What the DEA’s reclassification of marijuana means for Colorado cannabis

Cannabis advocates in Colorado applauded the Biden administration’s reported decision to reclassify marijuana, saying the decision would likely significantly reduce the tax burden on businesses.

Industry leaders warned that such a move – if completed – would not solve some of the major challenges facing the sector, such as limited access to banking. But they pointed to the symbolic importance of the U.S. Drug Enforcement Administration’s preparations to downgrade the drug’s classification as a drug.

“This will be the biggest change in drug policy at the federal level in at least 50 years, if not ever,” said Truman Bradley, executive director of the Marijuana Industry Group, a Colorado-based trade association. “The DEA has had the opportunity to reschedule marijuana previously and chose to keep it on Schedule I, so a reversal is a big deal.”

The Associated Press reported Tuesday that the agency planned to move the classification of marijuana drugs from Schedule I to the less restrictive Schedule III in a “historic shift in U.S. drug policy that could have major consequences for the entire country.” If the change is finalized, it will not be legalized nationally, but some restrictions will be relaxed.

Since the passage of the Controlled Substances Act in 1970, cannabis is included in Schedule I in addition to LSD, heroin and other drugs believed to have no accepted medical use and high potential for abuse.

The DEA believes that Schedule III drugs have “a moderate to low potential for physical and psychological dependence.” Substances in that category include ketamine, anabolic steroids and some products containing codeine.

Since August, when the DEA indicated it would consider rescheduling marijuana, a series of state and federal officials, including Colorado Gov. Jared Polis and Attorney General Phil Weiser supported it.

The fallout from such a move would undoubtedly reach Colorado, where cannabis has been legal for recreational use for more than a decade and for medical purposes since 2000.

According to local experts and owners, the biggest impact will be financial.

The federal tax code, in Section 280E, requires that companies that handle Schedule I or Schedule II substances prohibited from deducting many standard business expenses of the taxable gross income. That means state-legal cannabis growers, dispensaries and manufacturers “end up paying an extremely high effective tax rate — far higher than what any other business could pay,” said Andrew Freedman, executive director of the Coalition for Cannabis Policy, Education and Regulation (CPEAR), which advocates for drug reform at the federal level. He was previously a state marijuana supervisor in Colorado.

Moving marijuana to Schedule III would relieve local businesses of that tax burden and allow them to write off expenses such as electricity, payroll and insurance. For Wanda James, co-founder and CEO of Simple pure pharmacy in Denver that could mean a savings of as much as 15% to 20%.

“It’s a hugely significant number,” she said. “It depends on your business and what you do with your business, but it could mean hiring more people. It could mean spending more money on marketing. It may mean upgrading your facilities or benefits for your employees.”

Connor Oman, CEO of Sun Theory Holding Co., wrote in an email that he hoped the realignment would yield tax savings of up to 40%, a figure that fluctuates based on how each of the company’s businesses is structured. Sun Theory owns 13 pharmacies in Colorado, including all locations of the Terrapin Care Station Dispensary, which it recently acquired.

In a statement from the governor’s office, Polis said he was “thrilled by the Biden administration’s decision to begin the process to permanently reschedule cannabis, following Colorado and 37 other states that have already legalized it for medical use.” use or use by adults. decades of outdated federal policy.” He cited the likely reduction in the industry’s tax burden, saying it will “improve public safety and support a more just and equitable system for all.”

James sees the realignment as a sign of progress, but she noted that it would not solve another monetary problem in the sector: banking.

Major banks are hesitant to work with cannabis companies because they don’t want to take the risk of dealing with a substance that is still illegal at the federal level for fear they might violate anti-money laundering laws. Their reluctance makes it difficult for entrepreneurs in the sector to access loans, lines of credit or traditional trade processing.

Marijuana would remain a controlled substance even if it is reclassified. The incentive for banks to enter the sector would therefore not necessarily change.

However, Bradley remains optimistic that a realignment would inspire more investors and financial institutions to strengthen the sector, which has recently fallen on hard times and seen a decline in sales. In 2023, Colorado consumers spent just over $1.5 billion on cannabis products, the lowest total since 2017, according to the Marijuana Enforcement Division.

“Investors are on the sidelines because of the federal classification. With that change, it inherently reduces the risk of investing in the sector,” said Bradley. “The rescheduling removes any chance that the federal government will attempt to ban legal cannabis. That is nothing anymore.”