(This column originally appeared in the Inquirer)
Since 1970, cannabis has been classified under the Controlled Substances Act as a Schedule I narcotic, one that has “high potential for abuse” and that has “no currently accepted medical use in the United States.” That could soon change.
Although many states — including Pennsylvania and New Jersey — already allow the use of cannabis products like marijuana for either medical or recreation purposes, the businesses that sell these products face significant challenges due to its uncertain legality.
The good news for these businesses is that earlier this year the Justice Department submitted a request to reclassify — or reschedule — cannabis to a Schedule III drug. That would put it on the same level as a prescription drug like Tylenol with codeine, certain steroids like Testosterone, or anesthetics like Ketamine. A hearing is scheduled in early December with a decision expected sometime in 2025.
Because its current Federal classification creates unique hurdles, the proposed rule change would boost profits in the industry, easing many challenges these business owners currently face. Here are some potential changes on the horizon.
Tax deductions for cannabis companies
Cannabis businesses currently cannot take advantage of common tax deductions like rent, payroll and other operating costs.
“You can’t deduct business expenses other than the product cost itself,” says Anthony Minniti, who runs a cannabis dispensary within his pharmacy, Bell Rexall Pharmacy, in Camden. “You’re paying tax on the gross profit of a sale, not the net profit because you don’t get any write-offs.”
Insurance and banking issues for dispensaries
Banks and insurance companies are known for being financially conservative. So the federal Schedule I designation has kept many financial services companies out of the cannabis industry, even though a significant majority of states allow the sale of recreational or medicinal cannabis products.
“I drive an hour and a half to go to a small bank that’s friendly toward my line of business,” said Erik Miller who owns Budlanz in Northern Liberties. “We belong to the hemp industry as well as selling both CBD and hemp-derived THC products, and even for my business the rescheduling would have a positive effect on my banking relationships.”
Miller and Minniti both say they struggle to get financing because their business is seen as “high risk.”
Many financial professionals such as accountants, wealth planners, and lawyers are also hesitant to get involved in the industry. Some specialize in this area but their fees are higher because of their niche. Rescheduling will likely increase the supply of these professionals and could bring these costs down.
“Overall I think these costs — banking, insurance, financial professionals — are more than 50% higher than what I would be paying if I was not in this industry,” Minniti said.
More marketing freedom
Marketing is also a challenge. Major social platforms like YouTube, Facebook and Instagram have strict rules around advertising and promoting cannabis products.
“I was using my Instagram page to promote my business, and I’m trying to do it carefully, but then I get a note from Instagram that my account has been shut down, and I lost hundreds of followers that day,” Miller said. “These are headaches that we deal with that hopefully rescheduling can hopefully alleviate.”
Federal rules also disallow any marketing of these products across state lines, which precludes the ability to promote a cannabis business nationally or even regionally. There are also other restrictions on marketing these products to minors, as well as making sure the products are properly labelled.
Mihir Patel, CEO of BluLight Cannabis in Gloucester City, New Jersey, says companies that are more “vertically integrated” by providing cultivation, processing and distribution, as well as retail sales, would benefit most from the rescheduling because major corporations will be more inclined to enter the market. Those new corporate entrants will want to buy proprietary formulas and an existing brand.
Many businesses are “positioning themselves as a smoke shop or a convenience store. That’s that only works for a short amount of time,” Patel said. “Vertically-integrated businesses are in for a great ride when marijuana becomes federally recognized.”
New regulatory requirements
Despite the benefits of rescheduling for cannabis business owners, Minniti says, many may not be ready for the regulatory requirements that go hand-in-hand with a selling a Schedule III drug.
“Because I own a pharmacy I know that the price of compliance can be extraordinarily high,” he said. “Right now, I’m bound by more regulations selling a 30-count bottle of Sudafed than I am selling cannabis. That would significantly change if cannabis is rescheduled.”
Sellers would need to be registered with the DEA, and have fulfillment, labelling, warning and communication systems to handle prescriptions.
Minniti also predicts that, with a rescheduling, many smaller companies would be outmatched by larger competitors like CVS and Walmart, who have more resources to handle the new regulatory environment.
The better result for the small businesses would be completely de-scheduling cannabis, instead of rescheduling it.
“Rescheduling just means it comes down the totem pole. It’s not as severe on the classification list for drugs,” said Patel. “But with de-scheduling it gets off that list entirely. And that, to us, is a big plus.”
