The cannabis industry is celebrating Tuesday’s recommendation by the U.S. Justice Department to reclassify marijuana from a Schedule I drug to Schedule III, which would put it alongside less addictive substances like Tylenol with codeine, ketamine, and testosterone.
The move, which is expected to take 3-4 months to go into effect, removes the critical 280E tax penalty, which cannabis companies complain forces them to pay much higher taxes.
“Because of the 280E, we haven’t been able to take our business deductions,” said Jeremy Unruh, SVP for public and regulatory affairs for PharmaCann, a cannabis company based in Chicago.
“We’ve been taxed on our gross revenue and not our net revenue minus the deductions, so our effective tax rate was close to 70 percent. It basically meant we could never generate a profit,” Unruh said.
Sam Scanlan, who in March became Director of Global Consumer Investment Banking at Baird and previously covered cannabis as SVP of Houlihan Lokey’s Consumer, Food & Retail Group, said that while the reclassification recommendation was a very good thing for cannabis companies, the industry still has reason to be concerned.
“There’s still a lot of fundamental issues going on in the industry — there’s issues of oversupply. The reclassification will help these companies compete with the illicit market, but they’re still getting taxed on the state level.”
Despite such ongoing challenges, public markets responded favorably to this week’s decision. Shares in industry leader Tilray jumped 39 percent following the news, while Canopy Growth rose nearly 80 percent.
“This is as big a step as the Federal government has taken with cannabis in the last 75 years,” Unruh said, and it may be a sign of a shifting political environment for cannabis.
Industry observers hope this week’s decision will have positive knock-on effects for efforts to pass the SAFER Banking Act, which would allow cannabis companies increased access to traditional financial services.
In April, Senate Majority leader Chuck Schumer told a press conference that his chamber would ‘work very hard’ to get the Act passed before November this year.