IRS collects billions in pot taxes, much of it in cash

Sessions to rescind Obama-era marijuana policy
Sessions to rescind Obama-era marijuana policy

The way Zach Lazarus pays his taxes is different than most people.

The COO of A Green Alternative dispensary in San Diego pays city, state and federal taxes in bags of cash that smell like marijuana. And he arrives flanked by armed guards.

"We have a security detail with weapons that help us to get to the right destination to pay our taxes," said Lazarus. "Because everything's in cash we have to drive to our local IRS offices and pay."

The government does not require Lazarus to pay his pot taxes in cash. But because marijuana is prohibited by the feds, banks are not legally allowed to provide financial services to businesses that deal in state-legal pot. The lack of banking access forces them to use cash.

Many marijuana business owners are in the same predicament. Nearly a third of those taxpayers couldn't get bank accounts last year, according to a study by Marijuana Business Daily, an industry publication. Others have had accounts shut down.

This year, it's estimated that marijuana business owners across the U.S. will owe $2.8 billion in taxes to the federal government, based on estimates from New Frontier Data. Despite the fact that marijuana is an illicit industry, owners still pay taxes under a provision in the tax code called 280E, which requires drug dealers to pay taxes even on prohibited substances.

Related: Legal pot in New Jersey could top $1.2 billion sales

"If you're making money illegally, that's still income, and that money is supposed to go to the IRS," said Richard Auxier, research associate with the Tax Policy Center, who said the rule also applies to illegal sports betting. "That's where the old joke about Al Capone comes from, that he didn't report his income from illegal activities."

The government, in other words, is not missing out on revenue from the marijuana industry. But they're definitely leaving green on the table.

If marijuana were legalized across the U.S., federal marijuana taxes could spike to $18 billion by 2025, according to estimates from New Frontier Data (The estimates don't take into account the new tax law that passed in December which lowered the business tax rate from 35% to 21%.)

In California, pot businesses will owe about $530 million in state taxes for 2017, according to BDS Analytics, and that's expected to go up to $650 million in 2018, the first year with legal retail sales.

Related: $8 billion marijuana industry preps for a fight

Some have speculated that a recent move by Attorney General Jeff Sessions to strip Obama-era protections for the nascent industry could prompt serious legislative action in Congress to legitimize marijuana nationwide.

Senator Jeff Merkley of Oregon, who accompanied a marijuana farmer as he delivered cash to a tax office in the state capital of Salem, introduced a bill, called the SAFE Banking Act of 2017, that would free up financial services for cannabis businesses. A companion bill has been introduced in the House.

"You don't want to have this cash economy that invites money laundering and cheating and all sorts of stealing," said Senator Merkley, whose state reaped more than $120 million in tax revenue from recreational marijuana over the last two years. "There's no downside to providing banking services to the cannabis industry. It's crazy to have this unbanked economy."

To be sure there is a bigger bipartisan bill, with two dozen co-sponsors, working through the House that would eliminate criminal penalties associated with marijuana possession and distribution, and remove it as a schedule 1 controlled substance, effectively ending federal prohibition.

If the idea of lifting federal prohibition seems farfetched, it's exactly what Canada is doing.

Canada plans to have its retail market for cannabis up and running by July 1, opening a multi-billion dollar market.

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