The journey towards cannabis legalization has been long and winding, but we’re getting closer. While 46 states have legalized or decriminalized marijuana in some form, it remains illegal at the federal level. However, a proposed reclassification of marijuana from a Schedule I to a Schedule III drug could be a game-changer. This move could significantly benefit the pre-roll industry, which already accounts for 15% of the market and continues to grow.
What Does Reclassification Mean for Marijuana?
Since 1970, the Controlled Substances Act (CSA) has classified cannabis as a Schedule I drug, putting it in the same category as heroin, LSD, and ecstasy. This classification deems marijuana as having a high potential for abuse and no currently accepted medical use. But the landscape is shifting. The Justice Department, recognizing the Department of Health and Human Services (HHS) stance that marijuana does have medical uses, submitted a proposal in May to reclassify marijuana as a Schedule III drug. If approved, this would place marijuana alongside prescription drugs like Tylenol with codeine, testosterone, and anabolic steroids. Schedule III drugs are considered to have accepted medical uses and a lower potential for abuse than Schedule I and II drugs, with moderate to low potential for dependence.
The Reclassification Timeline
While there’s no set timeline for reclassification, the Justice Department has initiated the process by submitting the proposal and notifying the public. The Drug Enforcement Agency (DEA) will consider public commentary before making a final ruling. The 62-day public comment period ended on July 22, 2024, but there is no set timeline for review.
Financial Benefits for Pre-Roll Businesses
One of the biggest advantages of reclassification is the potential removal of Internal Revenue Service (IRS) Code Section 280E. This section currently prohibits businesses selling Schedule I or II substances from taking deductions or credits for business expenses. This has resulted in a heavy tax burden for cannabis companies, leading to less than 25% reporting profitability. Reclassification to Schedule III would eliminate Section 280E, allowing pre-roll businesses to claim deductions and credits, significantly reducing their tax burden and increasing their profitability. Additionally, amended tax returns could be filed to reclaim deductions within the statute of limitations, depending on the effective date and retroactivity.
Banking Access: A Potential Shift
Currently, banking institutions consider cannabis businesses high-risk due to their Schedule I status. Reclassification to Schedule III, which applies to legal prescription substances, could potentially lead to increased banking access for pre-roll businesses. However, it’s important to note that doctor recommendations for marijuana, which are legal at the state level, are not the same as federally legal prescriptions. Research and development could lead to the creation of FDA-approved prescription cannabis drugs, which could be sold in pharmacies rather than dispensaries. This could potentially legitimize the industry in the eyes of banking institutions, but this is a complex and uncertain process.
Immediate and Long-Term Benefits
Reclassification offers significant immediate and long-term benefits for pre-roll businesses. Reduced tax burdens will free up more income to be invested in product development, equipment upgrades, higher-quality inventory, and expansion. This could also attract investors and encourage new business launches, leading to increased competition and driving innovation and consumer choice. Moreover, the development of FDA-approved prescription drugs could further legitimize the industry, potentially attracting new customers, increasing access to banking services, and bringing cannabis closer to federal legalization.
Financial Benefits for Consumers
Consumers will also benefit from reduced tax burdens on pre-roll businesses. These savings could be passed along to consumers, potentially resulting in lower prices. Consider that a typical pack of 20 cigarettes costs about $8, but a pre-roll joint can cost anywhere from $5-$20 or more, making the cost of a 20-pack potentially much higher.
New Products and New Customers
The current Schedule I classification has severely restricted research and development opportunities for marijuana. Reclassification to Schedule III would loosen these restrictions, opening the door to new research and development. This could lead to a greater understanding of cannabis, the development of new products, and improvements in quality. New customers could be attracted by the increased availability of high-quality, diverse products. This increased demand could benefit the entire industry and potentially even lead to increased interstate commerce.
Innovation and Consistency
While state-level regulations vary, a greater emphasis on research and development, leading to product innovation and competition, will likely drive the need for higher quality, consistency, and compliance. Pre-roll businesses can stay ahead of the curve by implementing rigorous quality controls, seeking certification, offering transparency, and partnering with reputable suppliers like HARA Supply.
Preparing for the Future
While the timeline for marijuana reclassification remains unclear, pre-roll businesses need to be prepared for the changes it will bring. The potential for reduced tax burdens, increased product development, and new customers presents significant opportunities. However, it’s crucial to prepare for increased competition. Strategic initiatives are essential to position your business for future success. Contact HARA Supply today to learn how you can navigate the evolving landscape and thrive in the pre-roll industry.
