Despite being declared an essential service, the cannabis industry may fall victim to Covid-19.
Already beset by huge tax bills and an inability to access banks, the cannabis industry is also ineligible to receive money from the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, it’s not just companies that “touch the plant” that have been excluded from receiving financial aid, so have a host of other tax-paying businesses that provide services to the industry, such as lawyers and accountants.
Most cannabis companies are considered small, with many being mom-and-pop shops. These are U.S. businesses that don’t outsource production, provide jobs to about 240,000 Americans, and pay taxes to many layers of government that are now denying them help amid the economic lockdown.
The Paycheck Protection Program President Trump signed into law March 27th offers small businesses funds to pay up-to-eight weeks of payroll costs including benefits, Implemented by the Small Business Administration (SBA), the funds can also be used to pay interest on mortgages, rent, and utilities. The program plans to pay out $349 billion to small businesses that must go toward job retention and certain other expenses.
In addition, small businesses with fewer than 500 employees are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses currently experiencing a temporary loss of revenue.
Despite medical marijuana being legal in 33 states, 11 of which legalized recreational marijuana, the federal government considers the selling of cannabis to be illegal. But that doesn’t it stop it from collecting taxes on sales of marijuana. In 2018, the U.S. cannabis market was valued at $11.3 billion, according to Grand View Research.
“Businesses engaged in any illegal activity,” are ineligible for SBA loans in normal times. Last year, the SBA reiterated that direct marijuana businesses, those that “touch the plant” are ineligible. It also said indirect marijuana businesses “which derive any of its gross revenue for the previous year from sales to Direct Marijuana Businesses” are ineligible, examples include testing services, sellers of lights and hydroponic equipment, businesses that sell smoking devices, and providers of services, such as law firms, accountants or policy consultants.
“There’s a misconception that cannabis businesses are well suited for this [lockdown], but a lot of these businesses won’t survive,” said Shawn Hauser, Partner and Chair of the Hemp & Cannabinoid Practice Group at Denver law firm Vicente Sederberg. “They’ve made progress to now be considered essential businesses, but they’re not treated the same as other essential businesses.”
“These companies have been battered from not getting financial services. They can’t get the relief loans that other businesses rely on,” said Hauser “They don’t have the basic life jackets that every one else has.”
Like other businesses in the lockdown, cannabis dispensaries have seen sales drop, after being forced to use curbside service, with most states not allowing delivery.
“We’re still operating, but topline revenue is down anywhere from 50% to 70%. We’re trying to preserve jobs,” said Derek Peterson, founder and chairman of Terra Tech (OTCQX:TRTC), a cannabis producer in Irvine, Calif. Terra Tech has so far laid off 25% of its workforce.
In addition to federal taxes, these companies are subject to state and local taxes, like any other business. However, unlike other businesses, cannabis companies are not allowed to make business deductions, such as paper, computers, and attorneys. Ironically, cannabis companies are allowed one deduction, the cost of goods sold. That means the Feds let firms deduct the cost of cultivating the plants, but not the costs to run the business.
“Then layer on special purposes taxes that can range up to 20% of gross sales. Our effective tax rates are off the charts,” said Peterson. He added that if he couldn’t get help from the federal government, cannabis companies should at least get help from state and local government’s that have been the biggest beneficiaries of the industry.
“California has benefited for 20 years from this industry,” he said. “We need support from somebody that’s been cashing our checks for the last several years.”
Two weeks ago 34 members of Congress wrote to leaders of the House of Representatives to include aid for cannabis companies in future relief bills. Last week, Reps. Earl Blumenauer (D-Ore.) and Ed Perlmutter (D-Colo.) introduced a bill in the House to make cannabis businesses eligible for federal relief. Also ten senators, including Elizabeth Warren (D-Mass.), Bernie Sanders (I-Vt.), and Kamala Harris (D-Calif.) wrote to Sen. Majority Leader Mitch McConnell (R-Ky.) asking him to include legal cannabis businesses in any future relief bills.