Wads of cash in trash bags: The wild story of how Sacramento pot shops pay their taxes
When the owners of Sacramento’s retail cannabis dispensaries pay their taxes, they walk into City Hall hauling trash bags or backpacks stuffed with cash, sometimes hundreds of thousands of dollars in a single trip.
This, for obvious reasons, initially raised alarms among everyone involved. Worried about counting so much cash at the first-floor revenue counter at City Hall, staffers allowed the dispensary owners to come behind the glass and get their money counted in a traditionally restricted area.
In July, the city opened a “secure room” for dispensary owners, by appointment, to take their cash and insert it into counting machines, accompanied by city staff and monitored by security cameras.
“I felt that the money was getting too big and we needed to do something different,” said Dawn Holm, the city’s finance director.
No other type of business in Sacramento requires this special treatment, because no other business walks the line between legal and illegal like the cannabis industry.
Because growing and selling marijuana is still illegal under federal law, most federally regulated banks and credit unions won’t let pot merchants open accounts. It’s become, for the most part, an all-cash business, with ATMs in the lobbies and no credit or debit cards allowed for pot purchases at retail dispensaries.
So the cash piles up. “It’s a serious problem,” Holm said.
In Sacramento, the 30 dispensary owners or their employees paid $5.7 million to City Hall in Business Operation Taxes in the last fiscal year, which ended June 30, according to city spokesman Tim Swanson.
The unusual way in which the cannabis industry moves its money around highlights one of the major difficulties of regulating an industry that was made fully legal in California less than two years ago. The city of Sacramento has itself struggled with how to manage the consolidation of its cannabis storefronts at the hands of an increasingly smaller number of owners.
Now, with Sacramento’s pot industry facing scrutiny — including an FBI probe into bribery allegations and revelations a dispensary is co-owned by a Ukrainian-born U.S. citizen who was indicted in a campaign finance scheme — some experts believe the cash nature of the businesses to easily lends itself to abuses.
For one, an all-cash business could allow secret investors to enter the market, masking the names of the true owners from the public and regulators, said Lindsay Robinson, executive director of California Cannabis Industry Association.
“Keeping it in the dark, keeping it in cash, it creates a lot of vulnerabilities,” Robinson said. “It definitely allows for unsavory activity to happen.”
Banks worry about laundering
For many, including the IRS and Sacramento’s own auditors, an all-cash business opens up the possibility of fraud and under-reporting revenue to taxing authorities. Five out of six Sacramento dispensaries audited in 2017 reported a different income figure to the city than its revenue receipts showed. The city is still not inspecting dispensaries to find those discrepancies, a follow-up audit by the city found.
Banks worry about their federal charters as well. The American Bankers Association is straightforward about it: “Any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk.”
There have been efforts in Washington and Sacramento to make it easier for the cannabis industry to enter the banking system. California Sen. Bob Hertzberg, D-Los Angeles, introduced a bill this year that would authorize banks and credit unions to do business with cannabis companies on a limited basis.
The bill would create a state-chartered bank license administered and regulated by the Department of Business Oversight, said Katie Hanzlik, Hertzberg’s spokeswoman. Banks would be able to provide certain banking services to licensed cannabis companies, such as paying rent, paying taxes, paying vendors for goods, and purchasing state bonds.
Hertzberg pulled the bill last month to make changes to the timeline and implementation details, Hanzlik said. He plans to work on it over the next few months with Gov. Gavin Newsom’s administration. He hopes it will pass in January.
A federal bill with a similar goal might pass before then. The U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act, known as the SAFE Banking Act, last month. It’s unclear if the bill will clear the U.S. Senate, or if Majority Leader Mitch McConnell, a Kentucky Republican, will allow it come up for a vote. But if the act does become law, state action would no longer be needed, Hanzlik said.
The SAFE Banking Act would allow cannabis businesses to set up bank accounts in the 33 states where medical or recreational cannabis is legal. It would also allow customers at those businesses to pay with debit and credit cards.
Robinson with the California Cannabis Industry Association said a change in the law to allow cannabis businesses to access banks would be “extremely helpful.” She’s seen banks drop cannabis businesses, and the association itself was dropped by several banks before getting an account with North Bay Credit Union, she said.
“From a normal operating perspective, it’s a huge hindrance,” Robinson said.
Beth Miller, the spokeswoman for the California Bankers Association, said she does not know of any banks that knowingly do business with cannabis-related companies. Banks that do would be violating federal law because marijuana is still an illegal Schedule 1 drug under the Controlled Substances Act, she said.
“If you look at federal laws and how the drug is classified, it would be like bankers taking money from heroin dealers,” Miller said. “It’s the same classification of drug.”
The association, which represents more than 100 banks in California, supports the federal SAFE Banking Act as well as Hertzberg’s legislation.
Safety concerns
Many of Sacramento’s 30 dispensaries are located in south and north Sacramento industrial areas, though they are increasingly moving to midtown.
City code prohibits dispensary owners to sell or transfer their permits, but due to lax city oversight, that’s been happening anyway, according to a Sacramento Bee investigation. One group of business partners today owns nine of the city’s 30 licensed retail dispensaries, even though in 2011 they only owned two, according to city records obtained by The Bee.
Amid this, fights have broken out over the ownership of the lucrative storefronts in Sacramento.
In one lawsuit filed in Sacramento County Superior Court, Matthew Davies claims a dispensary he owned in south Sacramento, Twelve Hour Care, was stolen from him while he was in prison. He has accused a businessman named Garib Karapetyan, one of the five investors who has gained a major stranglehold on the city’s pot business, of the takeover.
Karapetyan’s lawyers deny Davies’ allegations. State and city records show the THC dispensary is owned by Karapetyan and Andrey Kukushkin, a Ukrainian national who was indicted in a campaign-finance scheme linked to President Donald Trump’s lawyer Rudy Giuliani.
For the city’s tax collectors, the all-cash cannabis storefronts in Sacramento present unique security issues. In the coming months, the city of Sacramento plans to start a pilot program that will send armored vehicles directly to the dispensaries to collect the taxes, eliminating the need for anyone to travel to City Hall with wads of cash.
When her medical marijuana dispensary Canna Care was open – before it closed to relocate – owner Lanette Davies was making daily trips to the Post Office with thousands of dollars to get money orders to pay her payroll taxes.
“I’m 60 years old walking down the street with $20,000 of cash in my purse,” said Davies, who is not related to Matthew Davies. “That’s not safe for me.”
Davies and Tina Childs, owner of a north Sacramento dispensary, both said they will feel safer with a vehicle coming to their shops directly, as the city has planned, though Childs said she does not think the city should charge dispensaries for the service.
In addition to going to City Hall to pay annual business operating taxes, dispensary owners must also travel elsewhere with wads of cash, and will likely need to do so for as long as they can’t have bank accounts. Childs said she has to travel to federal buildings in Santa Rosa or Stockton to pay her payroll taxes every other week.
“It’s a pain in the ass to drive all the way out there just to pay my bills,” Childs said.
For cannabis business owners, not being able to bank also leads to lower sales, Davies said, because customers tend to purchase more products when they can use credit cards.
“When you only have this much cash on you, that’s all you will purchase,” Davies said.
It also creates issues for business owners to pay their employees and give them insurance. Davies started a separate corporation, meaning she had to pay additional taxes, for the sole purpose of making sure her employees could get their W2 tax forms, health insurance, and 401Ks for retirement savings.
“You end up trying to find creative ways to get a bank so you can be semi-legal,” Davies said. “You’re constantly on the lookout – how can I be a legitimate business?”
This story was originally published November 1, 2019 at 12:40 PM.
