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Keegan Peterson had a friend with a unique cash problem. As an entrepreneur in the fledgling Colorado cannabis industry back in 2015, his friend lacked access to basic banking and business services, meaning his cash problem was he simply had too much.

“He had been dropped by six different times by payroll and HR providers because his company touched the cannabis plant,” said Mr. Peterson. “He was paying his employees in cash and manually calculating taxes and he even had to carry his tax payments in a big duffel bag down to the [Internal Revenue Service] building in Denver.”

Drawing on his background in HR software, Mr. Peterson co-founded Wurk to offer basic business support services to the legal cannabis industry and now, barely three years later, the company operates in 29 U.S. states. While most of his clients do have bank accounts, the IRS told him to inform the businesses he works with to know that the agency had hired additional staff specifically to count all the cash being delivered to its Denver and Seattle offices.

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“They also had to hire more security guards for the same reason,” Mr. Peterson said, so if you wanted to pay your taxes in cash you’d have to call the IRS building ahead of time to let them know how much money you’d be bringing in so they would know how much security to have on location.”

The IRS declined to comment on its staffing policies, though the experience of Mr. Peterson’s friend remains a relatively common one among cannabis entrepreneurs even as the cannabis industry grows and the stigma surrounding it falls. According to the U.S. Treasury Department’s latest Financial Crimes Enforcement Network report, there were 411 financial institutions “actively” operating accounts for marijuana-related businesses by the end of March, 2018, representing a 20 per cent increase since the start of the current presidential term.

“But the cash handling in this industry is still much more challenging than the actual product handling,” said Josh Rosen, CEO of 4Front Ventures, a Phoenix-based cannabis business he co-founded in 2011 that has since grown to amass cultivation and retail assets in four states.

“You can usually find a couple of banks in each state that will play ball,” said Andrew Thut, 4Front’s chief financial officer, “but they will charge you for it since they have to put in all sorts of compliance on their back end [and] it is a pain, we’ve been fired by multiple banks.”

One bank even went as far as closing Mr. Rosen’s personal account along with 4Front’s corporate accounts. “That was not a good time at home,” he said.

The few financial institutions willing to keep cannabis-related accounts open – credit unions in Ohio and Alaska recently joined that group – usually only offer access at a very high cost. Mr. Peterson said the different fee structures for cannabis banking services can often go as high as 5 per cent of the cash being stored in the account at any given time.

“Most small businesses, if you’re doing transactions, you’re not paying for the account itself at all, so [banking] definitely costs a lot for cannabis businesses,” Mr. Peterson said. “When cannabis businesses park money in a bank account, the banks cannot lend that money out so there is no way for them to make money off of that money so they basically charge those fees directly to the cannabis company to make up the difference.”

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Beyond ongoing federal marijuana prohibition making it difficult for federally-regulated banks to open their doors to cannabis businesses sanctioned at the state level, Mr. Rosen at 4Front said many financial institutions simply underestimate what it takes to stay on the right side of the law.

“What we have discovered in working with a number of them over the years is unless we are going to a group that has been at it for at least six or nine months, [banks] often think they want to get into this business and spend some time with cannabis,” he said, “but then when they get their first federal-level audit, they realize what a pain in the ass it is and they back away.”

The financial challenges plaguing the legal cannabis industry also extend well beyond basic banking services. Under the current U.S. tax code, cannabis businesses are not able to deduct even the most basic business expenses such as utilities and stationary from their taxes. Section 280E, which prevents businesses from taking any deductions if their business “consists of trafficking in controlled substances”, was established in 1981 after a convicted dealer of amphetamines and cocaine was allowed to deduct expenses such as gas for his car and even rent for his apartment.

In November, the California-based Harborside chain of cannabis retail stores – which is in the process of going public on the Canadian Securities Exchange – lost a decade-long legal battle in U.S. tax court to have 280E struck down in relation to cannabis businesses operating in states with legal regimes. As long as it remains in effect, cannabis businesses often end up with tax bills representing upwards of 80 per cent of their profits. In 2015, for example, The New York Times reported Seattle-based Northwest Patient Resource Center had to pay US$46,340 in federal taxes on US$53,369 in profit, representing an 87 per cent tax rate.

The result is even bigger duffel bags filled with even more cash.

Solutions have been coming slowly, glacially so at the federal level. Cory Gardner, a Republican U.S. Senator from Colorado, most recently tried to include the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act in broader criminal justice legislation passed by Congress just before Christmas, but was blocked. The STATES Act would, among other things, authorize federally-insured banks to offer services to cannabis businesses operating in states with established legal markets.

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Despite Sen. Gardner vowing to his fellow lawmakers he will “not give up this fight,” individual states are not waiting for federal action before exploring their own options. The Bank of North Dakota, as the only state-owned and state-run bank in the U.S., has been widely seen as a blueprint for other states seeking to close the cannabis banking gap.

Rather than insuring its funds through the U.S. Federal Deposit and Insurance Corporation, the Bank of North Dakota guarantees its holdings through a state law that requires every government agency in the state to deposit their funds in the bank, effectively providing the same backstop as the FDIC. Seven other states have tried to establish their own banks, but only the farming-heavy state of North Dakota has managed to make the model work so far.

Eventually, Mr. Peterson argues broader banking access for cannabis businesses is inevitable. When exactly that access will arrive, however, remains elusive.

“The future of cannabis is really just the status quo for other industries, everybody in the industry is just dying to have the tools they need to be able to operate, thing things that everybody else takes for granted,” Mr. Peterson said. “Everybody else takes for granted having a bank account, you can get one anywhere and normally they are dying for your business, but in cannabis the industry is dying for a bank account just to be able to pay their employees and to pay their taxes.”

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