Thriving marijuana businesses face sober financial realities

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By Michelle Dupler

Marijuana retail sales were a nearly $1.7 billion business in Washington in the 2016 fiscal year, but business owners who are still technically breaking federal drug laws are left to ponder, “What do we do with the money?”

For Steve Lee, owner of Finley-based Green2Go, the answer is to re-invest some of the profits from his recreational and medical pot shop back into the local community.

“Really, the only strategy is sit on it and wait for the laws to change, or use cannabis money to start businesses,” said Lee, whose latest venture — aside from his campaign for a seat on the Kennewick City Council — is an investment in the Gourmet Grub food truck.

Recreational marijuana was legalized in Washington when voters approved Initiative 502 in 2012, and medical marijuana has been legal in the state going back to the late 1990s.

However, marijuana remains classified as an illegal Schedule I controlled substance under federal law — the highest and most serious tier of controlled substances, putting marijuana in the company of drugs like heroin, LSD and ecstasy in federal policy terms.

Todd Arkley, a Seattle CPA who has built a practice on advising marijuana business owners about tax and financial matters, said marijuana’s continued federal classification as an illegal controlled substance presents both tax and banking challenges for business owners.

Owners of legal marijuana businesses are unable to get merchant accounts to process credit or debit cards, which means they must always deal in cash, Arkley said. Additionally, it can be difficult and costly to find a bank where cash can be deposited.

“Theoretically, the DEA could come in … and say you’re laundering drug money,” Arkley said.

Owners of cannabis-related businesses now engaging in state-legal activities are in the precarious position of relying on the federal government to continue its policy of looking the other way and agreeing not to prosecute marijuana retailers in states where the drug is now legal.

The Justice Department in 2013 issued what’s known as the “Cole Memorandum,” which laid out a more-or-less “hands off” policy regarding cannabis activities legalized by states. Instead, the department and federal prosecutors were directed to focus on interstate trafficking, marijuana, preventing cannabis money from funding cartels and organized crime, and other federal issues.

That policy remains in effect, despite a change in administration to one vocally less friendly to legal marijuana. Arkley said there is some concern in the industry that Attorney General Jeff Sessions could direct the Justice Department to disregard the Cole Memorandum and resume prosecutions. But he noted there appears to be sufficient support for states’ rights to regulate their marijuana policies among Republicans in Congress that he doesn’t foresee a significant backslide anytime soon.

But technically, marijuana retailers in Washington state continue to be “drug dealers” under federal law, and when they deposit cannabis money into a bank or invest it, that can be considered money laundering, Arkley said.

“The fact is this has always been illegal, even under the Obama administration,” he said.

Lee said that many banks won’t touch money from cannabis businesses for that reason.

“Anything over $20,000 cash is evidence of a plan to commit a conspiracy. Almost any big pot business does over $20,000 per day,” Lee said.

There are a handful of banks and credit unions in Washington where owners of businesses like Green2Go can deposit cash, but the only accounts available are non-interest bearing and fees can be significant.

“We can’t put it into a CD or a savings bond,” Lee said. “We can’t earn interest on it. The only thing we can do is buy stuff. You can buy stuff you like or you can buy stuff that earns you income that isn’t cannabis income.”

Arkley said without the ability to deposit cash into a bank where it’s secure, cannabis businesses often become the target of break-ins or employee thefts because of the amount of cash they have on hand.

Lee said Green2Go, which state records show does more than $1 million per month in retail sales, has daily armored car pickups to avoid a cash buildup, and the transfer of cash is monitored on video and documented every step of the way.

Another issue Lee encounters as a business owner is how the federal tax code views his trade. Revenue from his marijuana shop must be declared as income, but the tax code prevents him from taking deductions for business expenses like rent or utilities for income derived from trafficking a Schedule I drug.

Arkley said pot shop owners are allowed to take adjustments to revenue for the cost to get goods sold. For example, if a shop does $1 million in sales and it cost the business $500,000 to acquire the products, then it could declare income of $500,000. But then it has to pay tax on that full $500,000 without taking deductions that other businesses are allowed to take.

“It is a huge problem for cannabis retailers,” Arkley said. “There’s not a whole lot you can do in Washington to get around it. The reality is that I just try to get people to be cognizant of it and then plan for it.”

Lee said his strategy of investing in other local businesses is taking a long-term view. He hopes to eventually realize profits from those businesses, but also to solidify Green2Go’s presence as a productive and positive part of the local community.

“While our assets are restricted, the good we can do in the community is we can make jobs that add to the net pot in the community,” Lee said.

In addition to providing seed money for startups like Gourmet Grub, Lee has used Green2Go profits to support local political campaigns — including his own. Lee estimated that he’s spent more than $50,000 on his campaign for Kennewick City Council. Typical spending in local city council races a few thousand dollars.

The net result for Lee was a second place showing in the Aug. 1 primary that puts him on the general election ballot in November in the race for Ward 2, Position 2.

Lee earned 979 votes, or 35 percent, to incumbent Greg Jones’ 1,077 votes, or 39 percent. A third candidate, Shane Fast, earned 727 votes, or 26 percent, and will not advance to the general election.

“To have gotten less than a 5 percent difference against the incumbent is a really big achievement,” Lee said.

Lee noted that he has contributed to the campaign of any local candidate who asked, regardless of party. He believes that more and more marijuana business owners will become involved in campaigns in the future because it’s one place where they can use their money, and potentially influence future policy.

“That narrative is going to play out over the next 10 years,” he said.