U.S. moves to reclassify cannabis, sending potential cash infusion to Michigan dispensaries

-
U.S. moves to reclassify cannabis, sending potential cash infusion to Michigan dispensaries
The U.S. Drug Enforcement Agency is expected to reclassify marijuana, shifting the legal federal framework around the drug for the first time in more than 50 years. Credit: Nic Antaya / Crain's Detroit Business

The U.S. Drug Enforcement Agency is expected to reclassify marijuana, shifting the legal federal framework around the drug for the first time in more than 50 years.

The DEA’s proposal, which still must be reviewed by the White House Office of Management and Budget, would recognize the medical uses of cannabis and acknowledge it has less potential for abuse than some of the nation’s most dangerous drugs, according to reporting by the Associated Press.

Moving marijuana from a Schedule I drug to a Schedule III drug doesn’t make it federally legal, but it would be a significant change for cannabis businesses and their employees. It would mean instant cash flow with access to banking opportunities, as well as loan opportunities which could lead to much faster expansion of the industry in Michigan and other states where marijuana is legal.

It would also open the door to research grant opportunities and, most importantly, end a rigid tax regime that until now has stifled growth in the highly regulated industry.

“A reclassification of marijuana from Schedule I to a lower schedule or full legalization would represent a significant victory for the industry,” Jonah Folbe, CFO of Birmingham-based Quality Roots, said in an email to Crain’s. “It would bring substantial relief in terms of cash flow, affecting all aspects of the organization, including taxes, banking, marketing, payroll, and more.”

Keep up with all things West Michigan business. Sign up for our free newsletters today.

The DEA’s proposal comes after President Joe Biden called for a review of federal marijuana law in October 2022, and has moved to pardon thousands of Americans convicted federally of simple possession of the drug.

Classifying marijuana as Schedule III drug is the most consequential regulatory move the DEA has made on marijuana since classifying it as having “no currently accepted medical use and high potential for abuse” under the Controlled Substance Act in 1970. It would also eliminate a tax code law that was put in place in response to a clever drug dealer finding a loophole on his taxes in 1974.

Rescheduling marijuana eliminates the IRS Tax Code 280E, which prevents individuals from writing off business expenses involved in the trafficking of narcotics translating to a 70% or sometimes higher effective tax rate for marijuana dispensaries instead of the regular 21% corporate rate.

Game-changer for cannabis industry

Given an epic marijuana price collapse in Michigan — wholesale prices have fallen from more than $500 per ounce of flower in early 2020 to less than $100 per ounce today — caused by oversupply, margins for cannabis operators have evaporated. Marijuana not falling under 280E means instant cash flow for the industry.

The industry has been battling in Washington, D.C., to rid legal-state operators from 280E to no avail.

In 2017, the Congressional Budget Office estimated that repealing 280E for cannabis businesses would mean the feds would lose out on $5 billion in taxes over 10 years. But legislators from weed-legal states and industry insiders argue that’s a shortsighted view.

Rep. Earl Blumenauer, a Democrat from Oregon and founder of the Congressional Cannabis Caucus, has argued that 280E is a catalyst for marijuana companies to cut corners and adjust their business practices for tax avoidance. The representative has introduced the Small Business Tax Equity Act several times in recent years.

Ankur Rungta, CEO of Ann Arbor-based C3 Industries, which operates 13 retail stores under its High Profile Cannabis Shop brand, said in an email to Crain’s last fall that eliminating 280E would cut his company’s tax bill by more than half.

Rescheduling would open doors to banking

The rescheduling would also open up the marijuana industry to banking, more than it is already. Traditional large banks have avoided financing or even holding accounts for marijuana businesses or their employees.

Congress has spent nearly four years kicking around the SAFE Banking Act, which would provide certain protections to banks that choose to provide financial services to the legal marijuana industry. The law passed the U.S. House of Representatives in 2021 but has advanced no further.

Besides instant liquidity, the rescheduling could open up loans, which could lead to much faster expansion of industry in states where marijuana is legal.

A boost for a booming Michigan market

Michigan’s weed industry is effectively the top market in the country already.

Last year, the industry sold $3.05 billion worth of product and is projected to top that record this year. Statewide sales hit another all-time record in March, recording more than $288.8 million, up nearly $28 million, or 11%, from February, according to data from the Michigan Cannabis Regulatory Agency.

Given the current pace, the industry would surpass $3.17 billion in sales this year.

It’s hard to imagine the industry could continue to grow at that clip, but positive cash flow would likely cause consolidation of troubled players and further maturation of the industry, standing it up to compete nationally as companies grow inside and outside the state.

Rescheduling could, though, lead to some unknown conundrums in the future for the industry. Technically, Schedule III drugs are pharmaceutical products like ketamine and testosterone regulated by the U.S. Food and Drug Administration.

There is fear the FDA could upend the industry with new rules, though there is no evidence that is on the horizon.

“Facially, this is a monumental development,” said Benjamin Sobczak, partner at Detroit law firm Dickinson Wright and former counsel of cannabis operator Pleasantrees. “Looking deeper, the nuanced implications of rescheduling marijuana in this manner are unknown. Certainly, 280E tax relief will be a welcomed benefit, but the new classification is also sure to bring new challenges and obstacles to which operators will need to quickly adapt. Those concerns, however, are for another day. Today, we should celebrate this symbolic event for what it is – validation for the cannabis community and a showing of accountability by the federal government.”