The potential of rescheduling and removing Tax Rule 280E could boost profits for U.S. businesses. However, Zuanic and Associates‘ latest report reveals complexities and overlooked consequences. What is the best option for unlocking the cannabis industry’s potential: exploring exemptions or legislative change?
Tax Rule 280E poses a considerable obstacle to cannabis companies, forcing them to pay income tax on gross profits and resulting in an astronomical effective tax rate of 70% for many US plant-touching businesses.
While the removal of 280E through cannabis rescheduling appears attractive, Z&A cautions against embracing this narrative without considering its potential “Pandora’s Box” of consequences.
Rescheduling medical marijuana (MMJ) would indeed make it federally legal, but it could also usher in stricter FDA regulations and limit prescription accessibility for doctors.
Additionally, it might lead to the entrance of pharmaceutical companies, altering the industry’s dynamics significantly.
“Moving MMJ to Schedule II or III would make MMJ federally legal with all that implies: FDA regulation, likely tougher for Drs to prescribe, MMJ sold in pharmacies, interstate trade, increased QC rules, and perhaps the entrance of pharma companies into the industry (…) a separate regulatory framework would need to be enacted. Controlled substances that can be prescribed by Drs via Rx are federally regulated,” the report states.
Unlike medical marijuana, recreational cannabis cannot be rescheduled. Instead, it could be de-scheduled, but this path also faces hurdles.
Only substances that can be medically prescribed can reside in the various Schedules of the CSA, leaving the legal status of recreational cannabis in limbo.
For Multi-State Operators (MSOs), rescheduling MMJ could be a double-edged sword. While it might alleviate the 280E burden for medical businesses, the associated regulatory framework and potential downsides make it a precarious path.
Lobbying for favorable accompanying legislation would be crucial to ensure industry interests are well-protected.
If MMJ is re-scheduled, there might be cash flow consequences, but clever accounting and allocation of expenses could mitigate the impact.
“If MMJ is re-scheduled, earnings are not subject to 280E. Assume creative accounting: allocate overheads to medical business, and use transfer pricing for higher MMJ margins,” reads the report.
In 2022, 16 MSOs paid $761 million in corporate income tax, while the entire industry paid $1.2-1.5 billion. Despite the industry’s massive growth, cannabis taxes remain a fraction of the total US corporate income tax.
According to Z&A, this accounts for only 0.35% of the $425 billion collected in US corporate income tax, showcasing both the industry’s potential for expansion and the current limitations imposed by 280E.
The report states considering other avenues to free the cannabis sector from 280E, such as litigation or lobbying for exemptions, might be more viable and less risky.
Produced in association with Benzinga
Edited by Jason Reed and Kyana Jeanin Rubinfeld
