Confronting the Cannabis Conundrum: A Deep Dive into Rescheduling
Reassessing the Advantages and Disadvantages of Re timing Marijuana Legislation
Cannabis legalization in various regions has introduced a complex landscape of legal and financial hurdles, providing an intriguing ecosystem for businesses navigating the nuances of diverse regulatory conditions.
The archaic Section 280E of the U.S. tax code wreaks havoc on the cannabis sector as businesses cannot deduct common expenses such as rent, salaries, or advertising due to the federal illegality of cannabis. Accountants find themselves in the trenches, carefully dissecting and allocating the costs of goods sold (which are deductible) from all other non-deductible expenses to minimize tax obligations and maintain compliance.
This painstaking task, from an accounting perspective, has ignited a surge in demand for professionals versed in this specialized field. While accountants embracing this challenge agree that rescheduling cannabis from a Schedule I narcotic to a Schedule III narcotic could alleviate some accounting pressures, a top cannabis attorney warns such a move may imperil the entire industry.
As the legal landscape evolves state by state, the consequences remaining complex and dynamic, we explore the potential ramifications of rescheduling.
Rescheduling: A Legal Pandora's Box
Although every cannabis accountant interviewed supported the rescheduling concept due to the challenges posed by 280E, legal experts in the cannabis sector argue significant portions of this proposition have been overlooked by this group.
Jeffrey Hoffman, lead attorney at one of the largest cannabis-focused law practices in New York, cautioned CPAs about the possible repercussions of the rescheduling move. From a federal legal standpoint, rescheduling would shift cannabis' classification from being treated like "heroin" to being comparable to "Tylenol with codeine."
"It's the pharmaceutical companies who are allowed to produce and sell Tylenol with codeine," said Hoffman. "There's no way the mom-and-pop cannabis operators who are already struggling under the current regulations would be able to suddenly acquire a pharmaceutical manufacturing license to produce this stuff."
Hoffman maintains that rescheduling relinquishes control of the industry to Big Pharma and Big Tech. He argues that this will not only upend the industry but also impact his career.
"If rescheduling happens, I'm going to need a new job," Hoffman said. "I'll go become general counsel at one of those [pharmaceutical] companies, and the first thing I'll do is sue every state that has 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."
He added that the "calculus changes overnight" once rescheduling begins. Hoffman explained how Big Pharma could argue they experience damages from cannabis transitioning to a Schedule III product. He said states nationwide are currently operating under a different system that has created a situation ripe for a "textbook lawsuit." He contends that if cannabis is Schedule III, there exists a valid argument that all of the state-run cannabis programs are "taking money out of Big Pharma's pockets."
"The scary 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 industry around [then-rescheduled] cannabis, 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 advocates for the term "unscheduling" to replace the traditional terms of rescheduling and descheduling. "That means legalize it and sell it like lettuce."
Navigating the New Landscape
Tax professionals in the sector balk at Hoffman's predictions, arguing that Big Pharma has more profitable sectors on its radar. Mike Goral, a CPA who heads the cannabis practice at Armanino, stated that GLP-1 drugs will deter Big Pharma from targeting the cannabis sector should rescheduling occur.
however, he believes multi-state operators are prime for growth because of the opportunities that may arise with rescheduling. These multi-state operators (MSOs) are cannabis companies that operate in multiple U.S. states, handling cultivation, manufacturing, distribution, and retail. But since federal law prohibits cannabis from being shipped across state lines, MSOs must develop and manage separate infrastructures in each state where they operate, diminishing the benefits of large scale operations.
"I don't think Big Pharma will take over," Goral said. "They're laser-focused on weight loss drugs like Ozempic, which have way more commercial potential. They're not wasting time on cannabis. But big MSOs – they'll get bigger. It's like craft beer versus big breweries. The large MSOs can raise capital and will likely buy up smaller brands in places like Florida or Pennsylvania to expand their offerings."
Goral believes the rescheduling dawn is inevitable and is simply a matter of time before opportunities present themselves. This confidence has allowed him to share optimistic insights with his clients regarding the industry's future.
"I think rescheduling will eventually happen. It's been debated for over a decade, and every time we think we're close, it stalls," he said. "The Trump administration has sent mixed signals. Robert F. Kennedy Jr. supports rescheduling, but Trump's DEA appointee doesn't. So we'll see."
- The complexity in the cannabis sector, due to Section 280E, has created a demand for specialized accountants who can navigate the intricacies of the federal illegality of cannabis.
- While rescheduling cannabis from a Schedule I narcotic to a Schedule III narcotic could potentially alleviate some accounting pressures, it may pose risks to the entire industry.
- Jeffrey Hoffman, a leading cannabis attorney, warns that rescheduling could relinquish control of the industry to pharmaceutical companies.
- Rescheduling would treat cannabis more similarly to Tylenol with codeine, which is produced by pharmaceutical companies, making it difficult for small-scale cannabis operators to acquire the necessary licenses.
- Hoffman argues that rescheduling would upend the cannabis industry and potentially impact his career, as he may need to secure a job at a pharmaceutical company.
- Hoffman believes rescheduling could lead to state-run cannabis programs being sued by pharmaceutical companies for allegedly taking money out of their pockets.
- He contends that such a lawsuit could result in the closure of dispensaries, growers, and product manufacturers, jeopardizing the entire cannabis industry.
- Hoffman proposes replacing the terms "rescheduling" and "descheduling" with "unscheduling," meaning the total legalization of cannabis.
- Tax professionals in the sector are skeptical about Hoffman's predictions, suggesting that pharmaceutical companies have more profitable sectors to focus on.
- Mike Goral, a CPA specializing in cannabis, believes multi-state operators (MSOs) will benefit from rescheduling, as they could expand their offerings through acquisitions.
- Goral believes the rescheduling of cannabis is inevitable and will present opportunities for growth within the industry.
- Goral is optimistic about the industry's future, despite the mixed signals from the Trump administration regarding rescheduling.
