If the U.S. Drug Enforcement Administration were to reclassify marijuana as a less dangerous drug, it would not eliminate conflicts between the federal government and states like California, which have legalized many uses of the substance.
But it would bring an important change that could give California’s licensed marijuana businesses a much-needed boost: a lighter tax burden.
The Associated Press reported Tuesday that the Drug Enforcement Administration would propose moving marijuana from the list of Schedule I drugs, which includes heroin and cocaine, to Schedule III drugs, which includes ketamine and anabolic steroids. The proposal will still need to be reviewed and approved by the White House and made available to the public for comment.
Industry insiders say the move, if approved, could become a lifeline for California’s struggling cannabis industry. “We planned for this,” said Meital Manzuri, a lawyer whose firm specializes in the cannabis industry. “It’s important for the industry.”
Legal in California but illegal under federal law, the state’s cannabis industry operates in a difficult legal limbo. Stores and farms operate outdoors, but they are deprived of the advantages that other businesses enjoy, such as access to out-of-state markets.
Their murky legal situation also means that banking, credit card processing, insurance and other vital business services are out of reach for many marijuana businesses.
But the tax burden is particularly heavy. Section 280E of the federal tax code prohibits businesses involved in “trafficking” in Schedule I or II substances from deducting expenses they incur. As a result, they are taxed on every dollar they earn, not just their profits.
But if marijuana is reclassified as a Schedule III drug, “those in this industry will for the first time be able to take advantage of the standard tax deductions that other businesses enjoy,” said Paul Armentano, deputy director of the National Organization for marijuana law reform. , also known as NORML, which advocates for cannabis users. “The biggest change will be in the way the industry does business. »
“The California industry in particular has seen a decline over the last couple of years and this offers them a future,” Manzuri said. “This could be a lifeline that they need to keep operating.”
Legal marijuana stores reported about $5.1 billion in revenue in 2023, less than the previous year and 11% less than in 2021, according to the California Department of Tax and Fee Administration.
For years, licensed businesses have struggled to compete with a booming black market that, while avoiding licensing, fees and taxes, can sell its products at a fraction of the price charged by legal companies.
But Armentano hopes that those in the industry won’t “jump the gun” and that if marijuana is reclassified, it may still take some time for the changes to become tangible.
If cannabis were reclassified, he said, it would still remain illegal under federal law for recreational uses. States that have legalized marijuana, he said, are not operating to federal standards.
Thirty-seven states have legalized cannabis for medical use, seven more have legalized CBD oil for medical use, and 24 states have legalized cannabis for recreational use, according to DISA Global Solutions, a company that administers cannabis testing. drug testing.
Some organizations opposed to marijuana legalization, including Smart Approaches to Marijuana, have announced plans to challenge the final rescheduling decision.
“Raw marijuana has never met safety and effectiveness protocols,” said Dr. Kevin Sabet, president of Smart Approaches to Marijuana, calling it a political decision during an election year. “From the beginning, the influence of politics and industry weighed on this decision. »
If the reclassification is ultimately approved, it would recognize medical uses of marijuana and require the drug to be sold and regulated at the federal level in the same way that ketamine, some anabolic steroids and Tylenol with codeine are regulated. The products would need federal approval – something no cannabis product currently has.
“The majority of states regulate cannabis in a manner inconsistent with federal law,” Armentano said.
That means other financial benefits, such as banking and insurance, would remain out of reach for many businesses, Manzuri said, especially for dispensaries that operate recreationally.
This remains an ongoing problem for dispensaries, which typically operate as cash-only businesses. Many of them are unable to obtain banking services for what has become a multibillion-dollar industry, although the California Department of Cannabis Control has sought to help marijuana businesses open Bank accounts.
However, major credit card companies will not process marijuana-related payments, and reclassifying the drug as Schedule III would not change that, experts said.
“The payments industry only deals with legal products, and the reclassification does not make cannabis legal,” said Scott Talbot, executive vice president of Electronic Transactions Assn. “The reclassification moves things forward but does not cross the goal line of making cannabis legal and therefore acceptable to banks and the credit and debit card industry.”
Still, a reclassification could help combat some of the stigma associated with marijuana and the cannabis business, Armentano said. This will be part of a long process, especially for a service as important to the sector as the banking sector.
“I presume marijuana could become legal tomorrow, and your Chases and JP Morgan and Wells Fargos would still say, at least initially, that it doesn’t change our bottom line,” Armentano said.
But those who have navigated the legal waters of the weed industry still welcome the potential benefits of reclassification.
“Rescheduling will not legalize cannabis or allow a doctor to prescribe it, but it will allow existing marijuana companies to be taxed like any other business – essentially a huge investment in the entire industry in the form tax relief,” said Adam Terry, the sector’s chief executive. executive of Cantrip, a THC-infused beverage company based in Massachusetts. “(Reclassification) improves the overall economic health of the industry and continues to move toward legitimization in the public eye.”
“The California cannabis industry needs this right now,” said Amy Jenkins, legislative attorney for the California Cannabis Industry Assn. “The industry faces a significant number of challenges with our current tax framework. »
Whitney Economics, a cannabis-focused research firm, estimated last year that legal cannabis operators in the United States paid more than $1.8 billion in taxes in 2022 compared to other businesses.
The reclassification, Jenkins said, “would provide greater stability to the legal cannabis industry.”
It could also allow more entities to conduct research, possibly opening doors to industrial innovation and greater medicinal benefits. “No one has been able to do large-scale research for a long time,” Manzuri said.
For Armento, whose organization wants states to be allowed to regulate marijuana the same way they can regulate alcohol, the possibility of reclassification doesn’t go far enough.
“It will take a long time before regulators at the FDA, DEA and other agencies recognize that this change is not enough,” he said.
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