Way back in 2013, the Obama administration signed the Cole Memorandum, mandating that state-licensed cannabis businesses would not be prosecuted unless they explicitly violated a federal law. Unfortunately in 2018, the Cole Memorandum was rescinded creating uncertainty throughout the industry.
As of September 2020, medical marijuana has been legalized in 34 states, recreational marijuana has been legalized in 12 states, and 27 states have decriminalized marijuana. View DISA's interactive map on marijuana legalization throughout the US here.
Despite numerous states having legalized cannabis, it remains illegal federally under Schedule I of the Federal Controlled Substances Act. This fact makes it difficult for cannabis companies to obtain bank accounts and access other financial necessities. It also hinders the ability of these businesses to legally pay employees or operate as required for other industries.
Banking Roadblocks for Cannabis Businesses
Financial institutions are overseen by the federal government. While it’s true that there is no specific laws that prohibit banks and credit unions from working with cannabis clients, most won’t take on this kind of liability.
The issue? Federal law states that any money obtained through illegal transactions may not be FDIC insured. Because marijuana continues to be classified as a Schedule I narcotic by the federal government, the funds derived from cannabis sales would be classified in this manner. That’s a red flag for banks and credit unions, as they must insure each of their depository accounts.
On top of this requirement, financial institutions are also obligated to report any suspicious or illegal activities. In Oregon, Maps Credit Union had to file almost 13,500 reports detailing the activities of their roughly 500 cannabis business accounts. Noncompliance with mandatory reporting can result in numerous and costly fines for the bank or credit union.
It’s due to these risks and required procedures that banks typically avoid any business that may be construed as money laundering or otherwise suspect. And with this trend, cannabis businesses more often operate as a cash business, leaving them vulnerable to compliance risks and even theft.
So Without Banking, How Do You Pay Employees?
As expected, without a banking solution, payroll becomes a huge challenge for cannabis businesses. This forces some cannabis businesses to look for creative measures to pay their staff.
One of these routes that isn’t recommended is to misclassify employees as 1099 contractors, thereby avoiding all state and federal taxes that are associated with payroll. Initially this sounds like an easy and beneficial loophole. The reality, however, is that the consequences for misclassifying employees and unpaid payroll taxes can be detrimental. Eventually, the Department of Labor will find out, and it will be costly.
Most businesses turn partner solutions, like outsourced HR & payroll services. Even here, there can be risks. Many found after they started with well-known national providers, these national brands later canceled their contracts when they elect to no longer support the cannabis industry. When these cancellation notices are sent, they typically have 30-60 days to scramble and find a new provider.
The best suggestion is to partner with an HR & payroll company that specializes in the cannabis industry, like Greenleaf HR.
What should cannabis businesses do?
It may sound daunting, but there are options to help cannabis businesses manage their financial needs while also ensuring compliance and payroll needs. We’ve compiled a few helpful tips.
1. Find a financial institution that will work with a cannabis business.
While it may be a difficult task to find the right bank or credit union, there are options that support the cannabis industry today. Right now, about one in 30 banks or credit unions in the United States will take on a cannabis business as a customer. This number grows everyday – in 2018, the number of financial institutions working with cannabis businesses grew by 20%.
The forecast provides even more good news, with cannabis being the fastest growing industry in the United States. With so much growth, more banks and credit unions are changing their stances and accepting these clients. That said, cannabis businesses should be prepared to incur larger monthly account fees, as well as transaction fees.
2. Find an HR & payroll partner that knows the cannabis industry.
Talk with other cannabis professionals, read reviews, or even hire a consultant to help find the right partner for your business. It’s critical to consider your option carefully before partnering with a big name in HR & payroll that may initially take on a cannabis business. Many times these providers are forced to drop this type of business only a few months later, leaving the cannabis business to quickly find a new solution.
Find solid options with industry knowledge by attending tradeshows like NCIA’s Cannabis Business Summit, U.S Cannabis Conference, or MJBizCon. Industry events are a great place to find smaller partners specifically focusing on the cannabis industry and have a host of cannabis clients for references.
This guarantees a solution to not only meet the specific needs of a cannabis business, but also one that is intimately familiar with the industry and changing laws that affect it.
Regardless of the HR & payroll provider being considered, it’s critical to ask specific, detailed questions regarding payroll, taxes, and banking. This will help ensure the provider can maintain compliance and give critical guidance on all hot topics such as 280E.
3. Learn the ins-and-outs of 280E.
Due to the restrictions of Section 280E in the tax code, cannabis businesses cannot directly deduct business expenses except for the cost of goods sold (COGS). There are ways to mitigate this, but it requires careful consideration.
The important takeaway here is that for growers and processors, labor costs are inventoriable in nature, and therefore are considered part of the cost of goods sold. That includes cleaning, trimming, and curing of product as well as packaging and inventory labor.
Because of this tax advantage, it’s imperative to assign each employee a specific title and role within the business for tax purposes. This is critically important for vertically-integrated cannabis businesses with employees working in multiple roles.
For example, if an employee works 50% in cultivation and 50% in a retail dispensary, their work time and compensation need to be tracked separately. This means utilizing a time and attendance platform that can track split shifts as well as account for which labor costs are and are not deductible.