Federal law requires businesses to file employment withholding taxes via the Electronic Federal Tax Payment System (EFTPS), a process which requires a bank account. When a business doesn’t do this, it’s not the end of the world – but they do get dinged with a steep 10% penalty. That’s incentive enough for most companies to do their federal EFTPS duty. But what if a business would pay their Form 940 and Form 941 employment taxes through EFTPS if they could, but they can’t because they can’t legally open a bank account?
That’s exactly what happened to a Denver, Colorado medical marijuana dispensary called Allgreens LLC. The dispensary is a licensed business within the state itself. However, federal law trumps state law, and pot is a Class 1 controlled substance in Uncle Sam’s eyes. And any bank that knowingly accepts funds which came from selling a controlled substance, such as marijuana, starts wading into illegal money laundering waters. You probably know where this river is headed now. Although Allgreens is licensed to sell marijuana in Colorado, and although the dispensary, like a good taxpayer, pays its taxes in cash at a brick and mortar IRS office, the dispensary can’t actually get a bank account, and thus can’t file employment taxes electronically through EFTPS.
Allgreens LLC of course found getting burned with the consequent 10% penalty unfair, and challenged the IRS accordingly by filing a petition with the Tax Court. The IRS responded in turn with a big NO on penalty relief. According to the Agency, alternative payment methods exist. But let’s just say these alternatives have a faint whiff of so-called “dirty” money made “clean” about them. For one, the IRS suggested something along the lines of using a same-day loan to change the cash into a money order, which could then be deposited and sent via a same-day wire transaction through a bank. The IRS also proposed enlisting a third-party, such as a CPA, to deposit the cash for Allgreens.
In both instances, Allgreens’ attorney has pointed out that that “could still be considered money laundering.” The dispensary argued that “an alternative should not force a taxpayer to engage in a potentially unlawful activity under a federal statute.” And the other alternative offered by the IRS certainly isn’t hitting the nail on the head either: just pay the penalty. Most glaringly, that last option doesn’t answer the very important question of whether a business should have to pay the penalty if they are essentially prevented from using EFTPS.
Allgreens was not satisfied with the Agency’s response either and has filed a second petition in Tax Court to appeal the decision. The dispensary has claimed that “Even though the IRS has acknowledged that there are conditions outside of taxpayer’s control which make EFTPS payments all but impossible, the agency refused to consider abasement as a means to avoid unfair tax treatment to legitimate, licensed and tax compliant businesses within Colorado.” This one’s at least a mile-high up in the air for now, all puns intended, and we’ll have to wait until the smoke clears for any answers.