Without banks, dispensaries pay the government in cash, but face a penalty for the cash payments. This situation highlights the hypocrisy of the government's tax and drug policies, requiring payment on the one hand, punishing you for paying on the other. A recent case filed in U.S. Tax Court by a Colorado dispensary, Allgreens LLC, is the most recent challenge to this Catch-22 created by the government. Unfortunately, the IRS is probably going to win because it is just following the letter of the law here - a change to the tax or the drug laws is necessary for a fix.
Financial institutions generally refuse to open accounts for marijuana businesses due to the intersection with federal law and, once the bank finds out a customer is involved in marijuana activities, will also drop accounts for the existing customers who have such businesses.
Without many banking options, marijuana businesses are forced to operate primarily in cash. As a result, these businesses may have little option other than to make their tax payments in cash. This means they are unable to make their deposits through the Electronic Federal Tax Payment System. The IRS penalizes businesses and people who pay their payroll taxes in cash. The IRS is assessing a ten percent penalty on marijuana dispensaries for paying their federal employee the only way they can.
Given these current challenges, the IRS should waive this ten percent penalty for marijuana businesses at least on a temporary basis until there is greater clarity whether a reasonable cause exception is available. Unless and until these businesses have sufficient access to the banking system to meet their obligations under the Internal Revenue Code, the IRS's imposition of penalties is simply unfair.
If you have any questions, please do not hesitate to contact the Wilson Tax Law Group.