DEA’s Significant Change Regarding Marijuana Could Save California’s Cannabis Industry

If the U.S. Drug Enforcement Administration were to reclassify marijuana as a less dangerous drug, it would not eliminate conflicts between the feds and states like California, which have legalized many uses of the substance.

But it would bring a significant change that could give California’s licensed marijuana businesses a much-needed boost: a lighter tax burden.

The Associated Press reported Tuesday that the Drug Enforcement Administration will propose moving marijuana from the list of Schedule I drugs, which includes heroin and cocaine, to Schedule III drugs, which include ketamine and anabolic steroids. The proposal would still have to be reviewed and endorsed by the White House, as well as made available for public comment.

Industry experts say the measure, if passed, could become a lifeline for California’s struggling cannabis industry. “We were seeing this coming,” said Meital Manzuri, a lawyer whose firm specializes in the cannabis industry. “This is important for the industry.”

Legal in California but illegal under federal law, the state’s cannabis industry has operated in a difficult legal limbo. The stores and farms operate outdoors, but are deprived of the benefits that other businesses enjoy, such as access to out-of-state markets.

Their murky legal status also means that banking, credit card processing, insurance and other vital business services are out of reach for many marijuana companies.

The tax burden, however, has been particularly onerous. Section 280E of the federal tax code prohibits companies involved in “trafficking” Schedule I or II substances from deducting the expenses they incur. As a result, they are taxed on every dollar they raise, not just their profits.

But if marijuana is reclassified as a Schedule III drug, “for the first time, participants in this industry will be able to take standard tax deductions that other companies do,” said Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws. . , also known as NORML, which advocates for cannabis consumers. “The biggest change will be the way the industry does business.”

“The industry in California especially has been faltering in recent years and this offers them a future,” Manzuri said. “It could be the lifeline they need to continue operating.”

According to the California Department of Tax and Fee Administration, legal marijuana stores reported about $5.1 billion in revenue in 2023, less than the previous year and 11% less than 2021.

For years, licensed companies have struggled to compete with a thriving black market that, while avoiding licensing, fees and taxes, can sell their products for a fraction of the price charged by legal bodies.

But Armentano hopes that industry professionals don’t “get ahead of themselves” and that if marijuana is reclassified, it could still take some time for the changes to become tangible.

If cannabis is rescheduled, he said, it would nonetheless remain illegal under federal law for recreational uses. States that have legalized marijuana, he said, do not operate under federal standards.

Thirty-seven states have legalized cannabis for medical use, another seven have legalized CBD oil for medical use and 24 states have legalized cannabis for recreational use, according to DISA Global Solutions, a company that administers drug testing.

Some organizations that oppose marijuana legalization, including Smart Approaches to Marijuana, have announced their intention to challenge the final rescheduling decision.

“Raw marijuana has never passed safety and efficacy protocols,” said Dr. Kevin Sabet, president of Smart Approaches to Marijuana, calling it a political decision in an election year. “The influence of politics and industry has hovered over this decision from the beginning.”

If the rescheduling is ultimately approved, it would recognize marijuana’s medicinal uses and require the drug to be sold and regulated at the federal level, similar to how ketamine, some anabolic steroids and Tylenol with codeine are regulated. The products would need federal approval – which no cannabis products currently have.

“Most states regulate cannabis in a way that is inconsistent with federal law,” Armentano said.

That means other financial benefits, like banking and insurance, would still be out of reach for many businesses, Manzuri said, especially for dispensaries that operate for recreational use.

This remains an ongoing problem for dispensaries, which typically operate as cash-only businesses. Many of them are unable to obtain banking services for what has become a billion-dollar industry, although the California Department of Cannabis Control has sought to help marijuana companies open bank accounts.

Major credit card companies, however, will not process marijuana-related payments, and reclassifying the drug to Schedule III would not change that, experts said.

“The payments industry only processes legal products and reclassification does not make cannabis legal,” said Scott Talbot, executive vice president of the Electronic Transactions Assn. “The reclassification moves the needle, but does not go beyond the goal of making cannabis legal and therefore acceptable to banks and the credit and debit card industry.”

However, reclassification could help address some of the stigma that has been associated with marijuana and the cannabis business, Armentano said. It will be part of a long process, especially for a service as important to the industry as banking.

“My assumption is that marijuana could be legalized tomorrow, and your Chases, JP Morgans and Wells Fargos would still say, at least at first, that it doesn’t change our bottom line,” Armentano said.

But those who have navigated the legal waters of the weed industry still welcome the potential benefits of reclassification.

“The rescheduling will not legalize cannabis or allow a doctor to prescribe it, but it will allow existing marijuana businesses to be taxed like any other business – essentially a huge investment in the industry as a whole by way of tax relief,” said Adam Terry , chief executive of Cantrip, a Massachusetts-based THC-infused beverage company. “[A reclassificação] improves the overall economic health of the industry and continues to move towards legitimization in the eyes of the public.”

“California’s cannabis industry needs this now,” said Amy Jenkins, legislative advocate for the California Cannabis Industry Assn. “The industry faces a significant number of challenges with our existing tax structure.”

Whitney Economics, a cannabis-focused research firm, estimated last year that legal cannabis operators in the U.S. paid more than $1.8 billion in taxes in 2022 compared to other companies.

The reclassification, Jenkins said, “would provide greater stability to the legal cannabis industry.”

It could also allow more entities to conduct research, possibly opening the door to industry innovation and greater medicinal benefits. “No one has been able to research it on a large scale for a long time,” Manzuri said.

For Armento, whose organization wants states to be able to regulate marijuana in the same way they regulate alcohol, the possibility of reclassification is not enough.

“It will take a long time for regulators at the FDA, DEA and other agencies to recognize that this change is not enough,” he said.

Text by Salvador Hernández, reporter for Fast Break Desk, the Los Angeles Times’ breaking news team. Before joining the newsroom in 2022, he was a senior reporter at BuzzFeed News, where he covered criminal justice issues, the growing militia movement and breaking news. He also covered crime as a reporter for the Orange County Register. He is originally from Los Angeles.