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Last month, it was revealed that the U.S. Drug Enforcement Administration intends to reclassify cannabis from its current Schedule I status to the less restrictive Schedule III category under the Controlled Substances Act. While this proposal has not yet been finalized, it appears likely to become law, and the repercussions on the industry will be significant.
"Rescheduling will be a game-changer for the cannabis industry," said Adam Hutchinson, Founder of CannaSpyglass. "With potential benefits like reduced tax burdens, enhanced market credibility, and accelerated industry progress, we're excited to see how this impacts the future of cannabis!"
Reclassifying cannabis to Schedule III will not only reduce barriers to clinical cannabis research, but it will also alleviate the tax burden faced by cannabis operators under Section 280e of the federal tax code. With current tax rates reaching 70% or more, the industry eagerly awaits this change, anticipating increased profitability for both licensed and ancillary cannabis businesses.
How Will This Impact Licensed Cannabis Businesses?
Reclassifying cannabis as a controlled substance under Schedule III will recognize its medical benefits, placing it in a category with drugs such as ketamine and anabolic steroids. Since cannabis rescheduling does not equate to federal legalization, this still leaves state-licensed adult-use cannabis businesses operating in a legal gray area despite local approval.
Perhaps the most promising impact of rescheduling could be the elimination of Section 280e. Currently applicable to Schedule I and II substances, this provision has emerged as a substantial financial hurdle, with cannabis businesses categorized as federal drug traffickers and denied standard business deductions enjoyed by non-cannabis companies. In 2022, cannabis companies paid a staggering $1.8 billion in federal taxes, and projections for 2023 have climbed to $2.1 billion – leaving the industry hungry for change.
Maintaining profitability has become increasingly challenging for operators with thinning profit margins and intensifying competition. Removing 280e could save operators thousands of dollars each year, providing them with the opportunity to improve their financial stability and reinvest in business growth. For larger multi-state operators, the financial impact could be substantial, potentially amounting to savings in the millions, dependent on the state's corporate tax rates. Ultimately, eliminating 280e could allow cannabis businesses to better compete with the black market, as well as level the playing field with other legally recognized industries.
The removal of Section 280e may also serve as a catalyst for increased lending within an industry that has traditionally faced difficulties securing financial backing. Presently, cannabis loans typically incur high capital costs, ranging from 20% to 40%. With the elimination of Section 280e, businesses may have the opportunity to redirect previously drained cash flows toward servicing debts and funding new initiatives and expansions. This enhanced financial flexibility may draw more lenders into the cannabis sector, potentially reducing loan interest rates and promoting essential growth and stability.
While rescheduling alone will not provide cannabis businesses complete access to institutional banking and lending services, it could signal to wary investors that the federal government is adopting a more accepting stance. This change in perspective might attract fresh capital sources, particularly from smaller financial institutions that are more open to risk. Though larger banking entities may still proceed cautiously, smaller institutions may see the decreased risk as a chance to enter the emerging cannabis market. Additionally, the industry has been eyeing an alternative solution in the form of the SAFER Banking Act, which could improve banking opportunities for cannabis businesses in the future.
Rescheduling cannabis holds promise for the industry's growth and legitimacy, but it may also introduce some potential challenges. One such hurdle could involve the requirement for state-licensed operators to register with the DEA, similar to pharmacies. Operators may then be expected to adhere to the strict production, record-keeping, prescribing, and reporting standards established for Schedule III. This adjustment could prove challenging for operators unfamiliar with DEA compliance protocols, though it is yet to be determined how the DEA will address this and other concerns – ultimately shaping the landscape of cannabis compliance.
How Will This Impact Ancillary Cannabis Businesses?
Rescheduling cannabis has the potential to significantly impact ancillary cannabis businesses. As licensed operators experience improved profitability and financial stability, they will likely expand their operations and reinvest in their brands. As they grow and require additional services to support their development, essential ancillary service providers in fields like marketing, advertising, merchandising, security, and technology could all see a sizable surge in demand.
With the ancillary sector rising to meet the evolving needs of expanding cannabis businesses, innovation and collaboration within the industry could flourish – paving the way for a more prosperous and stable industry for licensed and ancillary cannabis businesses.
What Comes Next?
Rescheduling cannabis has not yet been finalized, and there are a few more steps before it becomes law. Next, the White House Office of Management and Budget (OMB) is set to review the proposal, followed by a public comment period and review from an administrative judge. The DEA will then publish the final rule, effectively rescheduling cannabis to Schedule III.
Progress toward rescheduling has been a comprehensive and lengthy process. Initiated by President Joe Biden with his request for a review of federal cannabis law in October 2022, this process involved an almost yearlong investigation – one of the most extensive reviews ever conducted by a federal government on cannabis. Ultimately, the Department of Health and Human Services formally recommended the rescheduling of cannabis, publishing its findings in September 2023.
The rescheduling of cannabis to Schedule III marks a pivotal moment for the cannabis industry, offering a beacon of hope for relief from the financial constraints that have long impeded the growth and sustainability of cannabis businesses. While the timeline for rescheduling remains uncertain, it appears increasingly probable that cannabis will find its new placement within Schedule III in the coming year, possibly even before the 2024 presidential election. As we await the formal approval of this proposal and anticipate the impact on the industry, we remain optimistic about the future of cannabis in the U.S.
Stay tuned to our CannaBites Blog for additional updates about cannabis rescheduling and other snackable news, commentary, and more from across the cannabis industry.
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