“A big deal”: What the feds’ move to reclassify marijuana means for Colorado cannabis

Cannabis advocates in Colorado cheered the Biden Administration’s reported move to reclassify marijuana and said the decision likely would reduce businesses’ tax burden significantly.

Industry leaders cautioned that such a move — if finalized — would not resolve some major challenges facing the industry, such as limited access to banking. But they pointed to the symbolic importance of preparations by the U.S. Drug Enforcement Administration to downgrade the substance’s drug classification.

“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 option to reschedule marijuana before this and elected to keep it at Schedule I, so a reversal is a big deal.”

The Associated Press reported Tuesday that the agency planned to move marijuana’s drug classification from Schedule I to the less restrictive Schedule III in a “historic shift of American drug policy that could have wide ripple effects across the country.” The change, if finalized, would not legalize it nationally but would loosen certain restrictions.

Since the passage of the Controlled Substances Act in 1970, cannabis has been listed on Schedule I alongside LSD, heroin and other drugs deemed to have no accepted medical use and a high potential for abuse.

The DEA considers drugs in Schedule III to have “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 cadence of state and federal officials, including Colorado Gov. Jared Polis and Attorney General Phil Weiser, supported doing so.

The effects of 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 proprietors, the biggest impact will be financial.

Federal tax code, in section 280E, dictates that companies working with Schedule I or Schedule II substances are prohibited from deducting many standard business expenses from taxable gross income. That means state-legal cannabis growers, dispensaries and manufacturers “end up paying an extremely high effective tax rate — far beyond what any other business might pay,” said Andrew Freedman, executive director of the Coalition for Cannabis Policy, Education and Regulation (CPEAR), which advocates for drug reform on the federal level. He formerly was a state marijuana regulator in Colorado.

Moving marijuana to Schedule III would relieve local businesses of that tax burden and enable them to write off expenses such as electricity, payroll and insurance. For Wanda James, co-founder and CEO of Simple Pure Dispensary in Denver, that could mean a savings of as much as a 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 dedicating more money to marketing. It could mean upgrading your facilities or benefits to your employees.”

Connor Oman, CEO of Sun Theory Holding Co., wrote in an email that he was hopeful the rescheduling would produce 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 dispensaries in Colorado, including all locations of Terrapin Care Station Dispensary, which it recently acquired.

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

James considers the rescheduling a marker of progress, but she noted that it wouldn’t fix another monetary issue in the industry: banking.

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

Marijuana would remain a controlled substance, even if it is reclassified — so the incentive for banks to get involved in the industry wouldn’t necessarily change.

Bradley, however, remains bullish that a rescheduling would inspire more investors and financial institutions to bolster the industry, which has recently fallen on hard times, seeing declines 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 have been sitting on the sidelines because of the federal classification. With that change, it, by definition, reduces the risk of investment in the industry,” Bradley said. “With rescheduling, that removes any chance that the federal government is going to try to shut down legal cannabis. That’s not a thing anymore.”

Still, uncertainty remains around when changes will take effect and how far-reaching they will be.

Sam Kamin, a law professor at the University of Denver who was involved in the rollout of Colorado’s recreational market, says a rescheduling won’t align state and federal laws any more than they are now.

In the medical marijuana sector, he said, the government could now force those businesses to adhere to federal regulations for development and distribution of Schedule III drugs. Those often are more rigid than states’ rules to procure cannabis for medical conditions.

“You can’t buy anabolic steroids without a prescription. If you do so, you’re committing a federal crime,” Kamin said. “You can imagine an administration saying, ‘You wanted a lawful path to marijuana. We’ve given you a path, that is the only path.’ That would be really disruptive.

“I don’t think this administration is likely to do that at this time, but at some point that tension is going to need to be figured out.”

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