If you are a marijuana business, regardless of whether you are operating within state law, you have major tax and banking headaches. Banking and most tax laws are governed by Federal law, which deems these activities illegal. One challenge commonly faced by marijuana businesses is the lack of access to the banking system, because banks don’t want to deal with businesses illegal under federal law.
Without banks, dispensaries pay the government in cash, but face a penalty for the cash payments. This situation highlights the hypocrisy of the government’s tax and drug policies, requiring payment on the one hand, punishing you for paying on the other. A recent case filed in U.S. Tax Court by a Colorado dispensary, Allgreens LLC, is the most recent challenge to this Catch-22 created by the government. Unfortunately, the IRS is probably going to win because it is just following the letter of the law here – a change to the tax or the drug laws is necessary for a fix.
Financial institutions generally refuse to open accounts for marijuana businesses due to the intersection with federal law and, once the bank finds out a customer is involved in marijuana activities, will also drop accounts for the existing customers who have such businesses.
Banks do not want to risk the FDIC revoking its deposit insurance and other federal agencies cracking down on them for knowingly depositing monies from businesses deemed illegal drug trafficking activities under federal law.
Without many banking options, marijuana businesses are forced to operate primarily in cash. As a result, these businesses may have little option other than to make their tax payments in cash. This means they are unable to make their deposits through the Electronic Federal Tax Payment System. The IRS penalizes businesses and people who pay their payroll taxes in cash. The IRS is assessing a ten percent penalty on marijuana dispensaries for paying their federal employee the only way they can.
The IRS cannot efficiently deal with large amounts of cash, so it imposes penalties in the payroll tax situation. This is confounding because these businesses are simply paying their taxes using the same currency created by our federal government, which would be acceptable in other situations (e.g., auctions
and individual income tax payments under IRM 22.214.171.124
). Dispensaries want to follow the law and pay over payroll taxes and, due to no fault on the part of the dispensaries, the IRS penalizes them an additional ten percent. While the IRS has suggested alternative methods for paying their taxes, these are likely inconsistent with federal anti-money laundering laws, requiring the use of unnecessary third parties (the use of additional steps that mask the true nature of illegal income in certain situations can be considered money laundering).
Given these current challenges, the IRS should waive this ten percent penalty for marijuana businesses at least on a temporary basis until there is greater clarity whether a reasonable cause exception is available. Unless and until these businesses have sufficient access to the banking system to meet their obligations under the Internal Revenue Code, the IRS’s imposition of penalties is simply unfair.