The potential rescheduling of marijuana from Schedule 1 to Schedule 3 of the Controlled Substances Act, as recommended by the U.S. Department of Health and Human Services, could have significant implications for cannabis businesses, including Red Run Cannabis Company and the broader Alaska cannabis industry.
Initially, it’s crucial to understand the historical context of IRS Section 280E. This section, a response to a 1981 court case where a convicted trafficker successfully claimed drug-related business expenses as tax deductions, prohibits businesses dealing with Schedule 1 and 2 substances from deducting most normal business expenses. Although not intended to target legal cannabis industries, 280E has significantly impacted them. State-regulated marijuana dispensaries are hit hardest, with an effective tax rate exceeding 70% compared to mainstream businesses, which pay around 21%. This disparity arises because cannabis retailers cannot deduct many expenses under 280E.
For Red Run Cannabis Company and similar businesses in Alaska, the rescheduling could alleviate this heavy tax burden. It’s not just retailers but the entire supply chain, including cultivators and manufacturers, that’s affected by 280E. Although slightly less burdensome for these sectors, the delayed payments and cash flow issues stemming from the high tax rates impact them significantly.
Legal experts suggest that rescheduling to Schedule 3 would resolve the 280E issue, potentially in time for the 2024 or 2025 tax cycles. This change would not only significantly reduce the cost structure for retailers but could also lead to a range of other benefits. Lower tax burdens could result in lower prices for consumers, spurring demand. Alternatively, prices might remain stable as businesses seek to recover from years of low margins. The additional liquidity could then be reinvested into the businesses, fostering growth and stability.
Furthermore, the loss of 280E could attract new capital to the sector, benefiting companies of all sizes. This change, in conjunction with the SAFE Banking Act, would create a more sustainable cannabis industry and pave the way for federal legalization. While tax reform may not rescue all struggling cannabis businesses, it could significantly improve profitability and investment opportunities for many, including those in Alaska’s cannabis sector.
In summary, the rescheduling of marijuana would mark a transformative change for cannabis businesses in Alaska, like Red Run Cannabis Company. It would alleviate the disproportionate tax burden imposed by Section 280E, improve cash flow, attract new investments, and ultimately contribute to the sustainability and growth of the industry in the region and nationwide.