Sunday, March 9, 2014
Medical marijuana dispensaries will be cash cows
She outlines some of the plans that Medical Marijuana of Massachusetts, former congressman Bill Delahunt's enterprise, has for placing armed guards in each dispensary and making home deliveries in armored trucks. Because selling marijuana, medical or not, is against federal law, banks are sitting on the sidelines, not willing to offer their services to pot businesses. No checking accounts, no credit card transaction services, no mortgages or equipment loans, and no working capital lines of credit.
An extension to Legere's story about security measures required by an all-cash operation is how this cash is going to be accounted for and whether all of it will be reported on a tax return.
There is great temptation for a clerk running a cash register to pocket some of the proceeds. Unlike credit card transactions, there is no independently produced record of each sale. Paper receipts are only as good as their consistent use and the accuracy of the information printed on them. At $350 an ounce, there is room for skimming more than a few bucks here and there without detection.
On top of this, there is also motivation on the part of registered marijuana dispensary (RMD) owners to counter the onerous Internal Revenue Code "drug kingpin" rules that strip them of the ability to deduct expenses that are common tax write-offs for a typical business. This is not to say that budding RMD managers are dishonest, but overstatements and outright lies on licensing applications by several of them have already been exposed.
Adding fuel to this hard-to-control fire is the insistence of the state government that RMDs be vertically integrated. Dispensaries must grow their own supply of medical marijuana. While this arrangement may seem like a good idea from the standpoint of tracking product from seed to sale, it eliminates one more point of independent verification in terms of accountability. The purchase of medical marijuana plants or prepackaged ready-for-sale products by one company from another creates an auditable transaction. By requiring vertical integration, no such company-to-company transfer happens and the ability to obscure accountability is enhanced.
All of this adds up to a business that will be nearly unauditable by the state's Department of Revenue. Detection of underreported receipts will be next to impossible. Documentation of expenses, all paid in cash, could be easily manipulated. Diversion of product will also by hard to detect. This will leave auditors insufficient evidence to conclude whether an operation is straight up or not.
The opportunity for obfuscating the flow of cash may well lead to inaccurate tax returns and underpayment of income taxes which, of course, will be laid on the backs of taxpayers.