Rescheduling or descheduling marijuana: How would industry be impacted?

The possible reclassification of marijuana under the federal Controlled Substances Act is sparking debate about dismantling barriers to interstate commerce and the future of the industry.

While many states have created regulated marijuana markets for medical or recreational use or both, federal law remains a roadblock to nationwide market integration.

According to a report called “Where Will Weed Win” by Robin Goldstein, director of the Cannabis Economics Group at the University of California, Davis, the future of the industry depends on federal regulatory outcomes.

The future of rescheduling or descheduling marijuana remains uncertain, with many executives and operators in the $32 billion marijuana industry wondering whether it will happen under the Trump administration.

“To deschedule, I’d be shocked if it happened in the next five years, and I’d be surprised if it happened in the next 10,” Frank Colombo, managing direct at Viridian Capital Advisors, a New York-based, cannabis-focused investment banking and data analytics firm, told MJBizDaily.

Opinions vary about the impact of rescheduling or descheduling will have on the marijuana industry.

Although rescheduling – as opposed to descheduling – marijuana to Schedule 1 is unlikely to result in interstate commerce, it would grant federal tax benefits to licensed cannabis businesses under Section 280E of the Internal Revenue Code, according to Goldstein’s report.

“Schedule 3 doesn’t do much beyond 280E relief,” said Avis Bulbulyan, CEO of California-based cannabis consulting firm Siva.

“280E doesn’t apply to you if you’re Schedule 1 or Schedule 2. It doesn’t change the supply chain or dynamics, but it could open opportunities for listings on stock exchanges.”

If marijuana is rescheduled, it would require additional legislation, such as SAFE Banking, to enable interstate commerce, Bulbulyan said.

States also would have to decide whether to tax cannabis products that are imported into their jurisdiction, he said.

Rescheduling marijuana could result in a moderate expansion of the pharmaceutical cannabis market.

But any cannabis-based products likely would have to be approved by the Food and Drug Administration before they could be sold in pharmacies.

But the cost to enter the market for FDA-approved medicine might not generate ample returns to be worth it.

“Business models in this market segment are typically built around patents and health insurance, which would probably not translate well to weed,” according to the “Where Will Weed Win” report.

“The product is already widely available in generic forms that could not be patented and markups over production costs could not compete well with the margins of most profitable pharmaceutical products.”

Descheduling would likely legalize interstate commerce for the industry, which would accelerate its growth, according to the report.

It also could result in federal government regulation of the industry and taxation of marijuana products, which would slow the industry, create new costs for struggling businesses and make it more difficult for licensed cannabis businesses to compete with the illicit market.

Viridian’s Colombo said Western states such as California, Oregon and Washington, where cultivation is cheaper – and perhaps Oklahoma – would be the winners under a descheduling scenario.

The biggest losers would be cannabis multistate operators that have built indoor cultivation facilities in states where it’s not practical to grow marijuana outdoors.

States also would be losers because descheduling would cut into their tax revenue.

“Every state that legalized for medical or adult-use/rec did it for a reason,” Colombo said. “Caring about the patients is not one of them. It’s jobs and taxes.

“There would be no reason for anyone to build an indoor cultivation facility in New York if they didn’t have to.

“If you could put a regional production facility in Tennessee and ship to New York, you would do that.

“New York doesn’t want to do that. There’s a lot of jobs and taxes coming from cultivation facilities in New York.”

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Interstate commerce might not be legal for the marijuana industry, but it is for businesses that produce intoxicating hemp products and have captured a substantial share of legal cannabis dollars, according to Goldstein’s report.

“Many THC products now being sold in thousands of stores in hemp states are equivalent to licensed cannabis products being sold in other states,” the report said.

That’s why states such as California and Missouri want to regulate or ban it, Colombo said.

“They know which side their bread is buttered on,” he said. “They’re making taxes on (marijuana) but not hemp.”

Bulbulyan agrees.

“A governor in a state that has an adult-use program has a piggy bank, and they’re not going to let go of it and allow hemp,” he said.

States trying to stamp out intoxicating hemp products argue that they are unsafe, untested and sold to minors.

But such claims are merely excuses, Colombo said.

Given that the intoxicating hemp industry is growing faster than the marijuana sector indicates that consumers are voting with their wallets.

They know the products aren’t tested, but they’re still buying it because it’s more convenient, Colombo said.

“Convenience stores and gas stations sell beer as well and manage not to sell it to minors,” he said.

“Is it possible to have sales of intoxicating hemp products and still protect minors?

“Yeah, of course it is.”

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.