COVID-19 Tax Relief for Cannabis Businesses May Come at the State Level

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PHOTO: Viacheslav Lopatin/ Shutterstock.com.

LOS ANGELES – A coalition of advocacy groups last week requested California Governor Gavin Newsom grant temporary tax relief to the state’s legal cannabis businesses, especially due to ongoing economic uncertainty created by the coronavirus crisis.

Cannabis trade association Southern California Coalition (SCC) was joined by the California State Conference of the NAACP and the Los Angeles Metropolitan Churches in the letter to Gov. Newsom.

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News agency Associated Press reported other organizations that signed on included Americans for Safe Access, Black Women’s Cannabis Council, the California Minority Alliance, and the National Diversity and Inclusion Cannabis Alliance.

“As COVID-19 continues to disproportionately impact communities of color, our social equity businesses and our customers will be impacted even more,” the letter reportedly said.

The coalition pointed out that cannabis industry businesses have—despite being designated an “essential service” in California—no access to federal pandemic relief funds or programs. They described legal cannabis businesses that pay ever-increasing fees and taxes but, due to federal prohibition, cannot access banks for emergency loans or relief programs.

People of color also own cannabis operations, located in diverse communities and in areas that have suffered disproportionately from the decades-long war on drugs, the request noted. Those businesses create much-needed jobs, often employing those in marginalized and diverse populations.

The coalition’s request went on to caution state officials that rising prices, due to recent tax increases, will encourage consumers—already financially hard hit by the pandemic crisis—to access illegal and unlicensed vendors, who do not pay licensing fees or taxes.

Enforcing laws against the state’s illicit market has challenged California regulators since implementation of recreational cannabis legalization.

In mid-March, when the emerging pandemic started a domino effect of U.S. states’ implementation of “safe at home” orders, the SCC called out the California Department of Tax and Fee Administration (CDTFA) for increased excise tax rates, as well as increased tax rates on cultivators. The increases were implemented on January 1, 2020.

“[The] decision by CDTFA to raise taxes on California’s emerging marketplace is deeply concerning. This shortsighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive. They are being heavily undercut by the illicit market,” SCC said in a release, at the time.

Some tax relief is available to legal cannabis businesses in the form of deferrals and extended deadlines. Companies should to speak to their tax professionals regarding tax strategies.

During the previous attempt, in March, to pressure Gov. Newsom into action against increased excise taxes, the Southern California Coalition said, “Wretched market conditions, much of it created by the exorbitant excise taxation calculations, which were always artificially high and for which no deductions are allowed, argue for the excise tax to be reduced, not increased by 20 percent.”

“California taxpayers and employers have been offered extensions, penalty waivers, and other forms of tax relief in the wake of the COVID-19 coronavirus outbreak,” said a blog post on the tax law firm CohnReznick website.

“Most recently, on April 2, Gov. Gavin Newsom announced a 12-month deferral of sales and use tax up to $50,000 for businesses with less than $5 million in annual taxable sales,” the post continued, and provided a full list of emergency tax relief options provided by various state agencies or executive order.

Cannabis firm Wykowski Law issued a report entitled, Covid-19 Strategies and Cannabis, and also gave links to CDTFA FAQs and deferral schedules. The report suggested cannabis businesses might be able to take advantage of these tax relief options:

  • “Federal Payroll Contribution Deferral Programs—Cannabis employers who do not benefit from the Payroll Protection Program loan forgiveness get to defer their portion of FICA taxes (6.2 percent) from March 27, 2020 to December 31, 2020, to two later dates: half at December 31, 2021 and the remainder at December 31, 2022. In addition, the EDD is also accepting applications to defer state payroll reports and/or to deposit state payroll taxes for up to 60 days without penalty or interest.”
  • “State Sales/Use Tax Deferral Programs—CDTFA has created a special program that allows for businesses with less than $5 million in annual sales to receive deferrals of up to $50,000 in sales or use taxes. The deferral is interest free and allows the deferred amount to be paid over a 12-month period. Qualifying cannabis businesses can apply online through the CDTFA’s website.”
  • “Employer Disaster Relief Payments to Employees—Employers may decide to provide disaster relief payments to employees during this time. While such payments may not be deductible to the employer, the payments themselves may not be considered taxable income to the employee, depending on certain circumstances. Doing so may provide certain relief for employees undergoing economic hardship. A tax professional should be consulted as to what benefits could be provided to ensure that such payments are not taxable to the individual.”

There has been a continued outcry from industry advocates and organizations, who argue that while cannabis businesses generate millions in tax revenue and licensing fees, they are prevented from accessing federal relief during an emergency. Despite reported increases in retail sales, some legal cannabis operations have suffered the same losses due to the crisis as have been experienced by other storefront retailers.

In Monterey County, California, Supervisor Chris Lopez on April 14 asked the County Board of Supervisors to delay April tax payments for local cannabis operations until June 1, as well as for a delay on excise tax increases, affecting cultivators, scheduled to take effect on July 1.

“The purpose of this referral is to assist Monterey County-based cannabis businesses in weathering the COVID-19 economic downturn and to help keep people employed at this critical juncture for our local economy,” Lopez wrote in the request.

“I ask that staff bring to the board next week options to defer the April tax payments due until June. This is not a proposal for forgiveness but rather a delay until June when two quarters will be due. This is proposed in order to help these businesses that are not eligible for federal assistance or traditional banking relief to survive the crisis,” he continued, according to MontereyCountyWeekly.com.

Market conditions vary from state-to-state; in Alaska, Kelly Mazzei, excise tax manager for the Alaska Department of Revenue told the Juneau Empire in April, “We’re taking on new taxpayers all the time. Lots of new cultivation facility licenses are being approved, same thing for production and retail. There’s still licensing being approved, we’re definitely seeing our tax revenue increase.”

The Juneau Empire reported that Alaska Governor Mike Dunleavy has lightened some state transportation restrictions, to help the industry supply line keep rolling, in light of pandemic restrictions.

“We seem to be doing okay. We have other issues that we struggle with—no relief funding, no banking. We’re used to fighting hard and we’re used to being scrappy and resourceful,” President of the Alaska Marijuana Industry Association Lacy Wilcox said.

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