Quick solutions that would enable legal cannabis-related businesses to participate in federal coronavirus financial relief efforts
An alternative to enacting cannabis reform legislation
Guest post by Darryl K. Henderson, J.D. of Keith Consulting Group
Introduction:
U.S. states collected about $1.6 billion in legal cannabis sales and excise taxes in 2019.
The federal government will collect approximately $1.7 billion in 2019 income taxes from the legal cannabis industry, largely driven by IRC Section 280E.
Legal cannabis has been the fastest growing U.S. industry, with many businesses employing less than 500 employees.
Legal cannabis sales have been at a record high. Like beer, wine, liquor, cigarettes and cigars, cannabis appears recession-resistant to a point, helping consumers with relaxation amid the storms of reality. Unlike those other products, however, cannabis offers medicinal and health wellness benefits to consumers.
But not all legal cannabis businesses are thriving within the pandemic. We must ensure that legitimate legal cannabis businesses (and their employees) survive COVID-19. That can be done by providing financial stimulus to the legal cannabis industry, as has been done for other industries.
The Problem:
State-regulated cannabis businesses and ancillary businesses have been largely excluded from the financial benefits of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Families First Coronavirus Response Act (FFCRA), including the recent expanded relief package.
The exclusions are occurring despite the fact that numerous state and local governments have classified businesses selling legal cannabis as “essential services.”
(Hemp businesses are not excluded from the COVID-19 federal stimulus packages because of the 2018 Farm Bill that legalized hemp nationwide.)
Objectives:
As an alternative to enacting cannabis reform legislation, what if Congress moved quickly and simply directed the Small Business Administration (SBA), Internal Revenue Service (IRS) and Department of Labor (DOL) to make policy changes that lessen the financial burdens on legal cannabis and ancillary service businesses and the people employed by those firms?
Let’s be clear about the objectives:
Objective #1: Reduce the tax burden on industry and ancillary businesses so they can offset the expenses and financial hardships caused by COVID-19.
Objective #2: Carve out exceptions under the CARES Act to enable ancillary businesses to be eligible for some of the benefits.
Objective #3: Move expeditiously and avoid the inertia of trying to enact cannabis reform legislation.
Quick Solutions:
Quick Solution #1: Have the IRS suspend the application of Section 280E, to allow state-regulated cannabis businesses, along with ancillary businesses, to be eligible for the benefits provided under the FFCRA. (280E denies the ability of cannabis-related businesses to deduct “operating expenses.” Instead, federal income taxes are paid on “gross profit” after subtracting “COGS” from “revenue.”)
The FFCRA benefits include tax credits for private employers with fewer than 500 employees to offset the cost of paying employees sick leave and expanded family and medical leave related to COVID-19.
Short of authorizing tax credits for legal cannabis-related businesses, Congress can direct the IRS to temporarily or permanently exclude those businesses from 280E for 2019, and perhaps 2020 and 2021.
The effective federal income tax rate for legal cannabis-related businesses would drop from approximately 60% of sales to 36% of sales. That would be an estimated tax savings of $685 million for 2019, based upon industry sales of $13.6 billion.
Also, the DOL can allow medical cannabis facilities to qualify as “health care providers” under the FFCRA and “opt-out” of providing paid leave to employees.
Quick Solution #2: Have the SBA rescind its policy to exclude ancillary businesses which have “indirect” dealings with legal cannabis businesses from eligibility for the benefits provided under the CARES Act.
The SBA issued a policy notice in 2018 that defined the “direct” and “indirect” marijuana businesses ineligible for SBA loans. This position has been reiterated in the rules for receiving benefits under the CARES Act.
The SBA has defined an “indirect marijuana business” as a business that derived any of its gross revenue for the previous year from sales to direct marijuana businesses or services.
Examples include businesses that provide services (e.g., advise, counsel, testing), or sell grow lights or hydroponic equipment to one or more direct marijuana businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended for the marijuana business.
The SBA can rescind this policy.
Quick Solution #3: Have the IRS authorize state-regulated cannabis businesses, as well as ancillary businesses serving the industry, to be eligible to defer payroll taxes.
The CARES Act provides for tax credits and tax deferrals for eligible employers, as follows:
- Provides an employee retention payroll tax credit of up to $5,000 per employee for wages paid by eligible employers whose business has been fully or partially suspended due to government mandated restrictions on commerce, travel and group meetings or has experienced a significant decline in quarterly gross receipts.
- Allows a deferral of payroll taxes for 2020, payable in two equal installments, at the end of 2021 and at the end of 2022. Said differently, half of the 2020 payroll taxes will be due Dec. 31, 2021 and the other half will be due Dec. 31, 2022. The intent is to provide employers with immediate cash by eliminating the need to make immediate payroll tax deposits.
The Department of Treasury and the IRS have jurisdiction over tax credits and tax deferrals under the CARES Act.
A tax deferral is not a tax deduction or credit. As such, the IRS can issue a statement authorizing legal cannabis businesses to be eligible to defer payroll taxes for 2020 until the end of 2021 and the end of 2022.
Quick Solution #4: Have the DOL instruct or strongly encourage – whatever is appropriate – states to ensure that people who have been terminated from state-regulated cannabis companies, as well as ancillary businesses serving the industry, be eligible for state unemployment benefits under the same terms and conditions as people who worked in other industries.
This can be the easiest quick fix put on the table. Just do it.
Conclusion:
The state-regulated cannabis industry had $13.6 billion in sales in 2019, has had over 243,000 employees and over 42,000 businesses – most of which employ less than 500 people. Nevertheless, the industry has been largely snuffed out of the financial stimulus packages to combat COVID-19.
The language of a letter recently written by 34 U.S. House members calling for inclusion of state-regulated cannabis businesses in federal stimulus legislation (albeit unsuccessfully) serves as an apt conclusion to this commentary:
“The COVID-19 outbreak is no time to permit federal policy to stand in the way of the reality that … state-legal cannabis businesses are sources of economic growth and financial stability for thousands of workers and families, and need our support.”
About the author:
Darryl K. Henderson, J.D. is the president of Keith Consulting Group (KCG), a business management consulting firm that delivers advisory, project management and staff augmentation services. He has amassed a broad range of knowledge and skills in a variety of roles, including HR executive, chief diversity officer, chief employment compliance officer, operations executive, executive coach, entrepreneur, business management consultant, and employment and commercial lawyer. Darryl has worked with businesses within the biotech, financial services, technology, fuel, professional services, retail, grocery, restaurant, and U.S. legal cannabis and hemp industries. Globally, he has served businesses located in the U.S., Mexico, Canada, Italy, Ireland, and the UK. For six years, Darryl his served as an Executive Coach in the University of North Carolina at Chapel Hill Kenan-Flagler Business School Leadership Capstone Program, where he coaches 2nd year MBA students to be more effective leaders, managers and team members. He earned a Juris Doctorate degree from the University of Georgia School of Law and a Bachelor of Arts in Economics degree from Emory University.