet available.

The scarcity of banking services for marijuana businesses caused by the federal marijuana ban could intensify following the decision by U.S. Attorney General Jeff Sessions to rescind Obama-era federal guidance discouraging enforcement of federal drug laws against state-legal pot businesses — a move that could spook already wary financial institutions. Meanwhile, pot sellers' reliance on cash has forced many states with legal pot to modify facilities in preparation for accepting large amounts of paper money and coins. In response to concerns about the safety of state employees transporting large amounts of cash, a California working group suggested contracting with armored car companies.

A representative with the CDTFA didn’t immediately return a request for comment. 

Notably, the CDTFA is now responsible for not only the sales tax on marijuana, but also a 15 percent retail excise tax and a cultivation tax of $9.25 per ounce of flowers, $2.75 per ounce of leaves and stems, and $1.29 per ounce of “fresh” plant.

California legislation passed in 2016 allowed medical sellers to make cash payments to the board without having to pay a penalty or obtain a waiver, and legislation proposed this year would expand that to incorporate the recreational businesses market and the new taxes on pot.