A Pot Merchant Visits the Tax Man, Carrying Cash and a Gun

Pot Prices Double as Colorado Retailers Roll Out Green Carpet
Matthew Staver/Bloomberg via Getty ImagesAn employee counts cash from the sale of recreational marijuana inside the Evergreen Apothecary in Denver, shortly after marijuana became legal for sale in Colorado last month.
By Karen Weise

"Here's the first one," Elliott Klug said as he reached into a soft-sided briefcase and handed over a tax document and manila envelope filled with more than $3,000 in cash. Klug stood in front of the counter facing a Colorado official to pay taxes for Pink House, the chain of marijuana stores he founded.

Despite his laid-back appearance, which features a straggly ponytail and mutton chops, Klug's money was neatly bundled in stacks of $1,000 or $2,000, sorted by denomination; all bills faced the same way. "I guess I'm OCD or something," he said with a chuckle. Klug had trained his staff to organize the money this way to enforce precision. "I hated going somewhere and finding out I was $20 short," he explained.

Thursday was Colorado's deadline for tax filings based on January sales, the first month in which approved retailers could sell pot for recreational use. A colleague of Klug's had already paid Pink House's Denver city taxes, so he was delivering the state portion: a 2.9 percent sales tax on medical marijuana and a 12.9 percent sales tax on recreational pot. Colorado Governor John Hickenlooper's revised budget expects marijuana taxes to total $98 million a year, about 40 percent above the initial estimate of $70 million.

Klug was handing over thousands of dollars in hard currency because, like most marijuana entrepreneurs, he's stuck running his business largely in cash. %VIRTUAL-article-sponsoredlinks%Most banks, even after getting tacit approval from the federal government, won't take pot clients, even from businesses operating legally under state law. A number of companies have managed to maintain bank accounts. Some operate with full knowledge of the bank; others, like Klug's, fly under the radar. But because he can deposit only so much in each account without setting off warning signals, he reserves bank funds largely to meet payroll. Almost everything else, including rent and taxes, he pays in cash.

Klug drove to the state tax office in a Honda Element emblazoned with his bubble-gum company logo and Statue of Liberty cartoons, a handgun next to the driver's seat for protection. As he circled the parking lot looking for a spot, a man stepped up to the car and pulled aside his long, black coat to reveal a badge on his waist. The Department of Revenue official told Klug to park directly in front of the building in a no-parking zone.

"Hi, I'm Robert," the man said, shaking Klug's hand and cracking a joke about how unexpected it must be to get protection from the state. He ushered the marijuana merchant inside the building, where a uniformed guard took over escort duties, all the way back to Window 1. "From now on," the guard told Klug, "it will always be Window 1."

Janice, a smiling clerk wearing teal eye shadow, greeted Klug through the window and got to work. She and a colleague counted his cash -- sometimes in an automatic counter, sometimes by hand -- and checked the larger bills for counterfeits with a special pen. Janice stamped a form and gave Klug a receipt, then repeated the process with a new tax document and envelope for his next Pink House location. "Last one for this round," Klug finally told Janice, handing over an envelope for the final outlet. When she shook out the cash, a few coins jingled onto the desk.

While Klug paid his taxes over a nearly 15-minute span, the guard escorted two men into the room to await the marijuana tax window. The first, in a baseball cap and sunglasses, held a large brown valise that caught Klug's eye. A man in shorts carried two binders but no large bag. "He must have checks," Klug surmised.

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