Assessing the Advantages and Disadvantages of Re-scheduling Marijuana

Here's the rewritten article:

The Dilemma of Rescheduling Cannabis: A Financial and Legal Quagmire

With states across the nation giving the green light to cannabis products, the intricate financial and legal challenges that arise from varying rollout procedures, contrasting state legality, and the federal government's Schedule I classification of cannabis make for an intriguing topic for businesses navigating complex regulatory and market conditions in other industries.

The labyrinthine Section 280E of the U.S. tax code adds another layer of complexity to cannabis accounting, as businesses are unable to deduct routine expenses such as rent, payroll, or marketing due to cannabis's federal illegality. Accountants must carry out a meticulous process of separating and allocating costs of goods sold, which are deductible, from all other non-deductible expenses to minimize tax liabilities and ensure compliance.

This painstaking process has created a surge in demand for accountants and fractional specialists who specialize in this realm. While accountants responding to this need agree that rescheduling cannabis from a Schedule I narcotic to a Schedule III narcotic may help alleviate some accounting pressures, a top cannabis attorney warns that the move could potentially upend the industry.

As regulations continue to develop in sync with economic decision-making by local regulators from state to state—resulting in market saturation due to open licensing, thriving illegal markets, and oppressive licensing regulations—the demand for strong financial expertise remains high in the cannabis industry to manage the various trends impacting its development.

The Legal Conundrum of Rescheduling

While every cannabis accountant our website spoke to about rescheduling supports it due to the problems 280E presents for cannabis companies, legal experts in cannabis say a major component of the law is being overlooked by this group. Jeffrey Hoffman, who operates one of the largest cannabis-focused legal practices in New York, cautions CPAs that the ease provided by rescheduling 280E may also pave the way for Big Pharma to take over the industry.

Hoffman explains from a legal perspective at the federal level, rescheduling will shift cannabis from being "treated like heroin" to being treated like "Tylenol with codeine."

"It’s the pharmaceutical companies who are allowed to manufacture and sell Tylenol with codeine [for example]," said Hoffman. "There’s no way the mom-and-pop cannabis operators who are already struggling under the current rules will be able to suddenly obtain a pharmaceutical manufacturing license to produce this stuff."

Hoffman argues that rescheduling "hands the entire thing over to Big Pharma and Big Tech." He claims not only will it disrupt the industry, but it will also impact his career.

"If rescheduling happens, I'm going to need a new job," Hoffman said. "[Hypothetically], I'll go become general counsel at one of those [pharmaceutical] companies, and the first thing I'll do is sue every state with any sort of state-legal cannabis program, because the only reason those lawsuits don't exist right now is because cannabis is Schedule I, federally illegal."

Hoffman further predicts that the situation changes overnight once rescheduling begins. Big Pharma, he explains, can argue they are harmed if cannabis moves to a Schedule III product. He warns that states all over the country are currently permitting others to sell cannabis under a "completely different system" that could potentially lead to a "textbook lawsuit." He claims that if cannabis is Schedule III, there is a completely valid argument that all state-run cannabis programs are "taking money out of Big Pharma's pockets."

"The frightening part of this lawsuit is that it's a slam dunk," Hoffman said. "I don't think it even goes to trial. I think it wins at summary judgment because it's not complicated. If, for example, Pfizer or CVS is the only one federally licensed to sell a Schedule III product in a state, and your state is running a whole cannabis industry, they will sue you. They will ask for damages. They will get a court order to shut it all down—the dispensaries, growers, and product manufacturers will be gone."

Hoffman suggests ditching the jargon of rescheduling and descheduling for those in cannabis and instead use the term "unscheduling," which means "legalize it and sell it like lettuce."

280E and the Financial Impact of Scheduling

While 280E persists as a nuisance for cannabis accounting, Hoffman argues that using rescheduling as a means to abolish 280E is an oversight by accountants.

"Maybe it solves 280E, but the flip side is that it's a massive concession to the pharmaceutical industry – and it could potentially wipe out the cannabis industry as we know it," Hoffman said. "It wouldn't just be one company. You'd see class actions, multi-district litigation, injunctions – it would be open season, and all of this could unfold before people in the industry even fully realize what just happened."

Andrew Hunzicker, a CPA and founder of DOPE, a training program for accounting professionals who want to serve cannabis businesses, claims he believes 280E's repeal via rescheduling is inevitable and will serve as a significant catalyst for growth in the cannabis industry. He says that while some investors view cannabis as a money grab, playing the long game—including waiting out 280E—is his recommended approach.

"Eventually, 280E is going to go away, and estimates suggest that once 280E is gone, cannabis company valuations could skyrocket," said Hunzicker. "Say you own a dispensary, and for five years, you make nothing or even lose $1 million. Then cannabis goes fully legal, 280E goes away, your cash flow increases, and suddenly your dispensary goes from being valued at one time sales to four times sales, and you cash out for $25 million. Are you going to care about the $1 million loss in those first five years? No, and that's typical among startups."

He believes playing the long game is crucial for businesses aiming to solidify themselves in the cannabis markets, which is part of the reason why the industry continues to be so capital-intensive.

"When I advise people who want to get into this industry, I tell them, 'don't expect a gold rush,'" Hunzicker said. "You're going to open a dispensary, and even if you do everything right, you're probably just breaking even or maybe making a little profit. Depending on how well you run your store, you might be slightly profitable or taking a small loss, and that's okay because you're playing the long game."

Other CPAs who have built careers around cannabis agree with Hunzicker, but say 280E's repeal is only part of the challenge of cannabis accounting. Brenda Bader, owner of Gold Leaf Accounting in Missouri, which has been lauded as one of the few states to get the cannabis rollout right, contends the scheduling of cannabis poses additional problems beyond those caused by 280E's stipulation.

"Since it's not federally legal, businesses can still have a hard time finding merchant services—credit card processing, for example, or even certain software providers," Bader said. "Things are starting to change now, but five years ago, QuickBooks would boot you off their platform if they knew you were cannabis-related. Today, they're one of the biggest software providers in the space."

Bader detailed how she believes the entire business infrastructure of the cannabis industry has evolved over the last three years. However, she says the costs of doing business still remain high when compared to other types of industries.

"I'm also an insurance agent and run a small brokerage, and I can tell you cannabis insurance costs about three times more than what a regular retailer, farmer, or manufacturer would pay," Bader said. "The risk is higher, so the companies willing to enter the space are taking a big chance, but they're doing it because it's a growing niche. They're not federally backed, so if something goes wrong, they're on the hook. It's risky."

She warns that the scheduling of cannabis has also posed obstacles for some companies in the industry when it comes to raising capital. However, unlike Goral, Bader suggests investors are less interested in MSOs and more interested in local growers.

"I've started to assist with capital raises recently, and what I've noticed is that investors are shying away from the MSOs now. They're looking for local Midwest operators instead. I've had multiple investors tell me, 'If you find someone local, bring them to me,'" she said.

Bader asserts that cannabis continues to be one of the most capital-intensive, financially intricate industries. Due to this, she isn't overly concerned about her business’ future should rescheduling occur.

"I've been a controller for years, and one thing I've consistently seen is that cannabis is still a cash-heavy business," Bader said. "I don't care how many cards or digital payments are out there, there's still a lot of cash involved, so I don't expect my job to change much at all [if rescheduling happens]. Cannabis businesses will still need someone who knows what they're doing – whether they think they do or not."

The labyrinthine Section 280E of the U.S. tax code adds complexity to cannabis accounting, as businesses are unable to deduct routine expenses like rent, payroll, or marketing due to cannabis's federal illegality.
Accountants must perform a meticulous process of separating and allocating costs of goods sold, which are deductible, from all other non-deductible expenses to minimize tax liabilities and ensure compliance.
A surge in demand for accountants and fractional specialists who specialize in this realm has resulted due to the needs of cannabis businesses in managing financial pressures.
While accountants agree that rescheduling cannabis from a Schedule I narcotic to a Schedule III narcotic may help alleviate some accounting pressures, a top cannabis attorney warns that the move could potentially upend the industry.
Economic decision-making by local regulators from state to state, resulting in market saturation due to open licensing, thriving illegal markets, and oppressive licensing regulations, requires strong financial expertise in the cannabis industry to manage trends and remain compliant.
Jeffrey Hoffman, a cannabis attorney, cautions CPAs that rescheduling cannabis could pave the way for Big Pharma to take over the industry.
Hoffman argues that rescheduling will shift cannabis from being "treated like heroin" to being treated like "Tylenol with codeine," making it easier for pharmaceutical companies to manufacture and sell.
He claims not only will it disrupt the industry, but it will also impact his career, saying, "If rescheduling happens, I'm going to need a new job."
Hoffman predicts a complete valid argument that all state-run cannabis programs are "taking money out of Big Pharma's pockets" if cannabis is Schedule III.
Hoffman suggests ditching the jargon of rescheduling and descheduling for those in cannabis and instead use the term "unscheduling," which means "legalize it and sell it like lettuce."
Mike Goral, a CPA, believes the multi-state operators (MSOs) have excellent growth prospects due to the opportunities that will arise should rescheduling take place.
Goral says the rescheduling is inevitable, and it's just a matter of time for these opportunities to surface, allowing him to share a positive outlook with his clients regarding the industry's future.