I admit to being surprised by a headline pertaining to a new story published this past spring. The story explained that medical cannabis retailers in the state of Utah are on board with federal marijuana rescheduling. At first, I could not understand why. Utah retailers have been traditionally protective of their market. But then it dawned on me: rescheduling would have an enormous impact on their tax bills.
Currently a Schedule I Controlled Substance
As this post is being written (things could change any minute) marijuana remains classified as a Schedule I controlled substance under federal law. That makes it illicit in every sense. Why is that a problem for companies like Salt Lake City’s Beehive Farmacy? Because dealing in illicit substances has an impact on a company’s tax position.
As long as marijuana remains a Schedule I controlled substance, Beehive Farmacy cannot deduct business expenses from its total revenue. The same is true for every marijuana business. Whether a company grows, processes, or sells cannabis at retail, standard business deductions cannot be taken.
The net effect is that marijuana businesses pay income tax on their total revenues, NOT just their profits. Other businesses do not have that problem. Take your neighborhood pharmacy that sells only legal prescription medications. It can deduct all expenses from revenues, then pay taxes only on profits.
More Real Income
For a cannabis retailer like Beehive Farmacy, rescheduling would translate to more real income. Moving marijuana to Schedule III, which is the proposal, would change its status from illicit to legal, with restrictions. Marijuana would become like any other prescription medication from a legal standpoint.
If that were to happen, cannabis businesses could start doing their taxes like businesses in any other industry. Being able to claim business expenses would reduce taxable income. As a result, the businesses would pay lower taxes and be left with more income to put in their pockets.
In markets where legal operators face stiff competition from cheaper black market sellers, rescheduling could have a big impact. I admit to not being sure how rescheduling would impact on the recreational market from a tax standpoint. But it sure would help the medical market by leveling the playing field somewhat.
A Potential Dark Side
I started this post by mentioning my initial surprise regarding Utah medical cannabis pharmacies and rescheduling. That surprise is rooted in the potential dark side. If you are not sure when I’m referring to, look no further than the chain pharmacies that populate our cities.
Moving marijuana to Schedule III opens the door to interstate commerce. It opens the door to large corporations coming in and dominating the space. Unless the states specifically stepped in to stop it, the smallest operators would get swallowed up by their corporate competitors.
That might not necessarily be a bad thing for one and two-location operations whose owners could stand to make a pretty penny by selling out to a corporate chain. But for those small business owners looking to keep their operations going, it would be awfully tough to fight against corporate America.
For Now, We Wait
How will it all play out? No one knows. For now, all we can do is wait for a final decision from the DOJ and DEA. Conventional wisdom says that rescheduling is inevitable. But we have been waiting half-a-year for the government to propose a final rule.
Had Vice President Harris won the election, I suspect rescheduling would have happened before the end of the year. But with a more conservative Trump and U.S. Senate, it may not happen at all.