Pot tax money should ride in armored cars, California treasurer says

State Treasurer John Chiang proposed a stopgap Tuesday for a weighty issue cash-based cannabis businesses face: He recommended the use of armored cars to collect what might amount to $1 billion in annual taxes when recreational cannabis becomes legal for sale Jan. 1.

Chiang announced the proposal for transporting cash securely as part of the findings of a year-long study on cannabis banking.

Access to financial services has been a nettlesome problem for medical dispensaries in California and in other states like Colorado where recreational cannabis has been legalized. Because the drug remains federally illegal, most banks won’t handle money from cannabis businesses, leaving them without access to credit card payments, checking accounts and electronic tax payments.

This will become an even bigger problem in 2018, when the treasurer’s office estimates the state’s cannabis industry will have about $7 billion in sales. The industry’s reliance on cash has raised major security concerns, which Chiang hopes will be alleviated by the use of armored cars.

“It is unfair and a public safety risk to require a legal industry to haul duffel bags of cash to pay taxes, employees and utility bills,” Chiang said. “The reliance on cash paints a target on the back of cannabis operators, and makes them and the general public vulnerable to violence and organized crime.”

Chiang recommended that the state contract with a private courier service to transport the large amounts of cash to a secure counting facility, before depositing it with the Federal Reserve or a commercial bank willing to take the funds. These collected taxes would then be transferred to taxing authorities.

How to pay for the service still needs to be worked out, the treasurer’s office said, and tax-collecting bodies will ultimately determine whether armored cars will be used. The California Department of Tax and Fee Administration will handle the collection of the cash, and its director, Nicolas Maduros, said that it’s too early to say whether this proposal is feasible.

“This is not a new issue for us,” Maduros said. “We’re very concerned about collecting cash in our offices for those taxpayers who can’t get access to banking services, so we’ve looked at every possible alternative and have not yet found a great solution, especially one that’s feasible in the immediate term.” He said, however, that if the treasurer’s office is able to come up with a workable plan, his agency would support it.

“Our main concern is the safety of our staff and the safety of the public,” Maduros said. “That’s the primary concern, much more so than cost.”

Safety remains an issue in the industry. There have been a number of cash robberies at dispensaries across the country, including one in San Diego in September. Hezekiah Allen, executive director of the California Growers Association, said that he believes such thefts are vastly underreported.

“Many cannabis businesses don’t feel comfortable reporting theft, but as these businesses become normalized over the next few years it’ll become clear that it’s a common problem,” Allen said. “It happens frequently.”

Allen, who was part of the working group that produced the report, supported the idea of armored cars for tax collection, but emphasized the need for other solutions. “I think the approach the treasurer and the attorney general’s offices have taken to focus on the most essential transactions and reduce the public safety impact makes sense,” Allen said. “But there are all sorts of other impacts that need to be considered. There’s the human impact. It’s really tough to get a mortgage if you don’t have a bank account and credit.”

In Colorado, five years after recreational sales were legalized, these issues linger. Adam Weiss, who runs a cannabis business in Boulder, Colo., said that armored cars are commonly contracted to protect cash. “Or you’ll get someone riding along with it who has a right-to-carry license,” Weiss said. Weiss said this is becoming less common, as some credit unions and banks within the state have opened their doors to business.

Chiang admitted that the armored cars were a short-term step for businesses that were trying to get into the new market, rather than an ideal long-term solution.

“It’s not my view that this ought to be the state’s principal role,” Chiang said. “But there are those who want to engage in this effort, and there are still unresolved issues related to a state bank and existing banking services, so if we can engage and move quickly using the private sector, I’m not averse to that approach.”

The report also featured several more long-term recommendations, including the creation of an online portal that would collect data from local governments and state regulatory agencies. This would help banks fulfill a federal obligation to “know your customer” before taking money from businesses. Since marijuana businesses have had to operate on a cash basis, data about them are scarce.

It also recommended a study to explore the option of a state-backed financial institution, an idea that has had growing public interest but faces concerns over viability.

Chiang said a public-sector bank might be a positive alternative, but it was too early to say. “Is it like a potato chip?” he asked. “It might taste good going down, but ultimately be of no nutritional value.”

The report also recommended the formation of a multistate consortium to lobby the federal government, do outreach and education, and serve as a resource for states where cannabis is legal.

In the meantime, the cash will still have to roll in, one way or another. Maduros said that when the first round of taxes from legal sales is due in late February, the agency will collect them. “We expect to be prepared one way or another to collect the tax,” Maduros said.