The Impact of the COVID-19 Outbreak on the Cannabis Industry in the U.S.

By April 9, 2020 July 23rd, 2020 Cannabis, COVID-19 Insights
COVID-19 and Cannabis

“Our supervisor came into the break room and said he just sold $1,500 worth of edibles to one customer.” – worker at a Southern California-based dispensary, on the recent surge in cannabis sales since the beginning of March.

In the earlier weeks of the coronavirus pandemic in the United States, much was made about the rise of panic buying of essential items like toilet paper, food, and hand sanitizer. But one other good flew off the shelves as well – marijuana. Hundreds of dispensaries across the country are experiencing an uptick in sales since the beginning of the COVID-19 outbreak.

As many industries face extreme hardships due to the measures being taken to prevent the spread of the novel coronavirus, the cannabis industry is having a breakthrough moment.

How has the coronavirus outbreak impacted the cannabis industry?

As the concern and threat of the coronavirus percolates through communities, the cannabis industry appears to be thriving. One of the most important factors for marijuana businesses is the designation by state and local government authorities, including Los Angeles County and San Francisco, as “essential.” With exemption from mandated “stay-at-home” closures and similar orders, surging sales, congressional support, and recognition for efforts to help fight the spread of the virus, the cannabis industry is having its moment.

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Recognition as “essential” and mainstream

As government authorities began to issue city-, county-, and even state-wide shutdowns of any business not classified as “essential,” there was concern whether marijuana dispensaries and delivery services would fit the bill. Initially, some cities, like San Francisco and Denver, left marijuana businesses off of the list. But then, the public revolted in the name of public health. In San Francisco, it took only one day for the Mayor to adjust the city’s public health order and add dispensaries and cannabis deliveries to the list of “essential” businesses.

In state after state, governors and public health officials deemed cannabis businesses as “essential” operations. Now, nearly all of the 33 states with legal medical or recreational markets classify marijuana businesses as an “essential service,” allowing them to remain open even as much of the retail economy shutters.

Marijuana shops are essentially being treated the same as pharmacies, reflecting a dramatic shift in cultural perceptions about the drug over the last decade. In fact, a survey conducted by YouGov posed the question: “Do you believe medical marijuana dispensaries should or should not be considered essential services?” 53% of respondents said yes. The overall trend reflects the mainstreaming of marijuana in U.S. society, with state and local governments increasingly recognizing the value and benefits of medicinal marijuana.

To find out more about how each state is ensuring legal marijuana access during the COVID-19 outbreak, you can check out a list here.

Sales took off

Even before government-ordered shutdowns were common, cannabis dispensaries experienced a significant rise in sales and new customers. On March 17, the Orange County Register noted that some dispensaries, like Bud and Bloom, saw overall sales increase by 30% in one week. The owners also commented on the increase in new customers and the amounts each customer spent in one visit. But it was not just the dispensaries in California enjoying sales increases. For example, Oakland-based marijuana delivery service saw their sales triple in a week.

Then cannabis dispensaries and services received coveted recognition as an “essential” business and the sales only continued to grow.

Marijuana sales are booming, with some states seeing 20% spikes in sales as anxious Americans prepare to hunker down in their homes for the next several weeks (if not months). To meet the increase in demand, sellers are staffing up, hiring laid-off workers from other industries. And in the midst of a historic market meltdown, the stock prices of MedMen Enterprises and Tilray, two of the largest marijuana companies in North America, doubled over the course of one week.

Support from those in power

Through the crisis, state representatives and lawmakers are stepping up to advocate for keeping recreational marijuana shops open during the COVID-19 outbreak.

For example, Rep. Katherine Clark (D-MA) raised concern that military veterans could be especially impacted by her home state’s decision to shut down the recreational cannabis shops amid the coronavirus crisis. She called on Massachusetts Governor Charlie Baker to reopen adult-use shops so that veterans can continue to obtain marijuana products more readily and without fear of being penalized.

Similarly, it was Illinois State Representative Sonya Harper who introduced a bill in her home state to allow cannabis dispensaries to deliver.

In California, there has been support from the local level through the U.S. Senate. For instance, some GOP lawmakers, like Assembly Republican Leader Marie Waldron of Escondido sided with Governor Gavin Newsom’s decision to keep cannabis stores operating during the pandemic. She explained, “I think it’s also important to keep as many businesses open as possible, as long as that doesn’t interfere with virus mitigation and employees and customers are protected.”

While not a strong stance advocating for cannabis shops specifically, the comment does show support for the governor’s action. At the Senatorial level, Senator Kamala Harris (D-CA) was one of 11 senators to co-sign a letter to leadership of the Appropriations Committee, calling for the allowance of marijuana businesses to access federal loan programs – specifically the Loan Guarantee Program, Disaster Assistance Program and Microloan Program – during this time of crisis.

Beyond the call for keeping the shops open, other congressional leaders have recognized the positive contributions of the marijuana and hemp industries to help fight the coronavirus pandemic.

Sen. Cory Gardner (R-CO), in referencing his home state, explained, “In a uniquely Colorado way, you have hemp businesses that are now producing cotton swabs for medical needs…We have protective equipment that’s being donated…by the marijuana industry.” Praise like that from Sen. Gardner only serves to paint the cannabis industry in a more positive light and may possibly lend itself to changing some minds in the future.

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How has the cannabis industry reacted to the COVID-19 pandemic?

Like many businesses, those in cannabis were called upon to make adjustments to their retail operations in order to help combat the spread of COVID-19. The response by the industry has helped foster continued success during a time of great panic.

As many have had to do, dispensaries made changes to their store operations and postponed upcoming events. However, they were also quick to implement strategies to get people into the stores and ordering product.

For example, in Orange County, California a dispensary had to cancel its free bus services that typically brought residents from a local senior community into the stores. Not to admit defeat though, the dispensary instituted a “senior hour” – much like many grocery stores – when only seniors are allowed in the shop. Other dispensaries are following protocol by installing hand sanitizer stations and limiting the number of customers in the store at any given time.

One significant strategy taking off is the launch of curbside pickup and delivery. Some states, including California, have temporarily relaxed some guidelines such as those that dictate where marijuana sales can take place. By doing so, governments opened the door for curbside and delivery services.

For instance, in Illinois, the state will now “permit the dispensary to sell medical cannabis on the dispensary’s property or on a public walkway or curb adjacent to the dispensary”. Michigan followed suit, also allowing curbside delivery to customers and home delivery to medical marijuana patients.

The ability to incorporate curbside pickup and delivery provides a significant connection in what otherwise may have been a broken supply chain. As such, the legal capacity to offer these services lends itself to helping the cannabis industry weather the COVID-19 storm.

Cannabis companies have also had to adjust to the loss of a number of live events. But the loss has sparked creativity throughout the industry. Where companies originally planned to host elaborate month-long celebrations around 4/20, they have had to pivot. Some cannabis businesses intend to celebrate the “holiday” with virtual parties and concerts; giveaways of cannabis accessories and swag; discounts on products; and utilizing social media influencers to spread their messages on Instagram and Facebook.

Much remains to be seen as to how the COVID-19 crisis will impact the industry as a whole, but we can start to make educated predictions. For instance, the dubbing of cannabis businesses as “essential” is incredibly significant. Not only does the title of “essential” convey the importance of these businesses, but it propels it into the mainstream and perhaps lessens the negative connotation that some consumers associate with the word “cannabis.”

Another component to consider is the rise in delivery services and curbside pickup. While state officials have allowed these services “temporarily” it will be interesting to see if the success of the services leads to any legislative changes in the future.

Finally, many companies have noted a change in buying habits as a result of the outbreak. Mainly, the shift to edible products and away from those that require smoking. One delivery company claim said that since March 9, edible sales have risen from 15% to 30%, while the sale of the plant itself decreased from 25% to 17%. Vape sales have also diminished from 33% to 25%. Will this be a lasting trend as the fear of coronavirus and other respiratory illnesses is sure to linger?

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What federal challenges exist for the cannabis industry during this crisis?

The burgeoning industry does face some stiff financial headwinds: The CARES Act and its $2.2 trillion stimulus package likely shuts out cannabis companies from taking advantage of its benefits, reflecting the continued federal illegality of marijuana. Prior to the recent boom in sales, the industry had been in financial turmoil, with many companies laying off workers and dismissing acquisitions as cash ran dry.

Add to this the array of obstacles not seen in more traditional businesses including sky high tax burdens due to Section 280E of the tax code prohibiting cannabis businesses from claiming standard business deductions, and the state-by-state nature of the industry where businesses have to replicate their operations in every new state rather than take advantage of economies of scale and shipping products across state lines.

This is then exacerbated by the lack of access to commercial loans and institutional capital. Without federal legality cannabis businesses already struggle with obtaining standard insurance plans and cannot rely on federal bankruptcy protections should the likely recession begin to impact them.

The CARES Act and Marijuana Businesses

With the CARES Act providing economic relief for businesses, many questions have emerged regarding those operating in the cannabis space. Most likely, whether a company may take advantage of the federally-funded or sponsored relief programs may come down to whether they are either Cannabis Tier 1 (i.e., flower-touching) or “ancillary” services which may not necessarily be characterized as “engaged in the trafficking of a controlled substance under the Controlled Substances Act.”

It is common belief that due to marijuana’s presence on the Schedule I list under the CSA, cannabis businesses are not eligible to participate in the Paycheck Protection Program (PPP) intended to help small businesses survive the current economic crisis. Because federal law still prohibits banks from supporting marijuana businesses, financial institutions remain hesitant to service the industry. As a result, even if cannabis-related businesses technically qualify to receive federal assistance under the PPP, they will face an uphill battle in obtaining such loans.

The conflict between state and federal law as it pertains to the legality of marijuana-related businesses continues to prevent the cannabis sector (as opposed to CBD businesses, which are federally legal pursuant to the 2018 Farm Bill) from receiving assistance from the U.S. Small Business Administration (SBA) under the Coronavirus Preparedness and Response Supplemental Appropriations Act. Thus, those involved in the marijuana business are shut out from participating in the Paycheck Protection Program (PPP), as it is administered by the SBA. In light of COVID-19, the SBA revised its “Disaster Loan” process to provide low-interest “disaster loans” to eligible small businesses. The problem, however, is that the SBA still refuses to assist state-legal marijuana businesses in need of small business loans. Specifically, in a 2018 Policy Notice, the SBA reaffirmed that marijuana businesses – and even some non-“plant-touching” firms who service the cannabis industry – cannot receive aid in the form of federally backed loans.

Although marijuana-related businesses face certain federal challenges, like not being eligible for the PPP because the SBA cannot issue loans to businesses that are federally illegal in the United States, the industry is perhaps better positioned than most mainstream retail businesses because it provides an essential health care service. Not only are dispensaries and other services allowed to continue their operations, but state and local governments are going out of their way to advocate for safe transaction options like delivery and curbside pickup services. The proof is in the numbers as cannabis sales surge and they continue to hire those laid off from other industries.

Cannabis and Potential State Relief during COVID-19

While the SBA’s small business loans may not be available to cannabis operators, there may be hope at the state level. More specifically, it may be possible to secure loans through state and local grants. This would be especially relevant in states which have deemed cannabis businesses as “essential.”

You have to admit, it would be hard for them to say that in the face of a pandemic you are “essential” and can remain open but cannot qualify for a state-based loan program. This may be a viable place to start if you are in need of financial assistance due to any coronavirus-related effects on your business.

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How can Squar Milner help?

Squar Milner takes pride in being a business leader working with those in the cannabis industry to handle all of their accounting needs. We have history working with cannabis clients and understand the uniqueness of the industry and the depths of the concerns without federal protections. So now in this time of crisis, we are ready to step up for you.

We are here to answer any questions you may have as you navigate changing state and local laws and the added complexities to your already-complicated tax process. Please reach out to ask questions and develop insightful strategies for the short-term and long-term needs of your business.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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