Cash Money Woes

Cannabis is still a primarily cash-based industry. Federal prohibition means that many banks and credit unions are hesitant to do business with cannabis-based businesses. Penalties for financial institutions range from the seizure of assets and loss of FDIC coverage to serious fines and licensure being revoked. Even if a business can find a financial institution that will provide banking services, they risk having all of the money in the account seized by the federal government and face incredibly high fees just for having the account open. All of these factors work together to create a culture of doing business in cash even as the cannabis industry becomes increasingly legal and mainstream.

In September of this year, the U.S. House of Representatives approved the SAFE Banking Act. The bill removes almost all penalties for banks who do business, including providing loans, with cannabis-based businesses. The bill doesn’t specifically protect the account holders, but other DOJ policies provide some protection currently. The SAFE banking would help, but first, it has to pass the US Senate and get Presidential approval. Additionally, the high cost of accounts may discourage some businesses from opening them even if they become available.

Missouri recently saw an emergency rule issued stating that cash would not be accepted for fees or taxes by the Department of Health and Senior Services. The logic was the same as it has been in every other discussion of cash and cannabis – large amounts of cash are targets for crime, the cash smells like cannabis, agency offices are not equipped to process large amounts of cash. All of these reasons focus on the convenience of the agency and its employees not on developing and nurturing a cannabis industry in Missouri. This is not the first time, and probably won’t be the last, that the government or another vendor has attempted to refuse cash from cannabis-related businesses.

IRS previously attempted to refuse or penalize cash payments. When the DOJ issued an opinion saying they had to accept the payments, the IRS attempted to institute a 10% penalty on cash payments. A business based out of Denver sued and won. Now, the IRS will accept cash in any amount without penalty, but only at specific locations and with an appointment. The victory and the DOJ’s original opinion were based on 31 USC §5103. That law says that cash must be accepted as payment for all “debts” public or private. The trick here is how “debt” may be defined.

There are some instances in which it is clear cash payments do not have to be accepted under Missouri Law. Court orders and public auctions often specifically state that cash does not have to be accepted. There is a state statute that allows local governments to refuse payment in cash for local taxes. Private businesses have no requirement to accept cash. Still, none of this has been challenged directly in Missouri courts and a court very likely would determine that cash must be accepted for “debts.”

Cash is not an ideal medium to use for large-dollar transactions. I was recently at a conference for attorneys who work with cannabis-based businesses where a topic of conversation was how to literally wash/fumigate the cash to remove the lingering weed odor before depositing the large amounts of cash in the bank. There are worries over crime and making transporters and delivery drivers major targets for theft. The rest of society and business is becoming increasingly cashless, and it seems inevitable that cannabis will join them as soon as the infrastructure is in place.

Already, alternatives to traditional banks are popping up in states with regulated markets. Most of these new systems are untested and rely on everyone being signed up for the same service. Still, their existence is evidence that the cannabis industry wants to operate efficiently and safely, just like every other business.

All of this will eventually be sorted out in the courts. If licensing fees and taxes are considered public “debts,” the agency will be required to create a reasonable system for accepting cash payments. If they are considered payments in advance, however, the court may determine the agency is within its rights to refuse the cash. Taxes are clearly debts as they are based on past conduct and may be put into collections. Fees, on the other hand, are paid before business can begin and may not be considered debts in a legal sense. The only question is who will be the first to bring the challenge.