The booming medical-marijuana industry in Washington is struggling to gain business legitimacy. Already on shaky legal footing because of the conflict between state and federal law, dispensaries are bogged down by troubles with banking and federal taxes.
Conscious Care Cooperative has a solid footing in a growing industry, with three storefronts in Seattle and a loyal customer base. But for much of the last two years, the nonprofit medical-marijuana provider has lacked one business basic: steady access to a bank.
The cooperative has bounced among five financial institutions, and four others rejected the cooperative outright, said CCC’s president, Nate Chrysler. In one case, a bank closed the account without notice.
“They froze our funds, and we didn’t know it until the checks started bouncing,” Chrysler said.
The medical-marijuana industry in Washington, after two years of wild growth, is struggling to move out of the gray market and into business legitimacy. Already on shaky legal footing because of conflict between state and federal law, dispensaries are now bogged down by troubles with banking and federal taxes.
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In some cases, dispensaries — unable to find a willing bank — are operating solely with cash. That complicates everything from payroll to tax preparation while heightening the risk of robbery.
Some dispensary owners say they’ve resorted to euphemisms — such as a “holistic healing center” — when trying to open a bank account.
That’s in part because federal authorities have warned banks that handling receipts from marijuana sales remains illegal under federal law and could violate money-laundering laws.
The conflict is not isolated to Washington, one of 16 states — plus the District of Columbia — to allow therapeutic use of marijuana for certain patients.
Aaron Smith, executive director of the Washington, D.C.-based National Cannabis Industry Association, estimates that half of dispensaries nationwide lack a bank account, which he blames on pressure from federal banking regulators.
“It is a widespread problem that threatens the entire industry,” he said.
Advocacy groups are lobbying Congress for changes to banking law and the IRS code that acknowledge the legitimacy of an industry estimated at $1.7 billion.
Despite President Obama’s indication during his campaign that he would be more laissez-faire, his administration has been more aggressive in targeting the booming industry than previous administrations. In an interview with Rolling Stone published last week, Obama reiterated that his administration would not prosecute patients, but gave no assurance to businesses.
“I never made a commitment that somehow we were going to give carte blanche to large-scale producers and operators of marijuana — and the reason is because it’s against federal law,” Obama said. “I can’t nullify congressional law.”
Washington voters approved medical marijuana in 1998, but it has developed into an industry — from storefront dispensaries to mobile THC testing labs to cannabis-infused sodas — only in recent years.
Industry advocates failed in the past two years in Olympia to get clear protection for dispensaries.
Instead, most dispensaries operate under a broad — some prosecutors would say mistaken — interpretation of state law that allows groups of up to 10 patients to grow 45 plants in a “collective garden,” and to share the costs. Dispensaries run those gardens, and patients join just long enough to obtain marijuana.
The state does not license or regulate dispensaries — leaving that to cities — but does want them to pay taxes. The Department of Revenue collected $755,764 in sales and business taxes in 2011 from 50 dispensaries.
With an estimated 135 or more dispensaries statewide, many medical-marijuana providers aren’t paying. Seattle, the state’s marijuana mothership, has issued 79 business licenses to medical-marijuana organizations, according to a Seattle Times analysis of city data.
The state has begun taking a closer look, auditing two dispensaries, said Revenue spokesman Mike Gowrylow.
Green Hope, a nonprofit patient network in Shoreline, has been without a bank account since last fall, when Walla Walla-based Banner Bank dropped them, said co-founder Laura Healy.
She now pays employees in cash, and uses cashier’s checks or prepaid Visa cards to purchase supplies. She said she’s tried “every bank in town” since then, but all refuse to open an account when she describes Green Hope. Other cash-only dispensaries opt to put ATMs in the lobby.
“I have a business license and federal tax ID number, but not a bank account,” Healy said. “They on one hand treat me like a normal businesses, then on the other hand treat me like a criminal.”
Of the five banks contacted for this story, only BECU answered questions about medical-marijuana accounts. Banner Bank, which dispensaries once saw as welcoming, did not respond to repeated inquiries.
BECU spokesman Todd Pietzsch said those accounts often involve large cash deposits, which require heightened scrutiny and reporting under federal banking and money-laundering laws.
“We took a look and found there’s a lot of unknown risk and uncertainty in this business,” he said. “At this point in time, it’s probably not in the best interests of our membership” to bank with medical-marijuana businesses.
Federal bank regulations do not specifically prohibit doing business with the medical-marijuana industry, and Attorney General Eric Holder told Congress in December that the Justice Department would not make it a priority to go after bankers who did.
But in June, Holder deputy James Cole issued a memo warning that “those who engage in transactions involving the proceeds” of marijuana sales “may be in violation of federal money-laundering statutes and other financial laws.”
The U.S. Attorney’s Office in Seattle has not contacted banks regarding medical-marijuana accounts, said Emily Langlie, spokeswoman for Seattle-based U.S. Attorney Jenny Durkan.
The Cole memo sent a chill through the banking industry, said Sam Kamin, a University of Denver law professor who has written about marijuana regulation. “It’s a great threat because it allows the federal government to do what it wants without using scarce resources.”
Months after the Cole memo, Colorado Springs State Bank, which marketed itself to Colorado’s huge medical-marijuana industry, closed an estimated 300 accounts.
Lance Ott, executive director of Guardian Data Systems, a Vancouver-based financial consulting firm, said he knows of no financial institution in Washington that openly banks the industry. Most of the major credit-card processors, as well as PayPal, also refuse medical-marijuana accounts.
“That doesn’t mean there aren’t people who don’t have a friend willing to work with them. A lot of it is behind the scenes,” said Ott. “The banks need to show liquidity on the balance sheets.”
Doing taxes with
“room full of attorneys”
Squeezed between federal regulators, reluctant banks and an ambitious industry, some medical-marijuana operators have looked into forming their own bank. Chrysler, of Conscious Care Cooperative, said he and business partner Trek Hollnagel investigated starting a credit union last year, but opted not to.
Colorado lawmakers this year debated launching a credit union as well, but the plan died, in part out of fear of a federal backlash.
In Congress, several lawmakers, including Rep. Barney Frank, D-Mass., introduced bills to ease banking access and to amend an IRS provision that restricts business deductions for medical-marijuana operations.
A campaign to change the tax law, run in part out of Seattle, started when an Oakland, Calif., dispensary, Harborside Health Services, was hit with a $2.5 million bill in October for back taxes. That bill hinged on an interpretation of IRS section 280e, which prohibits business deductions for drug traffickers.
The Harborside audit has reverberated through the industry. The director of one Seattle dispensary, speaking anonymously for fear of drawing federal attention, said he prepared his 2012 taxes with “a room full of attorneys.”
“They’re really making it very difficult to try to do business,” said Oscar Velasco-Schmitz, an ex-Microsoft software engineer who runs medical-marijuana Dockside Cooperative in Fremont. “It’s trying to run a business with a handicap, a government-imposed handicap. These are growing pains.”
He, like Chrysler, declined to name their current bank. After going through five bank accounts, Chrysler said, “Best not to say.”
Jonathan Martin: 206-464-2605 or email@example.com.