California‘s cannabis industry suffers from a seemingly unending list of problems: high taxes, prohibitionist cities, a related lack of retail licenses and oversupply of non-retail licenses, a monster illegal market with no end in sight, burdensome and often senseless regulations, and so on. Unfortunately, rescheduling won’t solve most of these problems–at least not directly. Today I want to look at what rescheduling could mean for California’s cannabis industry.
If you’re not already up to speed on rescheduling, check out my colleague Vince Sliwoski’s explainer of the DEA’s notice of proposed rulemaking to move marijuana from schedule I (where it sits next to heroin) to schedule III, or any of the following posts of ours:
With that out of the way, let’s look how rescheduling could affect (or not affect) California’s cannabis industry.
First and foremost, rescheduling does not mean that state-legal cannabis markets will be federally compliant. In other words, all California cannabis businesses will still violate federal law. The biggest change would be that IRC § 280E – which prohibits cannabis businesses from making standard federal tax deductions – will go away. But the statewide cannabis industry won’t be federally “legal.”
What that means is that rescheduling will have no impact on things like the prohibition on interstate commerce, which has kept California walled off from other states (at least California’s legal market). So for now, California’s still on its own.
Rescheduling also won’t impact state law where it counts. Things like local control, burdensome regulations, fighting the illegal market, and so on, will stay the same. Importantly, local and state tax law won’t change: California and many local cities tax cannabis businesses as if they are piggybanks. While 280E relief will undoubtedly help, it makes it much less likely that the state will revisit its own excise tax or think about how it could cap local gross receipts taxes.
So with all that out of the way, is there any good news? I think the answer is a clear yes. Here’s why:
- Even without state and local tax relief, 280E relief alone will be a monumental change for the industry.
- Investments into California’s cannabis industry are likely to increase as investors who previously stood on the sidelines become more comfortable with the idea of investing into a (slightly) less regulated industry.
- Other ancillary service providers may also be more open to providing services to the industry for similar reasons. More ancillary service providers may reduce costs within the cannabis industry.
- It’s possible that state governments also decide to be more bold. For example, states could decide to roll the dice on interstate commerce compacts after rescheduling, even in spite of schedule III issues.
- Although the impact on the illegal market will likely be small, the removal of 280E liabilities could entice people who would otherwise have remained unlicensed to become legal and complaint operators.
We’ve got a long way to go before rescheduling happens. And while nobody can really say for sure how things will shake out, it seems like there are some definite positive outcomes for California’s cannabis industry. So stay tuned for more updates.
