Federal government hangs Nevada cannabis industry out to dry

A NuLeaf cannabis company grow room. As many as 13,000 people work in Nevada's legal cannabis industry - photo: NuLeaf

Cannabis businesses in most states where they are legal have been deemed essential during the novel coronavirus shutdown. Since March 20, Nevada’s 70 cannabis retail outlets have been serving adult use and medical customers by delivery alone. An already disadvantaged business sector has been hard-hit. Layoffs have resulted, but unlike every other legal business in Nevada, cannabis companies are not eligible for federal grants or loans to help ride out the COVID-19 pandemic.

“We’ve seen that after a brief spike in mid-March, sales across the country have dipped to below average,” said Morgan Fox, director of media relations for the National Cannabis Industry Association in a phone interview. “And then businesses are also dealing with the added expenses that are incurred with additional public health and safety measures. So while the industry right now is doing OK in broader terms, if it doesn’t have access to federal aid, through various stimulus relief packages, and if it’s not supported by state and local governments, recovery is going to be a very difficult process. A lot of people are going to go out.”

Why No Federal Aid?

Medical marijuana is legal in 33 states and the District of Columbia. Eleven states have legalized cannabis for adult possession and use. Canada has legalized, taxed and regulated medicinal and adult use cannabis; but the United States government, since the enactment of the Controlled Substances Act of 1970, has grouped marijuana with the most dangerous and addictive of drugs.

According to the US Drug Enforcement Agency, the following drugs have been deemed to have “no currently accepted medical value and a high potential for abuse.”

Heroin, lysergic acid diethylamide (LSD), marijuana, 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone (Quaalude), and peyote.

An Uneven Playing Field

The listing enshrines marijuana’s federal illegality and comes with a variety of sanctions and prohibitions for state-licensed businesses. All banks are federally regulated, so cannabis businesses are denied access to banking services and must operate in cash. Due to the federal prohibition, cannabis companies cannot write off business expenses from their taxes.

To prevent federal intervention, states like Nevada invariably mandate stringent facility and security standards that multiply up-front and operational costs. In Nevada, all employees must be registered agents with the state and pass a background check. The management of a seed-to-sale tracking system adds to operational difficulty.

According to Nevada Department of Taxation records, in 2018, Nevada’s largely tourist-driven cannabis industry saw almost $640 million in taxable sales and collected $99,184,973 in state taxes.

Sean Luse is chief operating officer of NuLeaf, a vertically integrated company that grows, processes and sells cannabis and derivative products in Nevada. The company operates one retail location in Las Vegas and another in Incline Village.

“We’re really coming at it from a challenged position because even if the federal government changed their rules, the way people are accessing these Paycheck Protection Program loans is, it’s through an established banking relationship, but since we’ve never had proper banking access as the cannabis industry, very few of us have banking relationships to draw on to then have that banker set up a loan with the SBA for you.

“I hope that the policy changes, but even if it does, the way these programs are going at lightning speed and hundreds of billions of dollars is getting snapped up in a matter of days, I don’t know if there’s much hope for the cannabis industry,” Luse said.

The NuLeaf dispensary in Incline Village, NV – photo: NuLeaf

When the governor closed nonessential businesses, Luse said his company had 48 hours’ notice to shift operations to delivery only. Blackbird cannabis delivery scrambled to scale up its fleet, but before the pandemic, delivery made up a small percentage of dispensary sales. Capacity was lacking. Rather than wait for Blackbird to add cars and drivers, NuLeaf decided to develop its own delivery capability, no mean feat.

“It’s not as easy for us to put cars and drivers on the road as maybe other delivery services are like Domino’s or Amazon,” Luse said. “We’ve got to have all of our vehicles inspected by the state. Luckily, the state has moved to a virtual inspection system so that it can be done via email, as opposed to having to come out physically, but we have to get vehicles approved.

“Drivers have to have agent cards. So if somebody isn’t already in the system and doesn’t already have an agent card to work for a retail marijuana business here in Nevada, they might wait a couple weeks or more before they’re even eligible to work if they wanted to. So there’s definitely a lot that we have to do in order to do these deliveries, and that’s why I think we’re seeing the volume way down across the state.”

A NuLeaf grow room – photo: NuLeaf cannabis

As a vertically integrated company, NuLeaf grows and processes cannabis for sale in its stores. The company not only sells cannabis flower but also manufacturers several forms of concentrated cannabis products for sale in its retail outlets and other dispensaries within the state, but much of the cannabis NuLeaf grows is sold on the state’s wholesale market.

Some Nevada cannabis businesses do not operate storefronts but are only licensed to manufacture edibles or concentrates known variously as shatter, batter, budder, oils, waxes, and live resins. The technology needed to extract select aspects of the plant is expensive and represents an advanced manufacturing process. These operations buy wholesale cannabis from companies like NuLeaf.

“We haven’t had any wholesale activity outside of our own stores there since this all started back on March 20 or so with the governor’s order to go to delivery only. So, we have laid off about a dozen people at our production facility.

“At this point we’re still keeping everybody employed at our stores and cultivation facility … still have everyone there (at the cultivation facility) and that’s a situation where, with the plants needing care and, you know, living and being there every day … that’s something that really can’t be shut down, at least not without massive losses,” Luse said

As of this writing, the Nevada Department of Taxation reports that there are 13,271 registered agent cards issued to all industry employees in the state, to include owners, board members and other corporate officers.

Nationwide, according to a report by Leafly, some 211,000 people work in the cannabis industry. Morgan Fox is based in Washington DC and says his lobby has been working on the federal aid issue with lawmakers since it became apparent that impact of the shutdown could be disastrous for large swaths of the young and fast-growing industry.

“So far, we haven’t gotten any success yet, but we’re getting a lot of positive feedback from congressional leadership,” Fox said. “Just this past week, we saw a bill introduced in the House by Representatives Earl Blumenauer and Ed Perlmutter that would make businesses eligible for a lot of the SBA programs including the Paycheck Protection Program and other forms of relief funding.

“We’re trying to get language included in the next relief package being called CARES II at this point. That would allow banking access to be eased, and hopefully that will gain some traction as well. We’ve got a couple of weeks now until the debates really start in earnest on the next relief package, so we’re cautiously optimistic that we might be able to get some allowances for the cannabis industry in that legislation.”

Data from the Nevada Department of Taxation – image: The Ally

For Fox, being able to make a case to federal leaders during an emergency does present opportunity to move the cannabis industry agenda forward at the federal level, but the ability to introduce and move stand-alone cannabis legislation during the next few sessions of Congress could be limited.

“I think that it’s a bit of a double edged sword,” Fox said. In the positive column, the increasing recognition of legal cannabis businesses as being a necessary and essential part of healthcare systems and economic stability is definitely going to help increase support in Congress for broad, comprehensive reform.

“The downside is that the Coronavirus response efforts are going to take up the vast majority of Congress’s time and attention. So I think that while we may see increased support, and I definitely think we’ll see increased support and increased momentum for more comprehensive changes, including rescheduling cannabis. We also might see some delays and attention given to standalone cannabis policy legislation is likely going to be pushed back a little bit from where we thought it would have been in January.”

Last week, U.S. Senators Jacky Rosen (D-NV) and Ron Wyden (D-OR) led 8 of their Senate colleagues, including Catherine Cortez Masto (D-NV) and Jeff Merkley (D-OR), in a letter to Congressional leadership calling for forthcoming COVID-19 relief legislative packages to allow state-legal cannabis small businesses and indirect cannabis small businesses to access emergency loan and grant programs administered by the U.S. Small Business Administration (SBA).

In the letter, the Senators highlight the failings of current regulations that exclude small businesses with “direct” or “indirect” products or services that aid the use, growth, enhancement, or other development of cannabis from SBA-backed financing, including the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).

Congressman Mark Amodei (NV-2) has not returned a pair of emails asking if he supports extending financial aid to marijuana companies.

On the ground in Nevada, Sean Luse says help from the federal government could be the difference between NuLeaf making it or not.

“It could be a huge lifeline. I mean, we’re definitely living week to week here in terms of trying to juggle all of our bills due and our costs, trying to see what we can do to defer payments to staff members, salary reductions, whatever we can do to just stretch our accounts payable out and make this work and juggle it. So yeah, being able to get some relief on that could be the difference between us, the whole business surviving or not. And it would definitely likely be the difference in being able to continue to employ everybody that we that we have been.”

Luse says he wants to be optimistic, but as a veteran of the legal cannabis industry, faith in Uncle Sam is hard to come by among cannabis farmers with historical perspective.

“I’ve been operating in the legal cannabis industry for 20 years now. It started in California and now here in Nevada, and so it’s really par for the course. I guess it’s, you almost kind of internalize it perhaps … it’s just the way that it goes.

“It’s always an uphill battle for us, and we’re going upstream it seems almost at all times, but you know, it’s what we signed up for. We always find a way …

“We’ve had many times where over the years where things happen. You lose storefronts. There’s been raids, seizures from the federal government, and somehow you find a way to keep going and rebuild and just keep putting one foot in front the other. That’s what we do.

“It’s frustrating particularly when you’re being told you’re essential, but you’re not even worthy of a conversation about small business help, but it’s the contradiction that we live in.”


Brian Bahouth writes about a variety of issues for The Ally. Support his work.