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With recreational marijuana now legal in Colorado and Washington, and medical marijuana legal in 20 states and the District of Columbia, pot is now a legitimate billion dollar business in America. But according to federal law, purchasing pot is illegal. So practically speaking, actually buying and selling marijuana is still a sticky situation.

Because of the nature of their product, many dispensaries must operate an all-cash business, having been excluded from using the traditional banking and credit card services that are the norm for other retailers. Dispensary owners argue that the system is inefficient — even dangerous — and now it appears that the federal government may agree with them. On Jan. 23, the Department of Justice announced it would soon release regulations allowing banks to accept money from legal marijuana sales.

While many credit card networks have shied away from processing legal marijuana sales, it’s not because the profits aren’t big enough. Networks get about 2% to 3% of each transaction made with their cards. An Arcview Market Research Report puts 2013 legal cannabis sales at $1.44 billion and projects 2014 to be $2.34 billion. With such a lucrative business opportunity, you’d imagine credit card issuers would be eager to have a piece of the profits, but the federal and local legal limbo in which they exist makes this difficult.

The question of whether you can pay for legal marijuana with a credit card is not a new one. In fact, the gray areas have been discussed ever since legal medical marijuana first made its way to the American public — a decades-long debate. If you’re in a state where people can legally purchase marijuana, you can find a few dispensaries that take credit cards. Many stores have ATMs so debit card users can make purchases, but finding a shop that takes credit cards is rare.

“It’s not the norm in the industry,” said Brooke Gehring, a managing partner at Patients Choice of Colorado. The company has four dispensaries and is opening more. “People try to use credit cards every day.”

Challenges of an All-Cash Business

In 1996, California became the first state to legalize medical marijuana, and even as more states followed suit, it has remained a Schedule I controlled substance under federal law (heroin and LSD are also Schedule I, for context). In 2012, Washington and Colorado became the first states to legalize cannabis for recreational use, with sales already underway in Colorado and set to begin in Washington later this year.

When medical marijuana was first available, dispensaries took credit cards. It was a regular part of business for a long time, but a few years ago the federal Drug Enforcement Agency (DEA) started raiding dispensaries.

“That’s when the financial institutions started to or decided to pull out of the cannabis industry,” says Lance Ott of Guardian Data Systems, a provider of merchant processing to high-risk industries.

Despite local laws, selling cannabis was (and is) a federal crime, and credit card companies made it clear that their products were not to be used for illegal purchases.

“Before medical marijuana was really a big thing, say 2010, most dispensaries took credit cards, and it was a very popular option,” says Justin Hartfield, CEO of Weedmaps, an online community where people can search for and review dispensaries. “We’ve heard that credit cards increased sales by up to 20%, so we know it was a huge blow when we were unable to take them anymore.”

So how are some dispensaries accepting credit cards? They may be working with an agreeable financial institution. Or they may not have been completely honest. When a store applies for merchant services, they have to list their type of business on the application. Ott says some dispensaries operate under labels like flower shop or clothing store, in order to get bank accounts or merchant services.

Another not-so-transparent option is the cashless ATM. They’re small machines that can be placed at checkout: A customer swipes a debit card, enters the PIN and selects the amount of money to withdraw, say $50 for a $45.99 transaction. That withdrawal doesn’t yield cash on the spot, like a regular ATM; rather, it produces a receipt, which the merchant accepts as payment, and the cashier makes change from the register, if necessary.  At the end of the day, the cashless ATM transactions are transferred electronically to a bank account. Whether or not that bank account has been properly labeled is what makes this an iffy practice, though it could be a convenient payment option once the pending DOJ regulations make bank accounts more accessible to dispensaries.

At the moment, it’s a stopgap measure some companies use, if they can. The lack of a permanent solution to credit card processing (i.e. a green light from the federal government) has pushed many dispensaries to the all-cash model.

“As a business owner, and wanting to be a compliant operator, and wanting more than anything to have a transparent bank account, it’s not worth that risk of being investigated further for not being honest,” Gehring says. The only alternative payment options offered through Patients Choice are the in-store ATMs the company bought for every location, which they fill with their own cash.

Gehring has been in the legal cannabis industry since 2009 and says that while the loss of credit card processing didn’t hurt sales, it was a huge change for the business. About 30% to 40% of the sales at Patients Choice of Colorado were made with credit cards, she says, and that money went straight to its bank accounts. Patients Choice has been all-cash since July, and that’s a lot of dollar bills.

Losing the ability to process credit cards was only part of the problem: Even when dispensaries can get merchant services, they need bank accounts to handle the money, and those can be hard to come by. It presents huge safety risks, making dispensaries targets for robberies, and those handling the money need to be careful.

“The biggest obstacle that all-cash business presents is first and foremost the public safety,” Gehring says. Then there’s making sure transactions are spot-on, issuing payroll in cash, paying taxes in cash and transporting all that cash. Gehring described using different cars at different times to move money to avoid becoming targets for theft. It’s complex, and it’s time consuming. Gehring says her company spends more than 30 hours a week on cash management.

Patients Choice has been through at least 12 banks during the past few years, Gehring says, and the relationships always end abruptly.

“Once our industry became targeted as high risk, we then received letters that we would be immediately terminated,” she says. “Usually what happens is a federal agency might issue them a warning letter, and they cease (the relationship) so they’re not in jeopardy.”

Changing banks required a lot of paperwork, which was really the least of the company’s problems. Gehring is still trying to get funds from an account that was closed in July, but they can’t issue her the money personally, and she wouldn’t be able to deposit a check made out to the company. Smaller banks have been willing to work with the industry, but Gehring says those relationships don’t work out for businesses of Patients Choice’s size, since those financial institutions often don’t have the infrastructure to handle them. And things are only getting bigger — in a Patients Choice location that previously saw about 30 to 50 patients a day, 3,500 customers made purchases in the first 12 days of January, when recreational sales started.

Hartfield, of Weedmaps, says he is cautiously optimistic about the DOJ’s statement about potential access to banking.

“It will be the most narrow interpretation of the law,” he speculates. “Even just with that, I think it will be good enough to conservatively build a bigger industry and possibly attract institutional investment.” Until then, the mountains of cash will continue to grow.

Should You Pay With a Credit Card?

Many dispensary owners buy ATMs and fill them with their own cash, so consumers won’t be inconvenienced. That’s helpful in some ways to the customer, but it may also lead to ATM fees on many debit cards, which can add up quickly. Other than the budgetary implications of ATM fees, there are other things for consumers to think about when going to pay for pot with plastic. Theoretically, customers could use their credit cards for cash advances through ATMs, but Ott hasn’t heard of that happening, and cash advances often have different terms than normal credit card transactions, making them a less appealing option for cardholders.

Dispensaries started to see the credit card networks back away in 2012, but even with the federal government saying it will be hands-off in states where cannabis sales are legal, the networks have kept their distance.

A few weeks prior to the Justice Department’s announcement, Visa issued a statement on whether it would be processing payments at local legal dispensaries: “In offering our payment service, Visa adheres to the rule of law and seeks to prevent our network from being used for unlawful purposes. In this instance, the Federal government considers the sale of marijuana illegal, but has announced that it will not challenge state laws that legalize and regulate marijuana sales. Given the Federal government’s position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers are best suited to make any determination about potential illegality.”

Translation: If a dispensary processes your credit card, Visa will take your money. But this still raises the question, should you charge marijuana to a credit card? After all, there’s that pesky little federal law that may give consumers pause when it comes to charging their marijuana on credit.

“Technically, yes, it is illegal,” says Nicolas Geman, a DUI and criminal defense lawyer in Denver. “‘My bank let me pay for it’ doesn’t excuse the fact that you purchased it. … I think the thing that provides the most comfort to anyone who’s concerned about it is the idea that the federal government will go after one guy for buying a few grams. They don’t have the resources, and frankly they just don’t care enough.”

In other words, Geman says it’s unlikely that you would be prosecuted because the federal government found you purchased legal marijuana on a credit card. But there’s one more thing to keep in mind here: Using a credit card creates a record of your pot purchase, so if you’d rather keep that part of your life private, consider sticking to cash.

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