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April 29, 2024

Rescheduling Cannabis – Legal and Fiscal Implications

The cannabis industry is at a very critical point as the recommendation and legal procedures needed to reschedule marijuana could have a massive impact on the taxation and profitability of legal cannabis. The biggest challenges for most small and independent industry players are taxation and competition, with most finding it tough to get out of the 1-3 year start-up phase. We recently sat down with Aaron Smith, cannabis policy expert and founder of the National Cannabis Industry Association (NCIA), to learn more about what implications this rescheduling could have for small and independent cannabis operations and how this could improve the regulation of marijuana and hemp nationwide, leading to a greater reduction in the criminal market.

What Does Rescheduling Mean for the Cannabis Industry?

The executive branch recently asked the Food and Drug Administration and the U.S. Department of Health and Human Services to advise on cannabis being rescheduled. After their research and collection of scientific evidence, the recommendation came back to move marijuana from a Schedule I (drugs with no currently accepted medical use and a high potential for abuse) to a Schedule III (has some medical value moderate to low potential for physical and psychological dependence) drug. The current administration has made it a priority to complete the reschedule this year, and being an election year, there is a greater sense of urgency to move forward.

While this reschedule would not solve all the issues the industry is facing, and may even introduce new ones, it would have a significant impact on the taxation of state-legal marijuana businesses as well as their ability to influence state policy around production and distribution. Currently the largest hurdle to profitability and sustainability for legal producers and distributors is section 280E, a tax code that severely impacts small and independent cannabis businesses.

“280E prevents us from taking ordinary business deductions on our tax on federal taxes and with businesses that are essentially paying tax on their gross receipts and facing double or triple the effective tax rate of other businesses,” Smith explains. This is a debilitating rate that causes many industry players to bow out after 1-3 years in business and/or move to the illicit market.

But because 280E only applies to schedule I and II drugs, this move to a schedule III would effectively remove the burden of that portion of the tax code on legal cannabis businesses and free up millions of dollars in cash flow which would lead to sustainable operations and could eventually reduce the criminal market.

Furthermore, rescheduling will present an opportunity to build on momentum for further policy and tax reforms in the coming years especially at the state level.

What Happens Next?

Smith believes that the reschedule is imminent. While the Drug Enforcement Administration has no timeline to act on, and even license to ignore, the recommendation, the fact that the executive branch specifically requested this recommendation does place more weight on making the move soon. Smith feels that given the unique circumstances there is a high probability that the DEA will accept the marijuana rescheduling recommendation and then open up a public comment period for civilians and businesses to submit their opinions on the change to the DEA, which would then go through an administrative review before the end of the year.

The public comment period will most likely open up in the next month or two, last for three months, and then larger actions will be taken for the official rescheduling. Because two thirds of voters are in favor of rescheduling, should this not pass by the end of the year, there is still a strong likelihood that the following or continuing administration will make the push through.

Learn how cannabis businesses can make the most out of the current financial situation.

But Smith reminds us that a reschedule does not solve the industry’s problems and could even introduce new issues to work around. The first, and biggest, being that jurisdiction of marijuana would be moved to the Food and Drug Administration. While not a negative in and of itself, the FDA could rule that some marijuana products are in violation of the Food and Drug and Cosmetic Act. He doesn’t believe that this means “SWAT teams will be kicking down the doors of businesses that are selling scheduled three drugs. But there is a potential that the FDA, using its bureaucratic machine, can send out letters to everyone saying, ‘Hey, you’re violating this act, because these products aren’t approved by the FDA.’” 

Smith knows from working with so many small business owners in cannabis that a letter or disruption in operations like this could mean the end for many independent operators. To mitigate the effects, Smith’s team at the NCIA are working with the current administration to develop a memo “that makes it clear that state legal operations that are licensed under state law should not be disrupted under this under this system” and working with congress to budget bind the FDA ensure that they cannot use federal tax dollars to go after state legal programs.

The second being that this still does not decriminalize marijuana and this is not the end of the fight. While rescheduling is happening, smaller steps still need to happen like clear enforcement guidance to protect state-legal businesses and, he believes, retroactive relief for 280E so that the businesses who have been able to survive for the last 10 years are able to grow, finally. The NCIA is working with Congress to explore retroactively reimbursing businesses that were unfairly taxed under 280E. While a full reimbursement is unlikely, even a two-to-three-year reimbursement would bring great relief to legal operators who are barely able to keep afloat and bolster state economies.

Finally, Smith and the NCIA are ultimately working to get marijuana de-scheduled and regulated in a different way, much like alcohol, so that all legal products are subjected to the same standard nationwide. While they realize that the odds are overwhelmingly against them at this time, the rescheduling will have a great impact on positive momentum in Congress. A few states have plans to integrate hemp products into the cannabis supply chain with legislation that would fold intoxicating cannabinoids into the states hemp program to try and keep the hemp industry alive while leveling the playing field for marijuana and creating the public safety guardrails needed for intoxicating substances. Based on how these programs perform at a state level, there could be larger moves for federal implementation of similar programs over time.

How To Get Involved?

The National Cannabis Industry Association is the largest trade association representing legal cannabis in the USA (since 2010) and the only one working to advance policy at the national level. NCIA represents small and independent businesses and is deeply concerned about getting federal legalization for marijuana and getting it right, in a way that small and independent businesses can thrive and not be squashed out by players like the tobacco industry. The NCIA began as the voice of the whole industry before MSOs and then stepped in to ensure that lobbying was not strictly medical but also included social and mainstream cannabis. They hold multiple events around the country, annually, that directly connect small business owners to policy makers who develop the laws that directly affect these businesses. These events cover everything from state to national policy, specific issues to broad reform, and provide the unique opportunity to connect with policy makers on a deeper level than a 5-minute chat in their office to discuss moving the needle on cannabis reform.

They also distribute educational information and advocacy templates for the general public and other industries to take action on policy that is up for vote or public opinion via their newsletter. If you would like to receive templates on how to effectively advocate for marijuana rescheduling during the DEA’s public comment period, the NCIA will be sending out all of that information with links and tips through their newsletter so be sure to sign up!

If you’re looking for guidance on how to make your cannabis business more profitable, learn more about our virtual CFO services for cannabis businesses.

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