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Cash System Makes it Hard for Marijuana Businesses to Pay Taxes

Woman buying marijuana

As we approach tax season, all businesses are in the process of making complicated allocation and valuation decisions, and the process is even more complicated due to staffing shortages and interruptions due to the coronavirus pandemic. Thankfully, California and the federal government have granted extensions to the filing deadline for many filers. In the meantime, California marijuana businesses are facing particular hardship in dealing with federal and state tax requirements. While the licensed distribution of both recreational and medicinal marijuana is legal under California law, distribution remains illegal under federal law. The federal illegality has caused several difficulties and complications. The response by marijuana distribution businesses has been clever and interesting, to say the least. Learn below about the hardships faced by marijuana businesses in dealing with their taxes, and contact a knowledgeable cannabis business lawyer for help with your marijuana business.

Banks will not hold marijuana funds

Most large banks are insured by the Federal Deposit Insurance Corporation (FDIC). Federally-insured banks must comply with federal law, which prohibits banks from engaging in illegal activity and from assisting others with unlawful activity. Application of the law when something is legal under state law but illegal under federal law is not entirely clear, but federally-insured banks wary of losing government protection do not want to take the risk. So, they generally avoid contributing to an “illegal” business by not allowing marijuana distributors to deposit their funds.

That means that the millions of dollars pouring into cannabis businesses in Colorado, Nevada, California, and other states are held, in large part, in cash. Marijuana businesses do not want to give the federal or state government any reason to crack down, however, so they still want to pay their taxes. Federal and state tax laws both cover income derived from “illegal” enterprises and criminal activity.

Unfortunately, that means that cannabis businesses are paying their taxes in cash. Even more unfortunate, and somewhat unfairly, the federal government imposes harsh penalties for cash payment of taxes. Because the IRS lacks the infrastructure necessary to handle large amounts of cash payments, they impose penalties. Right now, dispensaries are paying upwards of a ten percent penalty for choosing to pay their taxes with the only means available to them.

Some dispensaries are fighting back against the unfair Catch-22. A Colorado dispensary, for example, recently filed such a challenge. The IRS has its hands tied by federal law, however, and is likely to prevail until the tax or drug laws are changed.

Reach Out to a Cannabis Business Lawyer

If you are interested in setting up a marijuana business or are dealing with taxation, licensing, copyright or other legal issues with your cannabis business in Los Angeles or Southern California, call McReynolds Vardanyan, LLP, in Glendale at 818-855-2115. Our California cannabis business lawyers will work with you to get your budding business off the ground efficiently, effectively, and legally.

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