Cannabis finance executives are pointing to the recently concluded federal marijuana rescheduling hearing as a potentially significant turning point for the industry, particularly if moving marijuana to Schedule III results in relief from the federal 280E tax burden.
The Drug Enforcement Administration (DEA) has released transcripts from all 11 days of the hearing, which examined a proposed rule to move marijuana from Schedule I to Schedule III under the federal Controlled Substances Act.
Anthony Coniglio, CEO of NewLake Capital Partners, said one of the most significant developments was the federal government itself arguing that marijuana has an accepted medical use and no longer meets the requirements for Schedule I.
“This is no longer simply the cannabis industry making the case for reform,” Coniglio said in an e-mail sent to The Marijuana Herald. “The federal government itself is now making the case that the science and medical evidence support moving cannabis to Schedule III.”
For NewLake, a cannabis-focused real estate investment trust, Coniglio said the most important potential consequence is relief from Section 280E of the federal tax code, which prevents businesses trafficking Schedule I or II substances from taking ordinary business deductions.
If marijuana is moved to Schedule III, state-licensed marijuana businesses would no longer be subject to 280E.
“Stronger operator cash flow can mean better rent coverage, stronger tenant credit quality and more capacity to reinvest in existing facilities or expand into new markets,” Coniglio said.
Terry Mendez, CEO of Safe Harbor, said the same change could have significant implications for banks and lenders considering whether to serve marijuana businesses.
“The ability to take ordinary business deductions could improve after-tax cash flow, strengthen balance sheets and give operators greater flexibility to service debt, reinvest and pursue growth,” Mendez said.
Mendez cautioned that Schedule III would not make marijuana banking conventional or eliminate the compliance requirements financial institutions face when serving the industry.
“Rescheduling could strengthen the financial condition of cannabis operators without eliminating the complexities of banking the industry,” he said.
FundCanna Founder and CEO Adam Stettner said the hearing represented a broader shift in the federal government’s position, but emphasized that several consequential stages remain before rescheduling could become final.
“The ALJ recommendation, the final rule, and the litigation ahead will prove more consequential than the hearing itself,” Stettner said.
Chief Administrative Law Judge Derek Julius is expected to issue a recommendation following the hearing. DEA Administrator Terry Cole would ultimately be responsible for issuing a final agency decision, which could then face legal challenges.
Stettner said the ultimate significance of Schedule III may extend beyond its immediate financial effects by providing businesses with greater regulatory certainty.
“This is real progress toward normalization,” he said, “but progress isn’t completion.”
