States act to deny licenses for cannabis companies with debt woes

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Image of a pink piggy bank drowning in debt

(Image by Romolo Tavani/stock.adobe.com)

State regulators and government officials nationwide are taking steps to ramp up enforcement against cannabis companies that fail to pay vendors, taxes or business fees.

New Jersey is the latest to take a hard line against delinquent operators, revoking cultivation and manufacturing licenses in early June from a company with unpaid fees.

It joins California, Michigan and Nevada, New York and Oregon in targeting such companies.

Some of these states are implementing enforcement measures, while others are taking steps to act.

The policy shift comes amid a challenging business climate for most marijuana operators across the country as recreational markets work through overproduction, falling wholesale prices, the tolls of high taxation and compliance as well as competition from unlicensed growers, retailers and manufacturers.

Many cannabis businesses are in a no-win situation, contends Chris Lindsey, the new director of state advocacy and public policy for the American Trade Association of Cannabis and Hemp in Washington DC.

“The federal government and the tax provisions of 280E are being grossly misapplied to state-licensed businesses, which has a real downstream impact,” he said, referring to the section of the federal tax code that bars legal marijuana businesses from taking the same business deductions that mainstream companies enjoy.

“Businesses that are working to comply with regulatory systems face a tremendous squeeze just to find themselves in competition not only with others in the legal market but also the illicit market.

“Our public policy needs work because there is too much of a burden on struggling businesses who want to be compliant but play an unfair game.”

The ramp-up in debt enforcement is chiefly centered in more established marijuana markets and driven by a few mitigating factors, according to Brooke Butler, vice president of partnerships at Simplifya, a Colorado-based compliance service and software provider.

“It’s about public safety and health. And it’s about the state getting their money,” she said.

“Those are the two biggest areas of compliance that people need to worry about.”

Expanding credit crises spurs action

A California lawmaker and New York regulators have introduced proposals to establish credit laws fashioned after the liquor industry, which penalizes vendors for failing to comply with 30-day credit-payback plans.

Under a new law enacted in May, New York’s Department of Taxation and Finance can levy civil penalties against companies that don’t pay taxes.

The legislations also established a new tax fraud crime for businesses that don’t collect or remit required cannabis taxes or sell untaxed marijuana.

Michigan and Oregon have also started the process of expanding regulatory authority to withhold, withdraw or deny licenses for cannabis companies with outstanding debt.

Both of those markets have been rattled by large operators struggling to pay bills.

Michigan marijuana cultivator and retailer Skymint is in receivership and auctioning off assets, which include 23 stores and two cultivation sites, according to Crain’s Detroit Business.

In March, Canadian investment firm Tropics LP, Skymint’s largest creditor, filed a lawsuit claiming the company owed more than $127 million.

In Oregon, Canadian holding company Chalice Brands, which operates as Chalice Farms, filed court documents last month to place five of its state subsidiaries under receivership.

The subsidiaries, part of the third-largest retail chain in Oregon with 17 stores, are $35 million in debt, Willamette Week reported.

La Mota, the state’s second-largest retailer with 37 stores, owes “at least $621,000” in back marijuana taxes, according to the news outlet.

The company and its top executives are embroiled in controversy, resulting in dozens of lawsuits, liens and the resignation of Oregon’s secretary of state, Shemia Fagan, now the target of a grand jury investigation for accepting a lucrative consulting contract from Veriede Holding, a La Mota affiliate, The Oregonian reported.

Credit and collection issues are magnified in the cannabis industry because vendors have little recourse to settle outstanding debt.

Businesses can’t access U.S. bankruptcy courts, which settle debt disputes, because of the federal government’s marijuana prohibition.

A small-claims filing is typically not an option for cannabis businesses, either, because outstanding bills often exceed the typical $5,000 limit.

And receiverships are also rare in the industry because creditors must take on those expensive processing costs. That option is more geared to settle multimillion disputes, according to legal experts.

New Jersey

The New Jersey Cannabis Regulatory Commission (CRC) on June 1 withdrew Harmony Foundation’s cultivation and manufacturing licenses because the company owes the state $700,000 in licensing fees.

The CRC told MJBizDaily the agency is required to ensure marijuana business applicants comply with state requirements, including the payment of mandatory fees.

“The NJ-CRC has not revoked any licenses, but awards have been vacated and returned to the commission for non-payment,” the agency said in an emailed statement.

“In most cases, applicants can reapply when they are ready to pay the required fees.”

Harmony declined to comment for this story.

As part of the CRC’s decision, Harmony can still sell recreational cannabis at its store in Secaucus but is required to purchase supply from other growers in the state.

Oregon

Cannabis regulators in Oregon are scheduled to meet June 15 to discuss a new plan by Democratic Gov. Tina Kotek to withhold licenses for marijuana cannabis retailers that owe state taxes.

“This will help ensure that all businesses are operating under the same rules and not getting any competitive advantage if they haven’t paid their taxes,” Kotek said in a statement.

The governor’s directive – carried out by the Oregon Liquor and Cannabis Commission and the state’s Department of Revenue – will affect more than 820 licensees annually, according to a news release.

Data from the revenue department shows that cannabis retailers have a higher noncompliance rate in Oregon on tax payments (9%) than other businesses (3%) in the state.

Mason Walker, CEO of Takilma-based East Fork Cultivars, a craft marijuana and hemp breeder, cultivator and product-maker, said he’s skeptical of more regulations beyond addressing legitimate health and safety concerns.

“My worry with this law, it could be used as a cudgel to make it harder to operate in this industry for otherwise good actors that are struggling with unfavorable market conditions,” he said.

In a related development, Oregon’s revenue department on July 14 will start publishing an online list of taxpayers who owe at least $50,000 in taxes, penalties and interest.

The list, which was originally set to publish in March 2020, will include:

  • Name of taxpayer, business and those liable for business debt.
  • Current city and state of residence.
  • Lien identification number, type of debt and amount due.

Michigan

The top regulator in Michigan might expand the scope and penalties for unpaid invoices.

The state’s Cannabis Regulatory Agency has proposed a plan to deny a permit or license renewal based on civil judgments or court orders from “unpaid debt for work, services, products, or equipment provided solely in the cannabis industry.”

The proposal, still in the early part of the rulemaking process, is among several on a 13-page draft that would significantly change business dynamics.

Michigan cannabis attorney John Fraser said the proposed penalties will not address the underlying issues – cash-flow shortages on the retail side and debt collection on the vendor side.

“If you take away this business’ license, how is the creditor going to get paid?” he questioned.

“You’re treating it on the back end instead of actually fixing what’s causing the issue. (Vendors) want recourse, and at the end of the day, that recourse is payment.”

Nevada

State regulators were among the first to take a hard stance against tax delinquencies, warning operators in mid-2020 they would be prohibited from accessing the state’s mandatory track-and-trace portal if they didn’t establish payment plans for back taxes.

The notifications came about a month after the Nevada Cannabis Compliance Board (CCB) took over regulatory duties from the Marijuana Enforcement Division within the state’s taxation department.

The state quickly recouped millions of dollars in outstanding renewal fees, taxes and “time and effort assessments,” or oversight fees.

In a related multiyear initiative, Nevada regulators have uncovered more than $5.5 million in outstanding tax debt from 132 “transfer of interest” investigations, which are carried out before regulators approve any internal corporate transactions such as ownership changes or restructurings.

The investigations assess tax liabilities, payments and obligations, among other areas.

The two-pronged approach helped the state clear most of the industry’s unpaid taxes and fees.

“We don’t really have anything hanging over our head or hanging over the industry’s head at this point because of what we did,” CCB Executive Director Tyler Klimas told MJBizDaily.

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.