Re-Scheduling / De-Scheduling, what does it mean?
There’s been a lot of buzz about the news from the US Drug Enforcement Agency around rescheduling cannabis in the past few weeks, and we’d like to unpack and share it’s impact on small, independent business like The High End.
So... What exactly was the DEA news?
It was announced this Tuesday that the US Drug Enforcement Agency was moving to reschedule cannabis to Schedule III. When the Department of Health and Human Services announced last Fall that they were making this recommendation, it was broadly anticipated that that it could take well over a year for the DEA to respond, and there was no indication whether or not they would even follow HHS’ guidance at all, so this is momentous. Our position is that cannabis should be descheduled altogether rather than rescheduled, but we can't deny that what this means for the ability to conduct research, not to mention the positive cash impact this will have on licensed operators, is immense. (I speak to this a little bit in a Boston Globe article from Sept 2023).
And what does this mean for The High End?
The Schedule III announcement has potentially huge implications for our bottom line. Under IRC 280-e, Schedule I (cannabis' current classification) businesses are prohibited from deducting any ordinary business expenses on their taxes, which created a massive over-taxation burden on cannabis operators that significantly impaired profitability. While the official rescheduling won’t happen overnight and there is still much red-tape, we are encouraged by the possibility of no longer being subject to 280-e, and are extremely excited for how that directly translates to greater profit potential.
This move by the DEA signals that, while cannabis will technically remain federally illegal until further reform is enacted, the federal government has significantly shifted their position. We believe this is a risk-reduction event from a capital markets perspective that will catalyze new interest in the industry. We saw this as cannabis stocks soared on the news, though they did pull back the following day. An analyst from Alliance Global Partners rightly noted that “this would result in meaningful cash benefits for operators” and a co-founder of cannabis VC fund Poseidon Investment said “we anticipate a surge in liquidity as sidelined capital enters the market, drawn by the potential for legal businesses to thrive... Rescheduling is likely to bring a vibrant return of investor interest that could quickly move the sector back to robust optimism”. These possibilities are meaningful to The High End, especially as we are still working hard to get our doors open!
We are cautiously optimistic that this move will spur more federal reform, which we believe is still desperately needed. Senator Chuck Schumer just announced that he remains committed to further legislation such as the SAFER Banking Act and the Cannabis Administration and Opportunity Act. But these won't pass without stakeholders putting the work in! We’re active in our advocacy for such reform, and that must (and will!) continue.
So while the fight for more reform certainly doesn't end here, we'll acknowledge the positive impact that this all would have on small, independent operators like ourselves in the cannabis industry. Most tangible will be the relief from removing the 280-e tax burden, allowing more of us to stay afloat! It means that businesses like ours can continue serving conscientious consumers like you!