August 8, 2020

Volume X, Number 221

August 07, 2020

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August 06, 2020

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COVID-19’s Continued Impacts on Cannabis Operators

As the novel coronavirus (COVID or COVID-19) continues to ravage the United States, the cannabis industry is feeling the pandemic’s negative impacts despite an initial spike in sales after cannabis operations were deemed essential under various state “stay-at-home” orders.[1]  This article details the most recent state-level responses activated in California and Illinois.

California

One month after California Governor Gavin Newsom’s proposed budget[2] predicted that California’s legal cannabis industry will face declining sales due to the pandemic-induced recession, California regulators – Bureau of Cannabis Control (Bureau), California Department of Food and Agriculture and California Department of Public Health – implemented a policy giving cannabis businesses the ability to defer the cost of their license renewals by 60 days.  In making this determination, the regulators citied the industry’s inability to access pandemic-related financial assistance from banks or the federal government (PPP, SBA loans, etc.) due to the product’s federally illegal status. The extension applies to cannabis business with licenses that are expiring on or before August 31, 2020.  This deferral can provide significant short-term reprieve as these license fees can be hefty.[3]

This action is in addition to the recent relaxation in certain restrictions on how cannabis firms operate, including deferred license renewal fees and extended deadline for filing first quarter tax returns.  While the applications for fee deferrals were originally only available to operators with licenses expiring by June 30th, deferral applications are now available to license-holders who have not yet renewed their licenses but are set to expire before August 30th.  Under this recent announcement, the state will not refund operators that have already paid submittal fees and will not provide additional extensions for operators previously awarded fee deferral extension.

In order to be considered for license fee deferral relief, licensees must submit a written request for regulatory relief via Bureau Notification and Request Form 27, Section A, noting that the request is due to an “inability to comply due to disaster” and providing details specific to the request in the comment section.

Additionally, purusant to Section 5038 of the Bureau’s regulations, the state agencies are accepting other disaster relief requests from licensees that are unable to comply with regulatory requirements due to COVID.  While, the agencies have not specified what regulations this applies to, the Bureau states the requests must be submitted by the owner or primary contact for the license, and should include the licensee’s name, license number, the specific regulatory requirements for which that licensee is seeking relief, reason for the relief and a detailed description of the licensee’s plans to conduct operations if relief is granted.  A licensee must obtain Bureau approval of such request prior to changing operations to reflect the relief requested.

Moreover, on June 30th, Governor Newsom issued Executive Order N-71-20 (EO N-71-20), extending the expiration date of Medical Marijuana Identification Cards (MMIC) issued pursuant to Health & Safety Code section 11362.71[4] for an additional 60 days.  Under EO N-71-20, MMICs, which would have expired between March 4, 2020 and any day within 120 days from May 19, 2020, will remain valid until September 16, 2020.  Retailers must accept MMICs that have expired on or after March 4th as valid during this extension period.  EO N-71-20 only applies to MMICs issued purusant to Section 11362.71 and not medical cannabis recommendations obtained from a patient’s physician.

Illinois

The Illinois Department of Agriculture (Department), which regulates cannabis grow facilities, was set to award 40 craft grow licenses, 40 infuser licenses and an undetermined amount of transporter licenses on July 1, 2020 as mandated by Illinois’s Cannabis Regulation and Tax Act.  However, COVID has caused Illinois to miss this deadline.  In response to the pandemic, Governor J.B. Pritzker signed Executive Order 2020-45 (EO 2020-45) extending the deadline indefinitely for these licenses.

Illinois also suspended the application deadline for licenses for community colleges to run cannabis-related vocational programs.  Additionally, the state is shelving the requirement for currently licensed cultivators to obtain a transportation license.

EO 2020-45 is not the first time COVID has impacted Illinois’s implementation of its recently enacted adult cannabis use laws.  Prior to this most recent extension, the application deadline for the craft grow, infuser and transport licenses was delayed six weeks, from March 16th  to the end of April.  Then, at the end of April, just days before the state was to issue retail licenses, Governor Pritzker issued Executive Order 2020-34 (EO 2020-34), suspending the requirement that the state agency issue up to 75 “Conditional Adult Use Dispensing Organization Licenses” before May 1, 2020.  EO 2020-34 also suspended the need for a retail agent to obtain an agent identification card prior to beginning work at a dispensary.  To date, those licenses have not been issued and there is no deadline yet for issuance.  Per the Department of Financial and Professional Regulation, which oversees those licenses, this delay could continue for the duration of the period in which Governor Pritzker’s COVID-related disaster proclamations are in place.

Under Illinois’s law, certain applicants must secure property in advance.  Without the issuance of a license, these applicants will likely be responsible for paying rent or other expenses on retail spaces for the duration of the delay despite the fact no lawful cannabis business can be operated out of these spaces.  Many fear these delays will have a significant impact on businesses applying under the state’s social equity criteria, as the delayed rounds were the first time such applicants could submit applications.

As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules.  This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.  This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay and other issues.

Check out Sheppard Mullin’s Coronavirus Insights Portal which now aggregates the firm’s various COVID-19 blog posts on a broad range of topics. Click here to view and subscribe.


FOOTNOTES

[1]  See here for prior post on cannabis operations being deemed “essential” during COVID-related “stay-at-home” orders.

[2]  The state budget projected in January that the state’s cannabis excise tax would bring in $479 million this year and $590 million in the fiscal year starting July 1, but Governor Newsom’s revised budget now forecasts just $443 million this year and a decline to $435 million next year.  Per the budget: “While similar products like alcohol and tobacco tend to be recession-resistant, the forecast assumes that cannabis businesses will be more negatively impacted by the COVID-19 pandemic.  Cannabis businesses have less access to banking services that could provide liquidity, have a younger consumer base likely to be disproportionately affected by the COVID-19 recession, and still must contend with competition from the black market.”

[3]  The Bureau, which oversees licensing for retailers, distributors, labs, event organizers, etc., charges $2,500 to licensees with up to $500,000 in revenue or $96,000 for operators with a revenue of more than $7.5 million.  The California Department of Food and Agriculture, which licenses cultivators, charges between $135 to $8,655 for licenses depending on the product.  And the California Department of Public Health, which licenses cannabis manufacturers, charges licensees between $2,000 to $75,000, depending on revenue.

[4]  MMICs are identified cards for persons authorized to engage in medical cannabis use and their designated primary caregivers.

 

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 191

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About this Author

Whitney Hodges, Attorney, Sheppard Mullin, Real Estate, Natural Resources
Associate

Whitney Hodges is an associate in the Real Estate, Land Use and Natural Resources practice group in the firm's San Diego office.  She also serves on the firm's Diversity and Inclusion Committee, the Recruiting Committee, and the Latin Business Team.

Areas of Practice

Ms. Hodges's practice focuses on general business litigation with an emphasis on land use litigation, real estate litigation, business torts/contracts, intellectual property, and litigation involving internet usage.  Ms. Hodges handles all aspects of litigation, including administrative, trial...

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