Menus Subscribe Search

Follow us

The Future of Money


Denver, Colorado's Cannabis Station. (Photo: Jeffrey Beall/Flickr)

Legal Marijuana’s Money Problems

• January 15, 2014 • 10:00 AM

Denver, Colorado's Cannabis Station. (Photo: Jeffrey Beall/Flickr)

As Washington and Colorado attempt to build marijuana-based industries that are still seen as illegal in the eyes of the feds, those involved in the business of pot are finding themselves targeted by crooks and government officials alike.

As marijuana moves toward legalization in some areas of the United States, a unique kind of crime wave is following. In November 2013 alone, two masked, armed men robbed a dispensary in Longmont, Colorado; a security guard was shot in an attempted dispensary theft in Palmdale, California; and four people kidnapped and sexually tortured another California dispensary owner in an attempt to force him to reveal where in the desert he was burying bags of money (he was actually just driving to meetings with potential investors).

These incidents are all driven by a surprising fact: marijuana businesses are often (though not always) sitting on top of piles of cash. Whether it’s a warehouse that grows the plant or a retail outlet that sells it, cannabis companies are being forced to do their business in physical bills because many banks and credit card outlets, including Visa, MasterCard, and BECU, the largest credit union in Washington, refuse to work with them on the grounds that the market is still illegal under federal law. That refusal is endangering everyone involved, from business owners to workers, as well as cutting off potential economic growth.

During a recent conference on launching marijuana businesses, Denver Relief Consulting founder Ean Seeb warned potential entrepreneurs to have strict rules in place for how money is managed. “We’re a cash-based business—cash and marijuana,” he said. “You don’t want to get caught not following safety procedures.” The consequences include attracting robbers as well as risking employee theft of money or product (Connecticut’s medical marijuana laws force all industry workers to wear pocketless clothing). Yet before the drug even changes hands, cannabis companies face difficult monetary barriers.

The marijuana market must walk a tricky line between being regulated enough to keep amateurs from dabbling in large-scale drug production and not being so strictly controlled as to discourage entrepreneurship.

“Companies in our space have a tough time getting access to capital,” says Troy Dayton, the founder of Arcview, a California-based marijuana-focused investment firm. That means “no bank loans, no real institutional money” is available to kickstart a small business. “Public companies aren’t really the place to be” for funding, he says. Private investment firms like Dayton’s are rising as a substitute for the missing loan funding, and making a profit while banks miss out.

The lack of loans presents a problem because marijuana grow operations and dispensaries have large upfront costs.

Jason Katz runs the grow for Local Product, a dispensary and consultancy in Denver, Colorado, where law requires grow operations and retail outlets to be integrated into single companies. A warehouse grow space with an industrial electric power upgrade could run a few hundred thousand dollars, he says. Professional grow lights cost around $400 each and a large operation could require dozens, along with at least one employee per light, Katz offers as a metric, plus extra staff to manage dispensary stores.

Simply obtaining the license to run such a business could cost $50,000 in government fees and lawyer assistance, according to Katz. “Make sure you have a source of money that’s prepared to add capital to the pool if need be,” he says.

The marijuana banking ban also means difficulty in storing money. But some marijuana businesses are finding ways around this issue. “Use a generic-sounding name,” Ean Seeb says. That means if you don’t append obvious adjectives like “green,” “happy,” or “psychedelic” to your cannabis company, bank clerks just might turn a blind eye.

But getting in with a financial institution doesn’t mean you can depend on it. Seeb recounted how a bank he had worked with for four years suddenly dumped his company. “Don’t get complacent,” he says. “Open multiple accounts, so when the inevitable happens you’re prepared to be able to continue business.”

Complying with the laws regulating legal marijuana can also cost more than it does for those in more mundane industries. Joe Stevens, the founder of Greenleaf Compassion, New Jersey’s first functioning dispensary, hadn’t anticipated how expensive his operation would be. Under IRS code 280e, those engaging in federally illegal activities aren’t allowed to write off their expenses. Stevens is thus forced to pay a 39 percent tax, one of the highest rates in the state, on all of his revenue without deducting for normal business costs.

If you try to skirt the government’s cut, the penalties are also harsher for businesses in the gray area of the law. “Pay your taxes, all of them,” Katz says. “Don’t for a second try to pull the wool over the eyes of the IRS; they will crush you.”

The marijuana market must walk a tricky line between being regulated enough to keep amateurs from dabbling in large-scale drug production and not being so strictly controlled as to discourage entrepreneurship. In Colorado and Washington, large upfront fees and an extensive licensing process ensure professionalism, but the lack of a good financial structure is hurting what could be America’s next great growth industry.

Thankfully, the situation is starting to change. In September of last year, Bank of America announced that it would accept Washington state’s revenues from marijuana taxes, despite the fact that the money is dirty in the eyes of the federal government. Credit cards like Visa and MasterCard still don’t work with cannabis companies, but some dispensaries are finding ways to accept plastic through ATM-like systems, improving safety and convenience for workers and customers alike.

Colorado and Washington House representatives Ed Perlmutter and Danny Heck are introducing the Commonsense Marijuana Business Access to Banking Act, which would “provide financial institutions assurance that they can make their own business decisions related to legal, financial transactions without fear of regulatory penalties or criminal prosecution.” The law would clear the way for more financial institutions to accept cannabis cash.

Yet it still takes a lot of resolve to create a legitimate business in this fitfully lawful form of drug dealing. Founders must be aware that the worst could happen, whether that means getting targeted by crooks or the government—or both. “You need to be able to go full steam ahead knowing that what you’re doing is not federally legal,” Denver Relief Consulting’s Ean Seeb says. “Keep in mind the possibility of going to jail. Plan for your family.”

Kyle Chayka
Kyle Chayka is a freelance technology and culture writer living in Brooklyn. Follow him on Twitter @chaykak.

More From Kyle Chayka

A weekly roundup of the best of Pacific Standard and, delivered straight to your inbox.

Recent Posts

October 24 • 4:00 PM

We Need to Normalize Drug Use in Our Society

After the disastrous misconceptions of the 20th century, we’re returning to the idea that drugs are an ordinary part of life experience and no more cause addiction than do other behaviors. This is rational and welcome.

October 24 • 2:00 PM

A Letter to the Next Attorney General: Fix Presidential Pardons

More than two years ago, a series showed that white applicants were far more likely to receive clemency than comparable applicants who were black. Since then, the government has spent hundreds of thousands of dollars on a study, but the pardons system remains unchanged.

October 24 • 12:00 PM

What Makes You So Smart, Middle School Math Teacher?

Noah Davis talks to Vern Williams about what makes middle school—yes, middle school—so great.

October 24 • 10:00 AM

Why DNA Is One of Humanity’s Greatest Inventions

How we’ve co-opted our genetic material to change our world.

October 24 • 8:00 AM

What Do Clowns Think of Clowns?

Three major players weigh in on the current state of the clown.

October 24 • 7:13 AM

There Is No Surge in Illegal Immigration

The overall rate of illegal immigration has actually decreased significantly in the last 10 years. The time is ripe for immigration reform.

October 24 • 6:15 AM

Politicians Really Aren’t Better Decision Makers

Politicians took part in a classic choice experiment but failed to do better than the rest of us.

October 24 • 5:00 AM

Why We Gossip: It’s Really All About Ourselves

New research from the Netherlands finds stories we hear about others help us determine how we’re doing.

October 24 • 2:00 AM

Congratulations, Your City Is Dying!

Don’t take population numbers at face value.

October 23 • 4:00 PM

Of Course Marijuana Addiction Exists

The polarized legalization debate leads to exaggerated claims and denials about pot’s potential harms. The truth lies somewhere in between.

October 23 • 2:00 PM

American Companies Are Getting Way Too Cozy With the National Security Agency

Newly released documents describe “contractual relationships” between the NSA and U.S. companies, as well as undercover operatives.

October 23 • 12:00 PM

The Man Who’s Quantifying New York City

Noah Davis talks to the proprietor of I Quant NY. His methodology: a little something called “addition.”

October 23 • 11:02 AM

Earliest High-Altitude Settlements Found in Peru

Discovery suggests humans adapted to high altitude faster than previously thought.

October 23 • 10:00 AM

The Psychology of Bribery and Corruption

An FBI agent offered up confidential information about a political operative’s enemy in exchange for cash—and they both got caught. What were they thinking?

October 23 • 8:00 AM

Ebola News Gives Me a Guilty Thrill. Am I Crazy?

What it means to feel a little excited about the prospect of a horrific event.

October 23 • 7:04 AM

Why Don’t Men Read Romance Novels?

A lot of men just don’t read fiction, and if they do, structural misogyny drives them away from the genre.

October 23 • 6:00 AM

Why Do Americans Pray?

It depends on how you ask.

October 23 • 4:00 AM

Musicians Are Better Multitaskers

New research from Canada finds trained musicians more efficiently switch from one mental task to another.

October 22 • 4:00 PM

The Last Thing the Women’s Movement Needs Is a Heroic Male Takeover

Is the United Nations’ #HeForShe campaign helping feminism?

October 22 • 2:00 PM

Turning Public Education Into Private Profits

Baker Mitchell is a politically connected North Carolina businessman who celebrates the power of the free market. Every year, millions of public education dollars flow through Mitchell’s chain of four non-profit charter schools to for-profit companies he controls.

October 22 • 12:00 PM

Will the End of a Tax Loophole Kill Off Irish Business and Force Google and Apple to Pay Up?

U.S. technology giants have constructed international offices in Dublin in order to take advantage of favorable tax policies that are now changing. But Ireland might have enough other draws to keep them there even when costs climb.

October 22 • 10:00 AM

Veterans in the Ivory Tower

Why there aren’t enough veterans at America’s top schools—and what some people are trying to do to change that.

October 22 • 8:00 AM

Our Language Prejudices Don’t Make No Sense

We should embrace the fact that there’s no single recipe for English. Making fun of people for replacing “ask” with “aks,” or for frequently using double negatives just makes you look like the unsophisticated one.

October 22 • 7:04 AM

My Politicians Are Better Looking Than Yours

A new study finds we judge the cover by the book—or at least the party.

October 22 • 6:00 AM

How We Form Our Routines

Whether it’s a morning cup of coffee or a glass of warm milk before bed, we all have our habitual processions. The way they become engrained, though, varies from person to person.

Follow us

Politicians Really Aren’t Better Decision Makers

Politicians took part in a classic choice experiment but failed to do better than the rest of us.

Earliest High-Altitude Settlements Found in Peru

Discovery suggests humans adapted to high altitude faster than previously thought.

My Politicians Are Better Looking Than Yours

A new study finds we judge the cover by the book—or at least the party.

That Cigarette Would Make a Great Water Filter

Clean out the ashtray, add some aluminum oxide, and you've (almost) got yourself a low-cost way to remove arsenic from drinking water.

Love and Hate in Israel and Palestine

Psychologists find that parties to a conflict think they're motivated by love while their enemies are motivated by hate.

The Big One

One company, Amazon, controls 67 percent of the e-book market in the United States—down from 90 percent five years ago. September/October 2014 new-big-one-5

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.