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MARIJUANA MOMENT

Businesses that ‘indirectly’ work with marijuana industry ineligible for federal coronavirus loans

Charles Rex Arbogast/Associated Press

Marijuana Moment is a wire service assembled by Tom Angell, a marijuana legalization activist and journalist covering marijuana reform nationwide. The views expressed by Angell or Marijuana Moment are neither endorsed by the Globe nor do they reflect the Globe’s views on any subject area.

State-legal marijuana retailers and growers aren’t the only ones who stand to miss out on federal relief loans amid the coronavirus outbreak.

In addition to that restriction, which the federal Small Business Administration confirmed last month, a wide range of businesses that indirectly service the cannabis industry are also ineligible under recently enacted legislation.

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Trump signed last month, provides for a Paycheck Protection Program that offers a significant amount of forgivable loans to companies with 500 or fewer employees. But cannabis businesses — as well as ancillary firms that contribute to them with products or services — are specifically excluded from those benefits.

In a notice about the draft rules of the CARES Act, the SBA points to a document from last year outlining businesses that are generally ineligible for its programs. One section describes how “Businesses Engaged in any Illegal Activity” can’t receive federal loans.

“SBA must not approve loans to Applicants that are engaged in illegal activity under federal, state, or local law,” it states. “This includes Applicants that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market.”

“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity,” it continues. “Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”

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To that end, it’s no surprise that businesses such as dispensaries and cultivation facilities would be excluded. But it’s also the case that a large class of companies that indirectly work with the cannabis industry could also lose out on the benefits.

An ineligible “indirect marijuana business” is defined by the SBA as “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana.”

The agency provides specific examples of such companies, including “businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business.”

Businesses that sell paraphernalia like bongs or pipes intended for cannabis use are also ineligible for the loans, the agency said.

However, the SBA said its interpretation of an indirect cannabis business doesn’t extend to companies that provide general services such as plumbing or tech support for laptops that marijuana firms use, for example.

“As a starting point, it is incredibly unfair that state-legal cannabis companies are not eligible for these SBA loans,” said Josh Kappel, founding partner at Vicente Sederberg. “These companies pay Social Security and Medicare taxes, unemployment taxes, and, of course, federal corporate taxes. In every way, they deserve to be treated like any other business when it comes to these emergency loans.”

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“It is even more egregious when the SBA determines, not by law but by its own regulations, that companies will be ineligible for loans if they derived any revenue in the previous year from selling products or services to state-legal cannabis companies,” he added. “In a state like Colorado, when you consider law firms, accounting firms, advertising and marketing firms, HVAC companies, lighting companies, and on and on, there are literally hundreds of small businesses that could be deemed ineligible.”

Advocates are pushing for Congress to add language to future coronavirus-related spending legislation to free up access to SBA services for state-legal marijuana businesses. But it remains to be seen whether that will materialize.

Eleven senators did recently send a letter to leadership in a key committee asking that they add a provision allowing marijuana businesses to access federal loan services in an upcoming annual spending bill.

“While we would like to see loans available to all cannabis companies, the SBA, at the very least, should immediately modify its regulations to remove the prohibition on COVID-19-related loans to ‘indirect marijuana businesses,'” Kappel said. “Countless jobs and small businesses could be at risk if they do not.”

Because hemp was legalized under the 2018 Farm Bill, businesses that sell the crop or those that indirectly service those companies are eligible for federal relief programs — a point SBA stressed in a recent blog post.

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