Can You Pay for Pot With Your Credit Card?

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This post comes from Christine DiGangi at partner site Credit.com.

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.

The marijuana business is booming. On the first day recreational pot was legal in Colorado, sales topped $1 million. Marijuana-related companies have been popping up, and the public ones — like Advanced Cannabis Solutions, Hemp Inc., Tranzbyte Corp. Inc. and others — have seen share prices spike in 2014.

But because of the nature of their product, many marijuana 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 U.S. 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 percent 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; it’s 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 that 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, pot 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 under way 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 Administration 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 percent, 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, it has to list its 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.

Some use cashless ATMs at checkout

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 percent 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.

Every aspect of the business is handled in cash

“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 of 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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  • piglett

    The DOJ is supposed to be “Independent agency” and for the purpose of equal enforcement and upholding of law. To make policy and rule “exceptions” for states or individuals, is big “D” discrimination and unequal enforcement of law. That said
    Congress has been prolific in passing discriminatory law that effects Social Security and tax payers for years. Like Obamacare and the WEP bill of 1983 they also stall implementation by “kicking the can” i.e. enforcement down the road for several years so the least amount of voters are effected after the unpleasant or discriminatory bill is passed. Seldom is any bill repealed, like the Social Security Fairness Act that has been reintroduced year after year since 1983, and with conflicting numbers put out as how many are affected by the harm. Money talks has at least two articles on these bills that were sold or voted on as “to keep employees or social security recipients from windfall or double dipping” into two or more pots of pensions or social security, regardless of how much they contributed to either so called savings or retirement plan. Some 7 million, on government source quoted estimate 1.5 million, the GAO in last years report says even Social Security Admin doesn’t know how many are eligible for the WEP.
    What that has to do with marijuana and the legalization or illegal sales of cannabis is this. The DOJ is the one putting out policy which is general or intent, by definition, but is not necessarily the law as stated and interpreted, if one believes in equal enforcement. 2nd; the DOJ is putting out policy about IRS, BANKING and BUSINESS law and civil litigation law and precedent (agricultural, environmental, drug quality , codes and pharmachutical, that will try and state policy of enforcement unequal among the many different federal agencies AND the States. Ridiculous! But the Lawyers who specialize in civil rights, medical and criminal defenses and prosecutions will make a mint, to say nothing of the frustration or conflicting opinions in the courts over jurisdiction, sovereign immunity , and just general liability when a family member or victim dies, gets sick, gets prosecuted or is sued or prosecuted for distribution or harmful crop, purchase or insecticide etc.
    Follow the money and follow law, but definitely question how DOJ can arbitrarily enforce federal law or selectively enforce law on states that try and enforce or change state law to help in the enforcement of Immigration law, or require Identification for voting when federal law always encouraged “cooperation” from local law enforcement” boots on the ground” for bank robberies and illegal aliens in the past, but now only want bank robbery enforcement or help. But in the most recent federally passed voter law makes Identification permissive by state, with DOJ selectively and reportedly only investigating and pursueing States with Identification requirements or complaints by Black on White, or that effects a single minority population?
    According to a recent ORiley commentary, he believes the Presidents priority “isn’t to harm America, but to promote social justice”. Whatever O’Riley, EQUAL RIGHTS AND EQUAL ENFORCEMENT AND EQUAL OPPORTUNITY was the basic premise and context of the constitution, and it was the attempt at equal enforcement as policy that made the Bill of RIGHTS so good but so lucrative for civil rights and minority attorneys who used language and defense as offense, and sold “social justice” to confuse, propagandize and legitimatize inequality and DISCRIMINATION aganst States, individuals, taxpayers and workers aganst non workers and the poor. Policy is “standards and practice” in local lawsuits, it is harder to prove because often it is based upon “you scratch my back and I scratch yours” and the old “parents, managers and exempt officials set the example through actions rather than words” policy. Lawmakers who started changing State laws that “conflict” with Federal Law also began testing the DOJ and FEDS in general to see if they would enforce the conflicts between Circuits and previous State policies and law that made generations of government workers change policy and procedure and State law to conform, just because the State and local agencies took so much or a little FEDERAL TAX MONEY and subsidies. “Social Justice” is different than equal justice enforcement or opportunity. Justice is supposed to be blind! Meaning for millions and in past vanacular and history, that the attempt is to treat all equally or as unbiased as possible. When the Justice Department or the enforcers are biased or have a policy of targeting and changing policy to enforce by color, by political party, or by swaying voters through non enforcement or Exception to law by state, demographic or jurisdiction, the enforcement is discriminatory and unequal rights rather than “justice” cultural, racial or social. Yet try and sue or repeal a federal law that discriminates by justifying new taxes or means testing taxpayers not by their religion, color or ethnicity, but by place of work rather than contributions and past federal contracts like Social Security and Medicare. Try and sue or repeal discriminatory conspiracy discrimination and unequal enforcement and enactment of law by elected and political appointees within Federal Congress or a State Legislature and the lawyers will tell you they have sovereign immunity, or are exempt from lawsuit or the only way to change law is “go to the polls and vote them out”. But when the discrimination is because of party, or conspiracy or party ideology infiltrated within the very enforcement agencies that are supposed to be “independent’ and supposed to strive for “equal enforcement or blind ideology” regardless of Party in power, lobbying or political ideological influence, the conflict and ‘vote em out” control theory falls flat due to the control of law and enforcement and its very disparate conflict of language and power.
    Sociology is supposedly the study of groups. Law is not supposed to be enforced or written based upon group mentality, group minority or majority thinking or numbers. Its fairly obvious that “groups” and “lobbies” were not what the Founders tried to protect regardless of the Bill of Rights, though they were the most historical and natural divisions that “blind Justice” would apply to. If the founders were intent upon Social Justice they would have written all sorts of exceptions by social and monetary group (think class, heredity, politics of the time) into the Constitution and the Bill of Rights. There would be no attempt at check and balance between the branches because of course the majority elected could be counted on to represent all 13 to 50 states equally without group think, politics or majority control and avarice influencing the lawmakers or enforcers and interpreters.
    Discrimination is everywhere in daily life, but now at this point in history, it is “exception to law” made by DOJ and Federal and State Immune political appointees and elected officials through formal and informal policy that is changing law enforcement and an individual civil right to equal justice. Changing the Lawyers in the individual states ability to advise on what is legal and what is not. As “right wing conspiracy” diverted attention from Clinton era wrongdoing and Democratic party policy of single issue voter, and creating newer special interest minority groups and numerical minorities into their Party or campaign strategies. “Social Justice” conspiracy or code and terminology diverts away from Equal Rights and EQual Enforcement legality and Historical significance. “Social Justice” is groups like pot smokers and drug investors and single issue voter groups such as Black Causus, Democratic and Republican strategists, lawmakers and civil rights affirmative action promoters who unit for single issues like pot, immigration, climate change, and political appeal to voters, to become the squeakiest wheel and loudest propaganda voice, until accepted law is changed or exceptionalized by policy or agency of choice then move on to the latest or newest money or “social issue” creating more conflicting law on top of prior conflicting law, with the individual left with no recourse aganst state or federal law that protects and discriminates with little basic equality of enforcement or liability due to the most basic Constitutional law that protects the growing elite class with soverign immunity and the political appointee class of so called leaders and managers who seem to be the most ignorant of legal interpretation except as it protects them with the 5th or 11th amendment and the ability to have communications redacted or exempted from NSA cell phone recording.
    Once Bank of America opened their banking to Illegals and foreign nationals, millions started flowing to foreign countries by wire, and made drug dealing alone much easier for the cartels and bankers and individuals who just had to transport money to families through snail mail cash, illegal crossings or western union cash. The article above isn’t about Social justice or equal rights or even health and safety, its about law and exception to law, discrimination and “look what I done for you” politics to gain and keep young voters, to say the least. That the DOJ is going to set new enforcement policy is the biggest insult to American jurisprudence and Lawmakers who seem to shy away from repealing bad law but allow exception to law by executive action, exective order and lately by unequal enforcement by numerous burecratic branches is the Gordian knot that grows with absolute power by party that corrupts.