How Marijuana’s Reclassification Could Revitalize Colorado’s Struggling Cannabis Industry

Look at a graph of cannabis sales in Colorado since legalization a decade ago, and you’ll see sustained growth to more than $2.2 billion in 2021. Then you’ll notice a decline just as quickly to $1.5 billion last year.

But now the weed industry, both in the Centennial State and nationwide, has been thrown a lifeline—and it’s one heck of a line. On April 30, the Drug Enforcement Administration (DEA) announced it intends to reclassify marijuana as a Schedule III drug, a category that includes substances that have a lower potential for physical and psychological dependence and potential medical uses such as ketamine, anabolic steroids, and Tylenol with codeine. Currently, cannabis is listed as a Schedule I substance on par with heroin and ecstasy.

The reclassification shouldn’t make much of a difference for the average Colorado consumer. Weed will remain illegal on a federal level and can be prosecuted the same way. The biggest change is what this means for cannabis businesses, says Brian Vicente, founding partner of Vicente LLP, a marijuana business- and policy-focused law firm based in Denver. Under the current rules, cannabis companies are subject to IRS Code Section 280E, which makes it impossible for pot businesses to claim the same deductions and tax credits available to other businesses. So where a craft brewery in Highland could deduct business expenses such as rent or payroll, the dispensary next-door can’t.

But 280E only applies to Schedule I and II drugs. “As such, [marijuana companies] will be able to make standard business tax deductions, which will take their effective tax rate from 60 or 70 percent, maybe even 80 percent, down to the traditional corporate tax rate in the 20s,” Vicente says. “It’s simply remarkable.” Richard Batenburg III, board member and chief investment officer of Clear Cannabis Inc., puts it more bluntly. “The punch line here is that every plant-touching company in the United States just got more profitable. Period,” he says.

A lower tax burden won’t only mean more money. It will also allow these businesses to simplify how they operate. “Being in the venture capital side [of the industry], I’ve seen every kind of shenanigan business structure you can imagine to minimize the impact of this ridiculous rule,” Batenburg says. And by making the cost of doing business in the weed world finally tax deductible, it also makes it cheaper for companies to grow since they’ll be able to deduct expenses for improvements such as new energy-efficient lighting for their grow operations or hiring additional employees. That will have enormous implications for marijuana businesses of all sizes, but especially for the mom-and-pop shops that have been most impacted by the current IRS rules.

The new classification will also make it easier for owners to attract outside investors for another reason, Batenburg says, since it could encourage those who’d previously been put off by cannabis’ nebulous legal standing to finally fund marijuana businesses. Either way, easier access to investors should allow weed businesses to grow like, well, normal businesses for the first time. “Previously, the cost of finding investment had been so huge that it really crippled the industry,” Batenburg says. “Companies that wanted to launch couldn’t find venture capital, companies that wanted to grow couldn’t get growth capital, and companies that wanted to scale couldn’t find scale capital.”

While the announcement sent reverberation throughout the industry, there are still a couple of hurdles left. First, the DEA’s recommendation for rescheduling will be reviewed by the White House Office of Management and Budget (OMB), and given that President Joe Biden pledged to decriminalize marijuana, it would be a surprise if OMB doesn’t sign off on the proposal. Then, after a public comment period that will last months, the reclassification will be finalized, likely before the election.

It couldn’t come at a better time: “We needed some wind in our sails,” Vicente says. “It’s been a tough time for the industry, so it’s nice to have some optimism.”