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Cannabis Deemed Essential; Faces Uncertain Future

May 14, 2020

The current COVID-19 pandemic has led to an interesting dichotomy for the legal cannabis industry: A significant number of states have deemed cannabis businesses to be essential, yet the businesses are unable to participate in any of the federal coronavirus relief programs.

Two of the largest legal cannabis markets, California and Colorado, have both deemed cannabis businesses to be essential and have issued rules which allow these businesses to continue operations while maintaining social distancing guidelines. New York, New Jersey, Connecticut, and Pennsylvania have also made medical cannabis businesses essential and exempt from the state ‘stay-at-home’ orders. Governor Baker of Massachusetts sent mixed messages, deeming medical cannabis businesses essential, but made adult-use cannabis businesses close.

Cannabis Industry Pushes for Federal Relief

The SBA, which administers the Paycheck Protection Program (PPP), has made it clear that the agency “must not approve loans to Applicants that are engaged in illegal activity under Federal, State, or Local law.”

In a March letter to U.S. House and Senate Leadership, cannabis industry groups urged Congress to allow state-legal cannabis businesses to be eligible for SBA emergency loans. The industry claims that “the ineligibility of cannabis businesses for disaster assistance loans is especially inequitable given that these same cannabis businesses are required to comply with other coronavirus-related measures, such as paid sick leave coverage.”

It is estimated that state-legal cannabis sales were expected to exceed $15 billion in 2020, supporting nearly 250,000 jobs and generating billions in tax revenue for federal and state government. The industry fears that if state-legal cannabis businesses fail, many patients and customers may be forced to turn to the illicit market.

With the industry largely unbankable, and no PPP relief available, cannabis businesses are forced to operate primarily in cash, as opposed to contactless payment, which could pose a significant health risk in a COVID-19 environment. A provision was recently added to a new stimulus bill announced by U.S. House of Representative Democrats which would allow banks to service state legal cannabis businesses without concern of federal reprisals. The SAFE (Secure and Fair Enforcement) Banking Act, which passed the House last September before stalling in the Senate, has been included in its entirety in the new bill. 

The Path to Legalization is Uncertain but Still Possible

Before the COVID-19 pandemic, cannabis legalization efforts were gaining momentum in certain quarters.  Progress has stalled on most fronts.

In New York, a potential multi-billion dollar adult-use cannabis market, Governor Cuomo has said that it is unlikely adult-use legalization efforts will move forward this year. Prior to coronavirus, Cuomo had made adult-use legislation a top priority in 2020 and wanted to include it in his budget for the state’s fiscal year starting April 1. Cuomo and the legislature instead turned their attention to the higher priority of fighting the coronavirus and adult-use legislation was left out of the budget. Though unlikely, there is hope the legislature may pass an adult-use bill in a separate legislative session later this year.

Adult-use legalization efforts in Connecticut are also unlikely in 2020. It could be included in a special session later in the year.

The State House and Senate in Vermont have already approved an adult-use bill, though they disagree on the details. The legislature is trying to work remotely but it is unclear whether the final bill will get done.

New Jersey’s adult-use initiative is already on the ballot for November and it appears that vote will go forward as planned.

In summary, while many cannabis dispensaries have seen a rise in sales, with patients and customers stocking up in anticipation of an extended quarantine, the industry as a whole has struggled to find its footing in the new normal. As always in the cannabis industry, and especially in a COVID-19 environment, the only constant is change.

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Brett Cornell

Brett Cornell is a Tax Senior Manager and a member of the Financial Services Group with tax and accounting experience specializing tax consulting and compliance services for the financial services industry including asset management and fund clients.

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