Conquering the Hurdles to Operating a Legal Cannabis Business

Personally, I feel when legalizing marijuana, states removed the prohibition of cannabis only to create a system with the potential to be riddled with crime and tax fraud.  Yet we are required to operate under the rules at present.  For instance, those in the cannabis business can attest to the vacuum created from the lack of reliable banking options available for what is essentially an all-cash business. Under federal law, cannabis businesses are prohibited from opening bank accounts.
With all-cash businesses comes theft (external and internal), as well as poor record-keeping, which can lead to things like unknowingly committing tax fraud. The question is how to run a legitimate business in this environment?

The first thing that must be done is secure the business, because any dispensary is going to deal with large sums of cash. Some dispensaries have elected to use armed security to deter any theft by the general public of either cannabis or cash. This is coupled with security cameras onsite to help law enforcement agencies if any theft does occur.

Then you have internal controls for which you need a good Point of Sale (POS) system.  This will track your inventory and the cash on hand or in a vault.  Not only will you know what product to order, you can also keep a close watch on things like costs and of course theft.  Note that even the best POS systems will require you to hand count your inventory at least once per month.  You also must also allow for the loss of a certain amount of product.

Now you have to think about cash controls. Running an all-cash business can take some thought. How much cash should be left on hand, in the safe, or on the premises? Not to mention payments to vendors. Some all-cash businesses pay everything from their employees to vendors in cash. This will require keeping receipts for each transaction. For instance, if you are going to pay your employees, you still have to calculate the taxes withheld with accounting software such as QuickBooks. Unfortunately, when you pay the taxes due, there is a 10% penalty for paying in cash, even when using a money order. The IRS wants electronic tax payments, however that isn’t possible with an all-cash cannabis business.

The POS should take care of recording the sale and keeping track of taxes collected. Each month, you need to report total sales to the state taxing authority, along with the amount of tax collected. You need to pay your taxes to the state each month. Again, some taxing authorities do frown upon cash payments.

Using a digital currency like Bitcoin for acceptance of payment is one option. Bitcoin is growing in popularity among dispensaries, as we’ve seen the number of vendors accepting Bitcoin as payment skyrocket in the past three years. The entire Bitcoin network relies upon a shared public ledger, called the block chain. The way it works is that Bitcoin wallets, which are their version of a bank account, can be used to calculate a spendable balance while new transactions can be verified as spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that funds have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network within ten minutes through a process called mining.

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks.

Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.

Some state Community Banks and Credit Unions are now taking the plunge and allowing cannabis businesses to open bank accounts.  However, before you waste your time shopping for a bank, take some time to get familiar with the different laws in your particular state.

As you can see, running an all-cash business has its challenges. However, there are some alternatives to traditional banking that dispensaries can use for their business.

 

By Craig Smalley

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