Earlier this summer, Elliott Klug had a plumbing problem on his hands. There was a leak in the drainage line between his marijuana dispensary, Pink House Blooms in Denver, Colorado, and the street. It was a relatively simple fix, but when it came time to pay the plumber, things got more complicated. Because of federal regulations that restrict marijuana business owners’ access to financial services like banking, Klug had no choice but to hand the plumber an envelope with $25,000 in cash. When the plumber tried to deposit the payment, the cash was held in limbo until the bank could count all of the money and verify that it wasn’t laundered—standard operating procedure for such a large cash deposit. Klug says it’s just another daily hassle for marijuana dispensaries, which occupy a strange legal gray area. Under Colorado law, Pink House Blooms is just one more small business, but in the eyes of the federal government, Klug is illegally trafficking one of the most dangerous drugs around.
Over the past 15 years, 20 states and the District of Columbia have legalized medical marijuana. In 2014, legal marijuana for recreational use will go on the market in Washington and Colorado. Public opinion is on legalization supporters’ side: More than eight in ten voters believe that marijuana should be legal for medical use if a physician prescribes it. A majority support legal recreational marijuana. But because the federal government still classifies marijuana as a Schedule One drug under the Controlled Substances Act—an extremely dangerous illegal drug with no approved medical use—dispensaries are stuck in no man’s land between the state and the federal government.
This legal uncertainty has real commercial implications. Because of regulations that bar banks from doing business with drug traffickers, many financial institutions refuse to open accounts for dispensaries or give them small-business loans. The same goes for major credit-card companies like Visa and MasterCard. Merchant service providers—the middlemen between retailers and credit-card companies who process customers’ payments—are also reluctant to run afoul of the federal government, so most won’t accept payments from dispensaries. These restrictions force dispensaries to operate as cash-only businesses. The fact that customers can’t swipe a card is the least inconvenient part. Without a bank account, dispensary owners can’t deposit their money in a secure place or write checks to their landlords. Every plumbing fix or utility charge must be paid in cash. “Perhaps you can survive without a bank account, but you’ll have to find vendors and suppliers who will take your cash,” Klug says. “We went through quite a few office-supply companies before we could find one that would accept our payments.”
The financial mess gets even stickier when tax season rolls around. Back in the early 1980s, after a drug kingpin successfully wrote off yachts, guns, and bribes on his tax return, Congress passed a law designed to prevent future drug traffickers from taking deductions on illegal business operations. The law, IRS Code Section 280E, forbids businesses from writing off any expenses related to a federally controlled substance, including marijuana. When, years later, California passed the first medical-marijuana law, dispensary owners were stuck between a rock and a hard place: As state-legal businesses, they wanted to pay federal taxes but couldn’t take deductions for product, payroll, health-insurance benefits, or rent. As a result, a dispensary’s tax bill can be three or four times what the average small business might pay, making it impossible to turn a profit. Harborside Health Center, the largest medical-marijuana dispensary in California, has been fighting the IRS since 2011, when the center was audited and told to cough up $2.5 million in back taxes.
These problems will only compound over the coming year in Colorado and Washington, which legalized marijuana for recreational use with ballot measures last November. Both states are gearing up for a dramatic increase in the size of the marijuana market, raising concerns about safety—more cash and more drugs will make marijuana businesses and their customers an even bigger target for robberies—and practicality. “We want to be treated like any other business,” says Ean Seeb, the co-owner of Denver Relief, a medical-marijuana dispensary in Denver, Colorado. “General access to banking, a place to put our cash, a way to write checks. We want to pay our taxes. It’s just very difficult to do so.”
These issues haven’t escaped the federal legislators’ notice. At the beginning of the summer, a group of representatives proposed legislation that would exempt medical-marijuana dispensaries from blanket prohibitions that apply to illegal drugs. One proposed bill, introduced by Ed Perlmutter, a Democrat from Colorado, would adjust banking regulations to allow financial institutions to do business with marijuana businesses in the states where it’s legal. Earl Blumenauer, an Oregon Democrat, introduced a second piece of legislation that would clarify the language in 280E to allow state-legal marijuana businesses to take standard tax deductions. Jared Polis, another Colorado Democrat, is backing a final bill with a much wider scope. His proposed legislation would remove marijuana from the Controlled Substances Act, shifting oversight over the drug from the Drug Enforcement Agency to the renamed Bureau of Alcohol, Tobacco, Marijuana and Firearms.
Despite bipartisan support for the legislation—including an endorsement from Grover Norquist’s group, Americans for Tax Reform, on Blumenauer’s bill—it seems unlikely that with politicians’ energies consumed by the budget showdown, the bills will get much traction. Mason Tvert, a spokesman for the Marijuana Policy Project, says he’s not hopeful about the legislation’s chances, but he blames the stasis on general congressional gridlock, rather than specific opposition to the bills. “Honestly, it’s more an issue of Congress being unable to accomplish anything than being about marijuana,” Tvert says.
Congress, however, isn’t the only recourse when it comes to the banking issue. According to Tvert, the Department of Justice could clarify the rules in a memo to banks, telling them they’ll be safe from federal retaliation if they start working with marijuana businesses. Right now, a shift in policy from the department seems a likelier outcome than congressional action. In a recent Senate Judiciary Committee hearing, Deputy Attorney General James Cole acknowledged that current policy will only grow more untenable as Colorado and Washington begin selling marijuana to the general public and said that the Justice Department is working with bank regulators to find a possible solution.
Unfortunately for advocates, the executive branch has less power over marijuana business owners’ inability to write off expenses on their federal income taxes. Although the change itself is small—according to Henry Wykowski, a San Francisco-based attorney who represents marijuana dispensaries under audit, the problem could be solved by exchanging an “or” for an “and” in 280E—the IRS has made it clear that Congress will have to make the fix, either by altering the tax code or removing marijuana from the Controlled Substances Act. Changing 280E might be feasible in a Congress less preoccupied with a looming government shutdown. But legalizing marijuana through Congress is still a daydream.
Despite this discouraging legislative outlook, it’s becoming increasingly clear that as more and more states legalize marijuana for both medical and recreational use, something will have to give. At least when it comes to banking, it seems likely that the federal government will step in. “Eventually, we’re going to have to find some reasonable solutions to these problems,” says Betty Aldworth, deputy director of the National Cannabis Industry Association. “If marijuana businesses can’t grow, that’s bad for state economies. And if the federal government wants a regulated marijuana system, they’re going to have to start giving these businesses some basic equity.”