This op-ed originally appeared in the Press Enterprise
Imagine you have a business, such as a restaurant, retail establishment or auto dealership. Then imagine that you can only accept cash and cannot retain financial records or bank accounts because they could be seized by the federal government. Would you expect the state of California to accept your estimate of sales, levy taxes based on what you admit to earning, and arrive with an armored vehicle to pick up your cash tax payments to help you avoid theft?
The above scenario probably causes you to question what I’ve been smoking. The state would most likely be cooperating with the federal authorities to prosecute the activity – viewed as money laundering – and assist with filing felony charges for sales and/or income tax evasion.
In our enthusiastic pursuit of taxing cannabis, however, we are attempting to help an “industry” avoid the potential negative consequences of violating federal law. Regardless of the recent polls showing California’s popular support for legalization, or our state’s laws legitimizing “medical marijuana” use, the legal dynamic remains unchanged in the United States, of which California still claims membership.
While comparisons with alcohol are made, it helps to recall that Prohibition was established with an amendment to the United States Constitution, and was later revoked by the same process at the national level. Legalizing alcohol at the federal level allowed for regulation, registration and taxation of product sales. A private, competitive market for liquor replaced the black market and mob or cartel business operations. That eventual legitimization may occur for cannabis, but at present, national enthusiasm lags behind California.
It may be that California and states such as Colorado are leading the trend to legalize the substance. To be sure, we expect an initiative on the ballot asking the voters to decide. However, whatever Californians decide at the state level does not alter federal law.
So, without getting into the issue of whether or not marijuana should be legal, the question is can and should we pursue legitimizing the industry through taxation? Accurate and reliable record keeping for cash and non-cash transactions is key to establishing tax policy. It’s been suggested that to avoid federal seizure of records and bank accounts we establish a state bank, which certainly conjures a new image of a logo for a Bank of California.
However, even if a cannabis banking accommodation could be established within our federal or state banking framework, there are many legal and safety issues, as well as the consideration of fairness in treatment for tax purposes that must be addressed. For example: If we exempt certain record keeping for one industry, will others follow? What will be the regulatory framework to prevent proliferation among minors?
Without a legal, verifiable banking and regulatory framework, we must decide if we are prepared to require state employees to turn a blind eye to federal law, accept incomplete financial information and place themselves in harm’s way attempting to audit and collect taxes on an industry with known cartel involvement. Without seriously getting into the weeds, our tax receipts may well go up in smoke.