Cash Payments to the IRS? Prepare to Pay the Penalty

bundle of cashWhen it comes to the federal government, marijuana businesses just can’t catch a break. We’ve preached frequently about the great federal-state divide when it comes to marijuana law and policy (read here, here, and here), and reminded our readers of the unfair treatment of marijuana businesses under the federal tax code. But a new complaint against the IRS brings a whole new inequity to light.

The petition was filed by Allgreens LLC, a Denver-based medical marijuana dispensary, which, like 99% of cannabis operators, operates on an all cash basis. That means that when it’s time for Allgreens to pay its twice-weekly federal payroll taxes (you know, that FICA line on your paycheck), Allgreens must of course pay in cash. But not only must Allgreens pay the payroll taxes, it must also pay a 10% penalty for paying in cash, because the IRS wants employers to pay using its Electronic Federal Tax Payment System.

According to Allgreens’ attorney, Rachel Gillette, the IRS has proposed alternative ways of paying the tax. Two of the proposals involved funneling the money through a third party, who could in turn pay using the electronic system … otherwise known as money laundering. Another (almost as distasteful) alternative offered by the IRS was to pay the tax in a monthly lump sum, for which the taxpayer would again get dinged, for paying late.

As Gillette says, it’s not that Allgreens doesn’t want to pay the payroll tax — in fact it is (and on time!). Rather, the burdens placed (by the feds) on banks wanting to provide services to marijuana businesses is so high that they cannot justify taking on such customers. So, canna business remains an all cash business, and Allgreens’ (and many more like it) hands are tied.

This case (brought in the U.S. Tax Court) is only in its infancy, but we will certainly be keeping an eye on how it develops. We hope that the Tax Court recognizes the incredible unfairness of this IRS policy. Allgreens’ counsel correctly points out that the IRS is all too happy to take the pot money, so the method of collection really shouldn’t matter.