The following article was written by Kenneth J. Berke, Co-Founder of PayQwick, Inc. and Sahar Ayinehsazian, Director of Regulatory Governmental Affairs at PayQwick, Inc.
The cannabis industry is growing at an unprecedented rate and shows no signs of stopping. In 2016, voters and regulators throughout the U.S., including those in Arkansas, North Dakota, Florida, California, Nevada, Maine, and Massachusetts, legalized medical or adult recreational marijuana use, bringing the total number of states that have legalized some form of marijuana use to 28, along with Washington D.C. Through comprehensive regulations, these states have allowed marijuana businesses to emerge from shadowy corners into licensed, well-lit and profitable storefronts. Nonetheless, these businesses still transact largely in cash because of the industry’s lack of access to banking. To address this issue, PayQwick, Inc., a licensed money transmitter in Washington, Oregon and Arizona has been facilitating cashless transactions and business bank accounts for licensed marijuana businesses, giving the company insight into how these businesses can operate efficiently and focus on making money rather than worrying about their cash.
The Importance of Compliance
Getting and keeping a state license to operate a marijuana business is an expensive and timely process. Applicants and licensees must comply meticulously with federal and state laws, including the eight enforcement priorities listed in Deputy Attorney General James M. Cole’s 2014 memorandum titled Guidance Regarding Marijuana Enforcement and each state’s marijuana regulations. Compliance failures could result in penalties ranging from fines to licensure loss, permanent exclusion from a state’s marijuana industry and criminal prosecution.
Compliance is also the key to getting and keeping a business bank account. Although larger national banks do not yet serve marijuana businesses, smaller community banks have begun to accommodate the marijuana industry. Developing lasting banking relationships require marijuana businesses to remain honest and transparent. Further, marijuana businesses should not use crypto-currency in any form. Crypto-currencies, like Bitcoin, facilitate money laundering and tax evasion, which can lead to criminal penalties for marijuana businesses and their banks.
Remaining compliant can also mean the difference between life and death. Marijuana businesses are frighteningly familiar with the risks of a cash-dependent industry. To mitigate these risks, most marijuana regulations require secure doors, locks, and state-of-the-art surveillance systems. Although compliance can be costly, marijuana businesses that have survived violent break-ins can attest to its importance.
Catering to Consumers
Modern marijuana consumers want a convenient and cashless way to pay for cannabis. Re-loadable cards and smartphone apps are amongst the most convenient consumer payment methods because they allow consumers to concentrate on what to buy instead of how to pay for it. Further, these methods allow consumers to set a marijuana budget, which is especially important for chronically ill marijuana reliant patients.
To provide consumer-centered cash alternatives, various companies advertise methods that allow consumers to pay dispensaries and retailers with debit/credit cards. Though these methods seem like sound solutions, dispensary and retail owners must carefully consider the legality and potential ramifications of using them. Business owners should be especially cautious of machines that allow consumers to use their debit/credit cards to pay for marijuana with crypto-currency because crypto-currency triggers red flags for banks and regulators. Further, because marijuana is a Schedule I substance, it does not have a merchant category code. Therefore, dispensaries and retailers must never conduct debit/credit cards sales by miscoding transactions to incorrectly reflect sales of a different good or service.
Working With Other Businesses
Working efficiently with ancillary businesses, including landlords, attorneys, and accountants, is a crucial part of a marijuana business’ success. A key to efficient businesses-to-business relationships is eliminating cash and using quick and secure payment methods. Online payment platforms are amongst the fastest and most secure means for marijuana businesses to send and receive payments. These platforms transform the payment process from gathering and delivering bundles of cash to simply clicking a button.
Online bill pay is another cash-free payment method that allows marijuana businesses to instruct a third party to send a check for them. Bill pay is especially helpful for marijuana businesses that lack a business bank account.
Getting the Right Advice
Getting a license and operating a marijuana business is a complicated endeavor. Retaining the right advisors, including attorneys and CPAs, can mean the difference between success and failure. While attorneys can counsel marijuana businesses on marijuana-specific regulations, marijuana business owners must also educate themselves about regular business matters, like whether to structure a business as an LLC, a partnership or a corporation. Marijuana business owners should not wait until a problem arises to seek legal advice or limit the advice they seek to marijuana-specific issues. Further, when seeking counsel, marijuana businesses should thoroughly research their advisors before retaining them.
Getting the right CPA is equally important, as CPAs who are familiar with how various tax codes, such as 280E, affect marijuana businesses make a huge difference in a marijuana business’ tax liability. Originally crafted to keep cocaine kingpins from deducting the costs of their illegal dealings, 280E now prevents cannabis businesses from deducting any expenses from their income that is not considered Cost of Goods Sold (“CGS”). In 2015, the Internal Revenue Service released an internal memorandum specifying what marijuana businesses may list as CGS. Consequently, marijuana business owners must work with CPAs who understand the ramifications of 280E so they can maximize their tax deductions.
As states throughout the nation continue embracing marijuana, those in the industry have the chance to profit immensely. To ensure lasting success, marijuana businesses must remain compliant, operate efficiently by simplifying transactions amongst themselves and their consumers and seek advice from qualified and experienced advisors.