A Colorado marijuana dispensary's bags of cash are handed to a security company for transport to state offices for payments in May 2014. (Hyoung Chang, Denver Post file)

IRS will refund fines to Denver pot shop that pays tax in cash

The Internal Revenue Service has backed away from a policy that penalized an unbanked marijuana business in Denver for paying taxes in cash, but the federal agency will not say if the approach applies industry-wide.

In a settlement with Denver-based Allgreens, a medical-marijuana dispensary that challenged the agency over its policy, the IRS said it would abate future penalties and will refund about $25,000 of fines the business was forced to pay despite having paid its federal employment withholding on time.

IRS rules require businesses to pay employee withholding electronically or face a 10 percent penalty for cash payments. Although the IRS allows for an abeyance in certain circumstances, it disagreed with Allgreens’ position that an inability to get banking services forced it to pay in cash.

The company filed a petition in U.S. Tax Court challenging the penalty, saying it was unfairly applied to a business that was otherwise compliant and paid the taxes in full and on time.

A spokeswoman for the IRS refused to comment on the settlement or its ramifications.

It remains unclear whether the IRS settlement will extend to other marijuana businesses that have been assessed the cash-payment penalty because they could not obtain banking services.

Allgreens’ attorney, Rachel Gillette, said it’s possible — even likely — other impacted marijuana businesses could benefit.

“If this had gone through to a successful verdict in court, it would be a precedent, but this is a concession and an agreement (the IRS) will abate penalties to those who pay in cash and don’t have access to the payments system,” Gillette said. “Not applying (the penalty) to other businesses uniformly would be as ludicrous as having applied it in the first place.”

Gillette successfully argued that the policy was intended for businesses that refused to be compliant, not as punishment for those that paid on time, yet were forced to bring a briefcase full of cash to the one Denver IRS office that would accept in-person payments.

The IRS told Allgreens that companies have two alternatives to pay electronically — each of which required Allgreens to funnel the cash to a third party who could then make the tax payment on its behalf, “the very definition of money laundering,” Gillette said.

A third alternative the IRS suggested — paying the tax in a single lump-sum payment at the end of each quarter — would not only incur the 10 percent penalty but an additional penalty for paying late.

“The taxpayer is entitled to an abatement for reasonable cause, which are circumstances beyond the taxpayer’s control, not willful neglect,” Gillette said.

That Allgreens “cannot secure a bank account due to current banking laws is not considered reasonable cause to abate the penalty,” an IRS hearing officer said.

Gillette said it meant the IRS penalty was “merely punitive and made no sense.”

State and local taxes paid in cash do not incur a penalty.

The agreement is the first concession by the federal government to the marijuana industry since it offered guidelines to bankers in February 2014 on how to work with pot shops.

Marijuana remains illegal under federal law and is ranked among the most dangerous of narcotics. A bill has been offered in the U.S. Congress to remove it from the list of Schedule 1 narcotics, which includes heroin and LSD.

The business side of recreational marijuana: Get an inside look at one of Colorado’s biggest pot retailers, Medicine Man — the ambitions of the family behind it and the evolution of their business amid changing state regulations

Despite the federal banking guidelines, marijuana businesses are still challenged to obtain — and retain — banking services, often resorting to creative methods of disguising what their business really does.

“There are a number of them that have set up holding companies or other methods to assess banking that is not in the actual licensed business’s name,” Gillette said. “That just makes things very complicated.”

Unclear is whether the IRS settlement will extend to all unbanked marijuana businesses or if it will force them each to seek relief in tax court, as Allgreens did.

“It’s still not convenient to pay in cash, and this doesn’t solve the banking problem. But if more and more businesses line up with cash payments, maybe the federal government is inspired to make a change,” Gillette said.

Gillette is also the executive director of the Colorado chapter of the National Organization for the Reform of Marijuana Laws.

David Migoya: 303-954-1506, dmigoya@denverpost.com or twitter.com/davidmigoya

This story was first published on DenverPost.com