Millions of dollars in tax money and fees from marijuana-related businesses will be held in a separate account from other Santa Barbara County funds, to protect against the risk of asset forfeiture, according to Treasuer-Tax Collector Harry Hagen.
The Board of Supervisors has adopted land use and business licensing ordinances for cannabis businesses, which will go into effect soon, and put a tax measure on Tuesday’s primary election ballot, so the county has to develop a banking strategy for the revenues.
While California voters have legalized recreational and medical marijuana operations, the federal government classifies cannabis as a controlled substance and can conduct enforcement, as it did in 2012 by raiding city-permitted Santa Barbara dispensaries and sending asset-forfeiture letters to dispensary property owners.
During a recent interview, Hagen said the county negotiated a contract with Bank of America to open bank accounts for cannabis-sourced revenues.
The county determined it was important to keep cannabis-sourced revenues separate to protect all depositors in the investment pool, which includes school districts and special districts, he said.
“When U.S. Attorney General Jeff Sessions back in January gave direction to federal prosecutors that federal laws would be enforced, that should have put everyone on notice that you don’t want, or shouldn’t want, to comingle cannabis with non-cannabis-sourced revenues, because you put those at risk,” Hagen said.
“The last thing we want to have happen is have the federal government enforce the laws of the federal government and come in and seize those types of funds.”
Comingling could bring risk of asset forfeiture or seizure to the other depositors, while a separate account protects taxpayers and non-county depositors, Hagan said.
“As a fiduciary, legally we are ethically bound to faithfully act in each depositor’s best interest,” Hagen said.
“It’s a higher responsibility when it’s public funds, and we take that very seriously.”
Hagen said the county reached out to multiple banking institutions.
“We wanted to be very transparent with banking institutional relationships, and cannabis-sourced revenues,” Hagen said.
“I have to say a lot of the banks, at least the ones we need to deal with, they had some cold feet regarding being up front and transparent.”
County Counsel Michael Ghizzoni said he had no comment on potential actions by the federal government, but at the fiduciary level, there was a compelling reason for segregating the funds.
The method will create more overhead, with separate accounting tracks for that money, he noted.
“It is the cautious way to do it for sure, and I think that’s the message we had back in the January board meeting, that a fiduciary is by definition cautious, and that’s the approach we’re taking,” Ghizzoni said.
“I think that we have the good fortune of not being the first jurisdiction to touch this, and you know, the board emphasized doing it right rather than doing it fast, and we had time to think through the different pieces.”
According to a letter submitted to the Board of Supervisors for Tuesday’s consent agenda, Hagen was able to open accounts in mid-May.
“Effective May 14, 2018, the county treasurer was able to open a set of segregated accounts with a suitable financial institution to deposit cannabis sourced revenues,” the letter states. “Pursuant to the county’s Cannabis Land Use Ordinance, the operative date shall be the date the County Treasurer opens such account.”
Moving away from the cash business model
Jennifer Christensen, chief investment officer for the Treasurer-Tax Collector’s Office, said that in recent months, marijuana businesses have been moving away from all-cash business models.
It has been quickly changing, she said, with businesses opening bank accounts and some Los Angeles-area dispensaries reportedly accepting credit card payments.
Moving to banking systems is more secure for everyone involved, she said.
Hagen told the Board of Supervisors earlier this year that the county was in talks to contract with an armored carrier company for the marijuana-related revenues, which were expected to be largely cash.
In April, he said the county may not end up needing that service after all.
The county will likely accept cash and non-cash methods of payment, Ghizzoni said, adding that they will encourage non-cash payments for security reasons.
At the permitting counter, for example, it is easier to process a check rather than a bag of cash, he said.
There are some banking services available to cannabis-related businesses now, and some use cash and cashier’s checks, said Mollie Culver, a consultant with the Cannabis Business Council of Santa Barbara County.
Culver, who has a background as a political strategist, said there are some bills in the state Legislature dealing with creating a banking system for cannabis businesses.
One of them, SB 930, passed out of the appropriations committee Friday, and would “authorize the creation of cannabis limited charter banks and credit unions, and authorize the use of special purpose checks issued by those institutions for specified purposes,” according to author State Sen. Bob Hertzberg.
“We’re greatly heartened by the direction and strides being made by the California state Legislature as well as by the county to enable banking and finance transfers to occur,” Culver said.
“I would say we are all focused on being strong players in the industry and being able to pay bills,” she said. “The banking industry is going to get there very soon, so long term this isn’t a concern.”
County tax measure on cannabis operations
The county is still waiting for all of its regulatory ordinances to be effective, for California Coastal Commission review of the coastal zoning ordinance, and to see whether voters approve Measure T, a proposed general tax on cannabis operations.
Hundreds of businesses have applied for and received state temporary licenses, and the county expects about 120 to apply for local permits and licenses over the next year, said Deputy County Executive Officer Dennis Bozanich.
“When the hearings went into full throttle last fall, a lot of growers were talking (during Board of Supervisors meetings), and some banks dropped them when they found out they were cultivating,” Bozanich noted.
A county conditional-use permit will have an estimated $8,000 fee, and business licensing fees are estimated to cost about $7,200 and then $4,000 for annual renewals, he said.
Tax revenue estimates, if Measure T passes, are in the broad range of $5 million to $25 million annually, Bozanich said.
The estimates are based on a consultant number of $1,000 per pound value for marijuana, and if the price drops, tax revenues would as well, he added.
If the cannabis-related tax passes, operators will pay it quarterly to the county, similar to how transient occupancy tax is handled now.
The county will also have a “track and trace system” so staff can see how much businesses sold, and for how much, Bozanich said.
Santa Barbara County expects most of its revenues to come from cultivation businesses, but local ordinances will also allow retail dispensaries, processing and other marijuana-related operations in unincorporated areas.
— Noozhawk managing editor Giana Magnoli can be reached at email@example.com. Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Connect with Noozhawk on Facebook.