SB 51 and the Future of Cannabis Banking in California

By October 18, 2019 July 23rd, 2020 Cannabis, Tax
Cannabis Banking California

Marijuana legalization is one of the hottest topics in the United States in recent memory. While still illegal at the federal level, more than half of the states have passed some measure of cannabis legality – whether medically and/or recreationally. Among those states, California has long been at the forefront leading the charge.

California was the first state to legalize medical marijuana in 1996. Then in 2016, California voters passed Proposition 64 with 57% of the vote, becoming the fifth state to legalize the recreational sale and use of marijuana. Subsequently, on January 1, 2018 the state officially began to legally sell cannabis products. Since then, not only have 68% of state citizens agreed that legalization has been a positive endeavor for the state, but they are even pushing for more municipalities to permit marijuana shops in their communities. California is even home to the first cannabis café, a farm to table restaurant highlighting cuisine and cannabis, in the United States.

Even with widespread approval by the state population and a new, marijuana-friendly governor at the helm, the cannabis industry has faced some considerable hurdles in its first few years of legal operation. There is a surplus of product, rogue black market providers, and exceptionally high taxes. One of those concerns, which Governor Gavin Newsom vowed to crackdown on, is the current banking operations for cannabis companies doing business in California.

What is the current cannabis banking system in place for California cannabis companies?

The short answer is: there isn’t one.

While cannabis is currently legal both medically and recreationally in California, it is not legal on the federal level. As a result, the growers, processors and retailers cannot open accounts or access lines of credit from federally insured banks. Furthermore, they cannot write off business expenses on their federal returns, and they have exceptional difficulty purchasing crop insurance.

So even though cannabis profits in the state are licensed, well-regulated and taxed, they continue to be shunned by most banks. Therefore, companies that sell, process, grow or distribute marijuana legally in California have no means of moving their money electronically. The result is an all-cash business. Currently, the federal laws act as a barrier to electronic payment, as all banks are subject to federal mandates through deposit insurance and access to the federal payment system. Any financial institution with federal ties risks severe punishment for doing business with cannabis clients.

As of February 2019, only five financial service companies – all credit unions – willingly and covertly work with cannabis clients. The limited supply and overwhelming demand of cannabis-friendly financial institutions has led those credit unions to shut themselves off from new customers, form long wait lists, and shroud themselves in secrecy.

Without aid from financial institutions, the California cannabis industry is almost exclusively a cash only business. Cash is the primary monetary token passed throughout the supply chain, from the farms to the retailers. Dispensaries typically do not accept credit or debit cards, and the cash received from customers is then used to pay for equipment, supplies and services. Employees often receive payment in cash form as well.

This in turn also impacts tax collectors as they attempt to calculate and collect state taxes. In fact, Hardcar Security, a company based in Palm Springs, offers 20 ex-military drivers, armed with bulletproof vests and Glock semi-automatic pistols, to move cash and cannabis around the state in vehicles supplied with GPS tracking, ballistic windshields, and bulletproof steel.

Clearly, if armored vehicles and ex-military guards are necessary to move the funds needed for your legal business – something is wrong with the current system in place. So where does that leave the abundance of cannabis-centric businesses in the state?

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What cannabis banking options do California companies have?

The good news is that there is national interest among financial institutions to make something happen. September 2018 data from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network is proof of that. It reveals that the number of financial facilities accepting deposits from marijuana-related businesses rose from 100 in 2014 to 486 in 2018. Of those 486, 375 were traditional banks and 111 were credit unions.

In California though, credit unions – well, five of them – are the only option. And the obstacles continue to mount. Per the “Cole Memo” issued under the Obama administration, banks in marijuana-legal states garnered some protections by doing audits and reporting any money being moved in and out of businesses. However, Former U.S. Attorney General Jeff Sessions withdrew the Cole Memo in January 2018, thus removing any formal guidelines for banks dealing with marijuana-related clients. In its place lives greater uncertainty.

Until legislation passes on either the federal and/or state level, the cannabis industry is left moving their cash in bulletproof vehicles throughout the state. However, not all hope is lost. In fact, there remains some optimism with one significant bill making its way through the California government and another sitting before Congress at the federal level.

Enter Senate Bill 51.

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What is Senate Bill 51?

In May 2019, the California State Senate passed Senate Bill 51 (SB 51) by a vote of 36 to 1.  The bill, still needing approval from the State Assembly and Governor Newsom, would allow private banks and credit unions to apply for a limited-purpose state charter in order to provide depository services to licensed cannabis businesses.

California boasts the largest legal market in the country and currently has no way to handle the profits, deposits, or taxes of the industry. SB 51 aims to change that. On top of creating a special class of banks to manage the money derived from cannabis-related companies, it would also permit those banks to distribute special checks to marijuana retailers to be used for designated purposes, including paying taxes and California-based vendors.

The bill also intends to help ameliorate the tax collection process, thus raising the amount actually gathered. State taxes collected from licensed marijuana retailers notably fell $100 million short of initial projections and lawmakers seek to change that. In fact, Republican State Senator from Temecula, Sen. Jeff Stone, suggested that the state is losing “probably hundreds of millions of dollars” simply because cannabis retailers simply cannot write a check.

SB 51 aims to solve the cannabis banking crisis in the state, or at least act as a large step forward, as well as improve state tax collection by making it easier for marijuana retailers to calculate and pay their taxes.

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What is the status of SB 51?

Despite Senate approval, the bill requires a number of additional steps before landing on Governor Newsom’s desk for signing. Following approval from the State Senate, SB 51 promptly moved to the Assembly Business and Professions Committee. There the bill passed again with a vote of 12-7 and continued on to the Assembly Appropriations Committee.

However, in September, the founder of the bill, California Senate Majority Leader Bob Hertzberg, withdrew the bill from consideration. Instead, he announced that the bill would become a two-year bill. This means that while he moved the bill to “Inactive” status for the time being, he plans to reintroduce it when the legislature reconvenes in January 2020 for the second half of the two-year session. The bill is tagged with an urgency clause and has already cleared a majority of the legislative obstacles; thus, with positive votes in the turn of the new year, the bill could go into effect in early 2020.

In a news release, Sen. Hertzberg explained that, “If we’re going to do this, we have to do it right. We owe it to the dozens of cities, counties, and cannabis industry officials who have been supporting this effort to see it through.”

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Is there any cannabis banking legislation progressing at the federal level?

Reality is that 33 out of the 50 states have legalized marijuana, either medically or recreationally, and as such has put pressure on the federal government to keep up. The SAFE Banking Act is here to get the ball rolling.

In 2017, Sen. Jeff Merkley (D-OR) and Rep. Ed Perlmutter (D-CO) introduced the Secure and Fair Enforcement (SAFE) Banking Act. However, the Act did not receive a full vote or hearing in either chamber of Congress. So Sen. Merkley and Sen. Cory Gardner (R-CO) with a House companion bill sponsored by Perlmutter reintroduced the bill in April 2019. Notably, this time it arrived with bipartisan support and under the rule of a Democrat-majority House of Representatives.

The SAFE Banking Act aims to bridge the gap between cannabis companies’ legal standing in their respective states and the current non-legal status of marijuana sales and usage on a federal level. Ultimately, the SAFE Banking Act would prohibit federal regulators from punishing financial institutions for the sole reason that they elect to provide services to cannabis companies.

Significantly and most recently, the Act passed the U.S. House of Representatives with a 321-103 vote in September 2019. Next up is the Republican-majority Senate where it is likely to face more severe opposition and possible amendments.

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What can I do?

If you are the owner of a cannabis-related business, you are undoubtedly navigating the ever-changing waters of the political cannabis landscape. However, in California you are still expected to pay your state taxes and comply with economic legislation.

That is where we come in. Squar Milner is one of the few public accounting firms leading the way on cannabis in California. We have a robust cannabis practice and experience working with a number of both publicly- and privately-held cannabis clients in the United States and Canada. We have the experience and technical expertise to be your financial guide through these uncertain times.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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