With the Department of Health and Human Services (HHS) actively requesting that the Drug Enforcement Administration (DEA) reschedule cannabis, there are a lot of questions of what this means. We covered the initial motion to reschedule cannabis as a Schedule III substance the week it was announced, but there are still questions of what that means for 280 E.
We have extensive information on 280E taxes for cannabis operators from our years of cannabis industry expertise. Essentially, 280E is a tax code that does not allow for regular business write-offs for businesses that traffic Schedule I or Schedule II classified substances. This is due to a situation in 1974 where a man in Minneapolis who was dealing drugs such as cocaine alongside cannabis attempted to claim business expenses relating to his drug dealing. He allegedly attempted to write off over $100,000 in ‘business expenses’ relating to his drug dealing when he filed his taxes.
By 1982, Congress motioned to pass the 280E tax code which does not allow any individual or business to write off expenses relating to Schedule I or Schedule II substance trafficking.
Currently, cannabis is still classified as a Schedule I substance, along with heroin, ecstasy, and peyote. Schedule II substances include cocaine, methamphetamines, fentanyl, and more. As we’ve discussed previously, the HHS sent a letter to the DEA on August 29, 2023, requesting that cannabis be rescheduled to a Schedule III substance. Current Schedule III substances include products such as Tylenol with Codeine or Depo-Testosterone.
Due to the 280E tax codes only applying to Schedule I and Schedule II substances, moving cannabis to a Schedule III substance would effectively remove cannabis operators from having to comply with these tax codes. In a white paper from the National Cannabis Industry Association they break down that while a non-cannabis business may pay a 30% tax rate, a cannabis business making the same gross revenue would be charged a 70% tax rate.
Bringing cannabis into the Schedule III classification would allow for more cannabis business to grow and expand simply due to the tax relief. In 2022, a longtime Colorado cannabis retailer and cultivation called Buddy Boy closed all their stores (11 throughout the state) and their farm due to unpaid taxes. While this is unfortunate, it’s also not uncommon especially with smaller businesses who simply can’t compete with rock bottom prices and staggering tax rates.
While rescheduling cannabis to a classification that allows them to process taxes like a conventional operation, there are still outstanding issues with the cannabis industry. Rescheduling cannabis will not affect its’ standing as a federally illegal substance. Cannabis is legal and regulated on a state-by-state basis. Due to cannabis being federally illegal (regardless currently of Substance status), FDIC-insured banks cannot legally work with cannabis operations. Without FDIC-insured banking available, cannabis still faces incredible issues simply processing everyday things like payments, payroll, and incoming cash. This is also why many cannabis operations cannot accept credit card payments or must find third party partners to process credit card payments.
If cannabis is able to be classified as a Schedule III substance, business operators will see much higher net profits and the industry will undoubtedly expand. Rescheduling will not fix all the industry’s problems, but it will be a major step forward to a brighter and greener future.
For more updates on the cannabis industry, continue to follow the MJ Platform blog.
