As COVID-19 takes its toll on human life and health, it also is upending economies worldwide. During a four-week period beginning March 23, more than 22 million people in the U.S. filed for unemployment insurance—a record, by far. The number is sure to keep climbing for weeks, if not months.
Many businesses, from restaurants to yoga studios to dentists’ offices have either closed entirely or offer a fraction of the goods and services they depend upon to survive the economic slowdown. It is very likely that the U.S. is about to experience a larger concentration of bankruptcies in a shorter period of time than ever before.
Most businesses in the country can take advantage of some form of bankruptcy to restructure and/or seek relief from creditors. Unfortunately, as bankruptcy is a federal matter, and the federal government considers cannabis companies illegal, declaring bankruptcy is not an option for cannabis businesses. For those companies that just can’t pull through, it’s a total loss.
That’s bad enough, but cannabis business owners have known this fact for a long time. Unfortunately, COVID-19 and the federal government’s response to the pandemic has created some additional unfair and discriminatory conditions for the industry.
Families First, Cannabis Last
On March 18, the Families First Coronavirus Response Act (FFCRA) became law. The FFCRA states that if a company has fewer than 500 employees, it must offer paid sick leave to any employee who contracts coronavirus, or to an employee who has a dependent who has the disease (although companies with fewer than 50 employees can apply for an exemption). The FFCRA calls for companies to pay for such sick leave by utilizing the funds they retain for federal employment taxes, including federal income tax withheld from employees and the companies’ and their employees’ share of social security and Medicare taxes, that would normally be paid to the Internal Revenue Service (IRS). It also requires the IRS to grant tax credits covering any funds paid to sick employees. It even accounts for companies that do not have enough funds set aside to pay sick employees by allowing employers to apply for an advance on the tax credits.
Internal Revenue Code section 280E prohibits companies “trafficking in controlled substances” from taking any regular tax deductions. Cannabis remains a controlled substance under federal law.
IRC 280E also prohibits those companies from utilizing tax credits. So, as small businesses, cannabis companies with more than 50 employees will be required to pay for sick leave for employees with coronavirus and for employees who miss work because they are taking care of family members who are fighting the virus. But they will be unable to utilize the tax credits intended to compensate small businesses for such payments.
Compliance with the FFCRA is governed by the Family and Medical Leave Act of 1993, which means that if a company fails to pay the sick leave of an employee with coronavirus, it invites civil lawsuits and administrative enforcement.
The pain for cannabis companies doesn’t stop there. The $2-trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act that President Trump signed into law on March 27 offers several ways for small businesses to apply for and receive assistance from the federal government. All of the avenues are similar in that the Small Business Administration (SBA) is the agency in charge of dispersing the CARES Act funds. However, cannabis businesses, most of which would be classified as small businesses, are unable to make use of such funds because the SBA, a U.S. government agency, has set a policy that any “businesses engaged in any activity that is illegal under federal, state or local law are ineligible for SBA financial assistance.” .
Infuriatingly, this restriction is not limited to cannabis businesses. In 2018, the SBA issued guidance stating that the agency would not work with cannabis-adjacent businesses, like software companies, marketing agencies, and companies that sell things like product packaging. If such businesses work primarily with cannabis companies, even if they do not handle cannabis, they too are prohibited from applying for SBA loans. Which means they will be unable to receive relief from the CARES Act.
The Case for Clemency
To date, most states with some form of legal cannabis have deemed cannabis sales “essential,” and thus able to continue doing business. Excise and sales taxes on cannabis during 2019 contributed $1.9 billion in revenue to the 33 states plus the District of Columbia that permit some form of legal retail access. As of last month, the cannabis industry employed 243,000 licensed employees nationwide, a jump of 15 percent compared to a year earlier. Meanwhile, people employed in adjacent businesses, like software companies, marketing agencies and soil companies, add many more jobs to the employment rolls.
Cannabis is offering relief to patients around the country. The industry is attracting brilliant entrepreneurs, building new businesses, and leasing millions of square feet of real estate. People are gaining new skills in fields like hydroponics, plant genetics, manufacturing, food production, HVAC and more. State and local governments are happily collecting enormous tax revenues, which they are using to build roads and bridges, expand public health services, and buttress law enforcement, from an industry that didn’t exist 10 years ago.
If it were any other industry, the idea of not being able to file for bankruptcy, being left out of a historic infrastructure bill like the CARES act, or being forced to pay sick leave without being permitted to ease that burden with tax credits would be absurd.
It is time for the federal government to recognize the cannabis industry for what it is—a powerful force for health and wealth across the nation. If nothing else, the federal government should give cannabis companies access to vital business tools like bankruptcy protection, SBA loans, and the ability to enjoy tax deductions for business expenses.
Dave Rodman is the founder and managing partner of The Rodman Law Group, a full-service law firm based in Denver. Note: This article contains opinions and does not constitute legal advice.