Coronavirus Buzzkill: CARES Act Overlooks Cannabis

APRIL 17, 2020

The CARES Act was enacted with much fanfare as a $2T boost to the U.S. economy devastated by the COVID-19 pandemic. In fact, the federal stimulus package—which includes individual recovery rebates, targeted lending to businesses, and tax credits aimed at the preservation of employment—has been a welcome lifeline for many, though there is at least one industry that the CARES Act leaves out in the cold: legal cannabis.

PPP Loans Are Not an Option

Those working in the legal cannabis space adversely impacted by the coronavirus outbreak must look to state governments for any necessary relief (either financial or regulatory), all due to the fact that the sale and distribution of cannabis still violates federal law. Consider this: many of the lending programs authorized under the CARES Act are administered by the Small Business Administration, yet pursuant to recently released SBA guidance, the agency “does not provide financial assistance to . . . marijuana growers and dispensers, businesses that sell cannabis products, etc., even if the business is legal under local or state law.”

The SBA’s stance is result of the continued Schedule I status of cannabis under the Controlled Substances Act (CSA). As such cannabis businesses are ineligible to participate in the Paycheck Protection Program, which is intended to keep small businesses afloat during the current COVID-19 crisis. Not only are PPP loans unavailable to legal cannabis operators during the current economic downturn, but ordinary bank loans are as well given federal banking laws that limit the ability of federally insured financial institutions to lend to such businesses.

Indirect beneficiaries of the cannabis business (e.g., companies that sell equipment or provide infrastructure to the industry) are also barred from obtaining CARES Act relief. The SBA has classified such entities as “indirect marijuana businesses,” many of which are feeling the economic consequences of the pandemic, without any federal programs to rely upon.

Forget About Tax Breaks Too

The CARES Act provides a payroll tax credit, but even this benefit of the legislation is likely inaccessible to employers in the legal cannabis sector. Pursuant to federal tax law, no deduction or credit is allowed for any amount paid or incurred in association with the trafficking in controlled substances within the meaning of Schedule I and II of the CSA. Consequently, there would be a significant risk to legal cannabis businesses that elect take the payroll tax credit under the CARES Act (absent future favorable guidance by the Internal Revenue Service). In the event such a business claimed a payroll tax credit that was successfully challenged, the IRS could impose interest and penalty charges.

Fortunately and notwithstanding all of the foregoing, the news is not all bad.

States to the Rescue

Seven states—California, Colorado, Illinois, Maine, Massachusetts, Nevada, and Washington, in which the sale of medical and recreational cannabis is legal—have designated legal cannabis as an essential business. As such, in these jurisdictions, where other businesses have been shuttered pursuant to stay-at-home and similar orders, legal cannabis operations are authorized (perhaps with a wink and a nod to federal prohibitions) to continue generating revenue, be it at full or limited capacity. Likewise, most states that have legalized medical marijuana are permitting medical cannabis dispensaries to remain open these days as well, though Vermont, Michigan, Oregon, and Alaska—where cannabis has been legalized for all purposes— have not deemed dispensaries as essential.

Even in states where the legal cannabis business is considered essential, there are, of course, some temporary limitations on operations in light of social distancing concerns. By way of example, Colorado requires cannabis dispensaries to restrict the number of people inside their stores, and encourages pre-orders and curbside pickup. Illinois is allowing curbside pickup too, and for its part, Nevada has closed storefronts but has authorized deliveries.

Federal Help May Be on the Horizon

Cannabis lobbying groups have urged governors to provide loans at the state level and to push their states’ congressional delegations to include legal cannabis businesses in the next federal relief package. Toward that end, there are rumors that Speaker Nancy Pelosi (D-Calif.) and Congressman Ed Perlmutter (D-Colo.) are devising a workaround for allowing cannabis companies to receive SBA loans. According to a representative of the lobbying firm Brownstein Hyatt Farber Schreck, “There is a very robust conversation happening in the House right now about how to help these companies going forward.”

So perhaps on the federal assistance front, there may be some light at the end of the tunnel for legal cannabis businesses. In the meantime, these companies can lean on the activity at the state level for some much-needed support.

We are working diligently to keep our clients up to date on coronavirus-related developments. Nevertheless, these developments are changing daily and, in some cases even hourly, so it is important that you make sure you are dealing with the most current information. That being said, this alert is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance and counsel regarding any specific concern or situation.