Since Missouri legalized medical marijuana in 2018, banking for marijuana-related businesses has become more accessible. But the marijuana industry still faces obstacles that other commercial establishments don’t have to consider.
Marijuana remains illegal at the federal level, meaning marijuana-related businesses have limited access to federally regulated financial services, including loans and 401(k)s. Marijuana-related businesses are also limited in which payment processing companies (debit/credit cards) they can work with and must pay a high tax rate.
Since the sale of medical marijuana began in Missouri, the industry has flourished. Sales, which began in October 2020, recently topped $600 million, according to Lyndall Fraker, director of public affairs for the Missouri Department of Cannabis Regulation.
Tax rates over 70%
Tax bill 280E is one of the biggest challenges facing the marijuana industry nationwide, said David Brodsky, director of retail at The Farmer’s Wife, which operates three dispensaries in southern Missouri.
Established in 1982, tax number 280E does not allow the deduction of expenses related to the sale of cocaine, amphetamines and marijuana. Since taxes are administered by the federal government, 280E still applies in states that have legalized both medical and recreational marijuana. Marijuana-related businesses can only deduct from their taxes the costs associated with purchasing the product from suppliers.
Expenses such as employee wages, rent and utilities, marketing and maintenance are not deductible. Brodsky said Farmer’s wife pays over 70% in taxes, which is the main driver of higher product costs.
“We don’t make a lot of money,” Brodsky said. “To be perfectly honest, and this is what I tell a lot of people, we are glorified taxpayers because of 280E.”
Difficulties with cashless payment
Some payment processing companies do not do business with the marijuana industry, making it difficult for their cardholders to pay at the dispensary.
Mastercard, Visa and American Express are among the largest payment processing companies that have said it is against their online policies to pay for marijuana products.
Fraker, of the Department of Cannabis Regulation, said most dispensaries have ATMs, giving customers the ability to withdraw cash for purchases.
Brodsky said The Farmer’s Wife offers both a traditional ATM with a $2 service fee and a cashless ATM with a $3 service fee.
Cashless ATMs are popular in the marijuana industry. The system works by rounding up purchases to make the transaction look like a cash distribution. Then, the customer receives the change.
For example, if a customer’s transaction total at The Farmer’s Wife was $37 and they used a cashless ATM, their total would be $43, which includes rounding up to $40 and a $3 service fee. The customer would then receive the $3 difference between their purchase and the rounded amount at the ATM.
In early December, several ATM transaction processors turned off cashless ATM transactions, affecting marijuana-related businesses across the country, including The Farmer’s Wife. High Times reported on December 7, 2022 that only about 20% of marijuana-related businesses still have access to cashless ATMs.
As of Wednesday, Brodsky said The Farmer’s Wife’s cashless ATM is back up and running.
Where do marijuana banks operate?
Most marijuana-related businesses in Missouri work with state-chartered small banks, which operate under Missouri Department of Finance regulations.
In years past, marijuana-related businesses may have had more difficulty finding banks that were open to working with the marijuana industry. But as the stigma associated with marijuana declines, more banks are open to partnerships.
About three years ago, the Missouri Department of Health and Seniors conducted a survey, examining how many marijuana-related businesses in the state had successfully found banks to work with. This research was conducted while the first medical marijuana dispensaries were opening in the state. A department survey concluded that 75% of marijuana-related deals found banks, Fraker said.
Fraker said he is aware of a “handful” of banks in the state that do the “majority” of business with the marijuana industry. He did not disclose which banks.
“Some banks have taken the time to set up a program to serve cannabis businesses,” Brodsky said. “Basically what they have to do is an extremely high level of reporting.”
Brodsky said Farmer’s wife had no problem finding a state-owned bank to work with, but the banks demand a high fee from the company to manage this highly regulated program. He did not reveal how much the monthly allowance is paid by Farmer’s wife.
Both federally and state-chartered banks must comply with Bank Secrecy Act expectations outlined in 2014 by the U.S. Treasury Department’s Financial Crimes Enforcement Network. These long-standing expectations require banks to conduct “thorough customer due diligence” on a new customer associated with the marijuana industry.
Evaluation recommendations include verifying the license of the marijuana-related business, developing an understanding of the company’s “normal” business activities, including the types of products sold, and monitoring any suspicious activity conducted by the company.
Recreational marijuana will be available for purchase in February
Missourians approved the legalization of recreational marijuana in November 2022. Fraker said the Department of Health and Seniors is still on track to meet constitutional deadlines, with recreational marijuana available in dispensaries as early as Feb. 6.