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Cannabis dispensaries continue to face challenges in obtaining the necessary banking and financial support to open deposit accounts, secure loans or lines of credit, and manage payroll. Without proper banking relationships, dispensaries are also unable to accept checks or credit cards for sales transactions. A number of financial institutions have started working with cannabis businesses, but many of their services are either limited, expensive, or both. Due to slow progress at the federal level, many cannabis dispensaries operate as cash-only. While cash-only transactions might seem easier to manage, they should not be a permanent solution. These businesses face an increased level of risk and often end up costing the dispensary more than expected.

In this article, we will discuss the various problems faced by cash-only cannabis dispensaries, and the benefits of partnering with a payment processor who understands their industry.

CASH-ONLY CANNABIS DISPENSARY PROBLEMS

1. INCREASED CHANCES OF THEFT AND ROBBERY

A. HIGH RISK FOR EMPLOYEES AND CUSTOMERS

Large amounts of money on site can increase the chances of theft and create a safety risk for both employees and customers. In general, 10% of all financial and product loss in the cannabis industry is attributed to external theft. However, about 90% of all loss is attributed to employee theft. Employees operating the POS system with cash-only transactions, being paid in cash, and having knowledge of an onsite safe and regular armored car visits can create temptation.

B. IMPLEMENTING STRICT PROTOCOLS AND SURVEILLANCE

Aside from having strict protocols and surveillance equipment in place, dispensaries can decrease the chances of internal theft by thoroughly vetting their employees for integrity and trustworthiness through extensive background checks and references. A mistake in hiring and poor security measures could cost the dispensary time and money, a scenario that is, unfortunately, quite common.

2. PAYROLL COMPLICATIONS DUE TO CASH PAYMENTS

A. COMPLIANT WITH EMPLOYEE LAWS

Without securing bank accounts and an appropriate payroll system, dispensaries cannot offer employees direct deposit or cut company checks to their employees. Many have no other option than to pay their employees in cash, which may not seem challenging at first, but does come with its own measures to be compliant with employee laws such as the Fair Labor Standards Act.

B. PAYING TAXES AND REPORTING

Employers must withhold payroll taxes (federal and state income tax, Social Security/Medicare) from employee pay. Employers must also report withholdings to the IRS. Moreover, employment taxes must be paid on employee earnings including unemployment and worker’s compensation. Should an employer pay an employee in cash without withholding and reporting taxes, employees would not be eligible for unemployment benefits or worker’s compensation should an accident or injury occur onsite.

C. EMPLOYEE MISCLASSIFICATION

Many dispensaries will consider employees independent contractors to circumvent tax complications. However, contract employees must fill out a 1099 form for appropriate classification and be made aware of their responsibility to take out their own taxes. Employee misclassification could mean severe fines and penalties if the dispensary is audited.

D. PAYROLL DOCUMENTATION

While in the short-term employees might be thrilled to receive cash, over time it can have a negative impact due to lack of documentation. Paycheck stubs often document the payroll date, the amount, and if any taxes were withdrawn. But, paying employees in cash leaves little to no paper trail and puts both the employee and dispensary at risk. To avoid complications or conflict long-term, some states require businesses to provide a paycheck stub or receipt for hours worked, rate per hour, total wages being paid, and if any deductions are taken out–this obviously would be a huge hurdle for cash-only dispensaries.

3. ADDITIONAL OVERHEAD AND OPERATIONAL EXPENSES

A. INCREASED SECURITY MEASURES

Many cannabis dispensaries are unaware of the extra labor, costs, and resources needed to operate a cash-only business. These expenses add up over time. Some states where cannabis is legal (medical or recreational) require dispensaries to take security measures. For example, California requires dispensaries to have:

•   ID badges for all employees
•   Limited-access areas within the facility
•   Security personnel
•   24-hour video surveillance of all areas containing cannabis products and all point of sale areas
•   Alarm systems
•   Commercial-grade locks
•   Secure storage of all cannabis products

B. CASH COUNTING & HANDLING

A California-based cannabis company reports that it employs workers to specifically handle and count the money. In fact, three or four hours a day is dedicated to feeding cash into a cash counting machine. And because safety is critical, the employees count the money three times at an undisclosed location. The money is then bagged up and transported in an armored car to be further processed. The workers, the time it takes to count and verify the cash, and the armored car service are all expenses.

4. INCREASED LIKELIHOOD OF IRS AUDITS

A. DIFFICULTY IN TRACKING FINANCES

Operating as a cash-only business makes it harder for the state to track the dispensary’s finances to ensure they are obeying the law and paying their taxes. A cannabis business may have several years in operation and be in good standing, but because the industry continues to be under scrutiny, cash-only dispensaries get the brunt of the law. Oregon Senator Jeff Merkley, who is in favor of the SAFE Banking Act, said operating an all-cash economy is, “an invitation to money laundering, to organized crime, to the diversion of products, to cheating on your taxes, to cheating your employees.” Even though dispensaries may have their hands tied at the moment with current banking challenges, operating in all cash makes them more vulnerable to IRS audits.

BENEFITS OF PARTNERING WITH A PAYMENT PROCESSOR FOR YOUR DISPENSARY

A. ACCEPTING CREDIT & DEBIT CARD PAYMENTS

Partnering with a payment processor who understands the cannabis industry allows dispensaries to accept credit and debit card payments, reducing the reliance on cash-only transactions. This not only increases the safety and security of the dispensary but also improves the customer experience as they can use their preferred method of payment.

B. COMPLIANCE WITH BANKING REGULATIONS

A payment processor that specializes in the cannabis industry will ensure that your dispensary is compliant with all banking regulations, reducing the risk of fines and penalties. This includes proper reporting of sales and taxes, as well as adhering to anti-money laundering (AML) and know-your-customer (KYC) regulations.

C. STREAMLINED OPERATIONS

By accepting credit and debit card payments, dispensaries can streamline their operations, reducing the time and labor required to count and handle cash. This also allows for more accurate tracking of sales and inventory, helping dispensaries make better-informed business decisions.

D. ENHANCED SECURITY

With reduced reliance on cash, dispensaries can decrease the risk of theft and robbery, creating a safer environment for employees and customers. Additionally, partnering with a payment processor can help implement secure payment processing solutions, protecting sensitive customer data.

E. IMPROVED FINANCIAL AND PAYROLL MANAGEMENT

A payment processor can help dispensaries establish proper bank accounts, enabling them to better manage their finances and payroll. This includes offering employees direct deposit, ensuring proper tax withholding and reporting, and maintaining accurate payroll documentation.

CONCLUSION

While cash-only transactions may seem like a simpler solution for cannabis dispensaries, they come with a host of problems, including increased risk of theft, payroll complications, and additional operational expenses. Partnering with a payment processor who understands the cannabis industry can help dispensaries overcome these challenges by enabling them to accept credit and debit card payments, ensuring compliance with banking regulations, and streamlining their operations.