California Marijuana Purveyors Go Mainstream, Except For The Sacks Of Cash

Source: San Francisco Chronicle, Peter Fimrite
Photo: Michael Short, Special To The Chronicle

Bay Area marijuana retailers who went fully mainstream this month were forced to act like gangsters anyway as they rumbled down freeways and across bridges in sport utility vehicles and sedans and, in at least one case, a Tesla, bearing cash piled in shopping bags and suitcases.

The money was headed for the collectors at the San Francisco and Oakland offices of the California Department of Tax and Fee Administration, which are handling tax payments under the 2016 state law that legalized recreational cannabis.

Everyone agrees the bundles of moola are a lure for criminals, but merchants who can’t access traditional banking have no other way to settle up. A month after California’s first recreational marijuana shops opened, the industry is mired in a fiscal free-for-all with few answers on how to handle the explosion of cash from rising sales and increased taxes.

Industry leaders estimate that 70 percent of the more than 1,600 recreational and medical dispensaries in the state are still dealing in cash. They must lug stacks of 20s, 50s and 100s to the tax collector every month, payments that are growing after California on Jan. 1 initiated a 15 percent cannabis tax on top of sales taxes.

The Wild West situation stems from marijuana remaining illegal under federal law, which prompts banks that might open accounts and extend loans to fear money-laundering charges.

In the latest bid for a solution, state Sen. Bob Hertzberg, D-Van Nuys, introduced legislation Thursday that would allow state-chartered banks, credit unions and other financial institutions to open accounts and issue checks for marijuana retailers.

Members of Congress have also sought protections, and Oakland and San Francisco have studied the idea of a public bank, but U.S. Attorney General Jeff Sessions has pushed in the other direction, signaling he favors a marijuana crackdown.

Frustrated state Treasurer John Chiang urged California in November to hire armored cars to help pick up the taxes, which industry experts predict will top $1 billion a year. But many courier services are fearful of being targeted by the federal Drug Enforcement Administration, and nothing has been done.

Instead, 90 percent of all cash tax payments to the state are now made by the cannabis industry, officials said.

“Certainly it’s an impediment to doing business,” said Erich Pearson, the founder of the San Francisco Patient and Resource Center, or SPARC, the city’s largest cannabis outlet. “A lack of banking has all sorts of logistical and operational challenges … so you have safes and cameras and security.”

The issue has intensified since Jan. 1, when the state put new taxes on retailers, growers and manufacturers. California businesses must normally pay a penalty for dealing in cash, but those in the cannabis trade can obtain a waiver, officials said.

Recent events in San Francisco and Oakland have only worsened the cash-only dilemma. The San Francisco tax collector closed in the fall after the office was accidentally flooded, forcing dozens of marijuana purveyors to drive to Oakland or Sacramento. The office reopened Jan. 22.

Earlier this month, the Oakland tax office became so swamped with currency that officials notified retailers it would only accept $20,000 in cash a day — a move that would have required some businesses to make multiple trips. The limit was rescinded shortly after The Chronicle inquired about it.

Tax authorities could not provide data on how much cash they are receiving and from how many businesses, but shop owners in San Francisco said it was not uncommon for them to haul in $80,000 at a time.

While no recent robberies have been reported publicly, dispensary workers across the country have fallen victim to cash heists over the years, including an Orange County dispensary owner who was kidnapped in 2012 and sexually tortured by four thieves trying to force him to hand over money. Another risk is that police or federal agents might confiscate gains considered ill-gotten.

“It’s a burden for the whole industry,” said Erick Alfaro, director of operations for the Green Cross in San Francisco, whose boss Kevin Reed had to make two trips to Oakland in his Tesla to pay taxes this month. “Walking around with that large amount of money is definitely a danger and a safety concern for us.”

Before January, medical dispensaries were required to pay state sales taxes that amounted to around $50 million annually, plus varying local taxes. Officials said only about a third of dispensaries paid all they owed — a shortfall that became one of the arguments for legalization.

The newly raised taxes will pay for marijuana research and regulation as well as programs to prevent drug abuse, protect the environment and test for pesticides.

Despite the windfall, bank managers contemplating opening cannabis accounts remain wary, and got no encouragement from Attorney General Sessions, who on Jan. 4 rescinded a memo issued under President Barack Obama’s administration that instructed the Department of Justice to leave cannabis businesses alone in states where the drug is legal.

“It would be ridiculous for banks like ours to bank in marijuana,” said Jim Brush, the president and chief executive of Summit State Bank in Santa Rosa, a state-chartered institution subject to federal regulation.

“Anytime we think there is anything to do with marijuana, we have to report that as suspicious activity because its illegal,” Brush said. “I have heard of some banks that have started it, but usually within a few months they aren’t doing it anymore. The fines can be substantial.”

Before Sessions rescinded the Obama administration directive, known as the Cole memo, 400 banks in the country had cannabis customers, according to a September 2017 study by the federal Financial Crimes Enforcement Network.

It isn’t clear how many banks have cut ties since. Industry experts say the institutions that remain are mostly small credit unions or banks where branch managers negotiate side deals without telling their corporate bosses about the clients’ marijuana connection.

Such arrangements can be fleeting, and many merchants have been forced to move from one institution to another as audits flag their accounts. Henry Wykowski, an attorney who represents Oakland’s Harborside dispensary and more than 100 other cannabis businesses in California, said he was bounced by Comerica Inc. after 25 years as a client, apparently after they found out he was depositing legal fees paid in cash by the dispensary.

Other outlets wire money to banks or use debit cards and ATM processing machines supplied by independent merchant-services groups, like CreditWeed and Green Kinex. But the fees can be 5 percent or more per transaction.

“We do receive inquiries from different companies offering credit card terminals, but there are quite a bit of fees,” said Alfaro, who recently received an offer with a 10-percent overall charge. “That wouldn’t be a really efficient way for us to run our business. It would be like them being a part-owner.”

Wykowski said the restrictions may open doors for drug cartels, which have experience dealing in cash and providing the kind of muscle needed to protect it.

“Not allowing cannabis businesses to engage in banking is actually detrimental to the federal government because there are now billions of dollars on the underground economy and all of it is cash that you can’t track,” Wykowski said. “Most businesses have found some type of accommodation, but the accommodation we have found is putting duct tape on the leaky pipe rather than replacing it.”

Peter Fimrite is a San Francisco Chronicle staff writer. Email: pfimrite@sfchronicle.com Twitter: @pfimrite

http://www.sfchronicle.com/bayarea/article/California-marijuana-purveyors-go-mainstream